Tenderloin Heights

by Jim Forbes

To characterize an entire market is not fair while we are in the middle of the holiday season and at war, too, but I can’t help it. As far as I’m concerned, it sucks. This is not because I think the current rental rates—some 25 percent off their 2000 high—are too low, because I don’t think they are. For instance, if I compare our latest studio rents to three years ago, we are still getting 20 percent more today, a growth rate well ahead of inflation, and that after a much steeper run-up from 1995-1998. I can make money at these levels as long as interest rates and property taxes are low.

No, the problem is not the rent nor really the money. It's the work—the turnover, the vacancies, the rehabs and the renegotiations with existing tenants who are paying hyper-inflated rates from last year. All this translates into the extra care that tenants, both those in place and prospective ones, now require. With so many options, potential tenants often need two, three or sometimes four showings before making up their minds. After that, there is the bickering over a few dollars or a few deficiencies in the apartment. I don’t recall having a build-to-suit sign out front.

Empowerment is the name of the game for tenants now, for we actually have to fix leaking sinks, shorting light fixtures and broken appliances. I mean, come on, this is San Francisco. Don’t you remember that “as is” clause in the lease? This is all in addition to the old problems of broken boilers, elevators and constant visits by a newly energized Department of Building Inspection, giddy with all the job security they now have.

Let’s face it, I’m lazy and I’ll be the first to admit it. I did not go into real estate investments to run a business. I was hoping for leverage both in terms of my time and good cash flow while I surfed in Hawaii or hung out at my favorite café. This job was supposed to be an easy one once I got lucky, which I did. I had made my money the old fashioned way based on who I knew. I sure did not expect to work once I became part of the landed (albeit in Tenderland) class. I expected only to put in a few hours at the beginning of each month when I was collecting and depositing those wonderful rent checks. By the fifth, I was out of here. Well that life is over now, big time. These changes explain why this article is a little short, and why you did not see one from me last month. I’ve been too doggone busy.

b>Old is Better
One recent realization that has given me hope for the future is that I found out that the rehab work I have been doing has been a total waste of time and money. For instance, I recently spent a fortune converting all the plumbing lines to copper in one building so that I could replace the eighty year-old kitchen counters and wall-mounted faucets with new cabinetry, deck faucets and new angle stops. These improvements have done nothing to my rent levels. In one studio, we were getting offers of $995 with the kitchen in its “as is” 1920s condition, but I wanted $1,095. Consequently, I spent $2,500 installing custom cabinets probably better than what I have in my own house and, presto, two months later I finally rented it for $950. The prospective tenant even mentioned how nice it would have been if the kitchen reflected the same 1920s vintage as the rest of the apartment.

From here on out my modus operandi is going to be restoration, not renovation. After all, most of my kitchens were built in the 1920s with good wood and tons of ceramic tiles. To replace that antique stuff defeats the reason people move to this town in the first place. What attracted me in buying these units is what attracts tenants—hardwood floors, claw-foot tubs and cast iron kitchen sinks. Forget about sealing up the Freon coolers. They make great planter boxes.

People who move to San Francisco do not want new. They want old. They may not even want clean. They want junky, rustic, old-fashioned cowboy shit. They want Victoriana, just like their hippy parents. They want places they have seen only in pictures. If they wanted new, they would have moved to Los Angeles or San Jose or Florida’s West Coast.

I am not totally upset about the plumbing conversion by the way. It has reduced my water bill, and for that I am grateful. By pulling out the Sloan-valve toilets in favor of 1.6-gallon tank types and putting an end to slow drips from rusty pipes embedded in concrete, my monthly water bills dropped to nearly half. Of course, one of the factors might have been that family of 12 who moved out of one of the studios during the work. Fortunately, no one has complained that I pulled the antique toilet seat out from under ‘em. I guess there is a limit to everything.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Jim Forbes is President of Urban Properties, a real estate investment and brokerage firm. He is a SFAA board member and publisher of SF Property Report. He may be reached at propnews.com. © Copyright 2002.