The Sheridan Report
by Matthew C. Sheridan
The city of San Francisco is trapped in a contradictory world as evidenced recently by several clear economic- and housing-related indictors. This world of failed political ideals is one with few innovative solutions, where the prevailing philosophy is short-term gain for a few and no definitive vision for the future. At times the outcome is almost comical, yet behind the headlines resides a city in conflict with itself—a city of opposites, a world apart.
Residential Rental Vacancy Rate: 9.8%
Nothing showcases this better than the polar opposites
of the rental and sales market. According to the latest
figures from the U.S. Census, San Francisco now has
the highest residential rental vacancy rate on record:
9.8 percent (or roughly 21,000 vacant rental units).
Contrast this figure with the home sales market, a
world where there is so little inventory that the median
home and condo price according to DataQuick is approaching
$625,000, and you begin to grasp how bizarre the petri
dish we call home really is.
On warm Sunday afternoons, San Franciscans are frantically scouring the city seeking home-owning opportunities in all shapes and sizes. Employing whatever is necessary to find a home—TICs, condos, homes and even apartment buildings—they search for themselves and their loved ones. On the other hand, the rental market, in addition to suffering from a sluggish job market, exhibits the consequence of years of rent control: owners refusing to budge on rents, fearful they will be caught with below-market rents or depreciated property values.
If the Census numbers are accurate, it could mean expanding options for San Francisco’s tenants. “A rule of thumb in real estate, is that anything above 5 percent is a healthy vacancy factor that gives tenants options and allows rents to stay abreast of the cost of living increases,” explained Jim Forbes, publisher of the SF Property Report.
“I can’t believe it’s that high,” said Charles Gaetani, owner of Gaetani Realty. “We manage 1,800 units and right now we only have 15 vacancies—a year ago we had between 30 and 40.” While some owners continue to refuse to lower prices, Gaetani successfully keeps his vacancies down by riding the market. “If the market is heading down, we rent down,” commented Gaetani. He believes personal service is key these days and apartments must be ready to rent and in pristine condition.
25 Years of Rent Control
The extreme results of rent control are ever so apparent
as the city approaches the silver anniversary of
the Rent Ordinance: white people overwhelmingly benefit
from its protections (72 percent of rent-controlled
tenants are white, although they comprise only 50
percent of our population). The Tenant Survey, published
by the San Francisco Rent Board last year, reveals
that in contrast, African-Americans reside in market-rate
units at double the rate of rent-control units. This
byproduct of rent control in San Francisco is yet
another bizarre example of the paradoxical results
of a political policy gone astray.
People & Jobs
Meanwhile, San Francisco has lost almost 25,000 residents
over the past three years, according to figures recently
released by the U.S. Census. The continuing exodus
(-3.2 percent since 2000) brings the city’s
population to just over 750,000. This figure is probably
even lower now, for these Census estimates only ran
through July 2003. Neighboring San Mateo County mirrors
San Francisco’s continuing losses, but Santa Clara County shows a mild return in population gains.
The South Bay numbers are reflected in two recent
data sets that point to an improving situation for
the San Jose
region. Though the state’s Employment Development Department (EDD) reported the region continued to lose jobs over the last year (-17,000 or 2 percent), it did show the strongest March-to-April
job gain since 1997 (+2,100). Numbers from the U.S.
Department of Labor also show San Jose is on the path
to recovery, with the MSA just behind Rocky Mount, N.C., in leading the nation with the largest over-the-year unemployment decreases in March (-1.9 percent).
Job growth, however, in the city of San Francisco continues to lag behind the region and the nation. As employment gains surged during the past two months on a national level (337,000 in March and 288,000 new jobs added in April), the city suffered its fourth straight month of job losses. The EDD data, on the other hand, indicates that the San Francisco MSA, including the counties of Marin and San Mateo, experienced a noticeable surge in employment from March-to-April (+2,400), although all of it was outside the city of San Francisco. This pathetic statistic certainly represents the sad state of our world. According to a recent comment made by Supervisor Michela Alioto-Pier, San Francisco lacks any real economic policy and the region’s contradictory employment numbers reflect this. (Note that the EDD recently revised the city’s labor force and employment numbers in its annual March Benchmark update. The shocking numbers revealed a massive correction this year in the numbers from the labor force and employed categories, each dropping roughly 15,000 from their previous estimates.)
Asking Rents vs. Tenant Demand
Another strange indication of the microcosm where we
live is apparent in the current rental market. In the
first quarter of 2004, in addition to the stratospheric
vacancy rate, San Francisco had declining asking rents
that dipped below the tenant-demand rate. MetroRent,
a rental listing service in San Francisco that supplied
the data, defines tenant demand as the maximum rent
that a tenant is willing to pay for an apartment.
| Asking |
Demand |
|
|---|---|---|
| Studios: | $1,017 | $914 |
| 1 Bedroom: | $1,510 | $1,341 |
| 2 Bedrooms: | $1,988 | $1,953 |
| 3 Bedrooms: | $2,442 | $2,558 |
| 4 Bedrooms: | $3,062 | $3,163 |
| All Units: | $1,705 | $1,767 |
Now, these two market indicators have crossed paths: asking rents have slid down almost 5 percent this last year, while tenant demand has returned to the same level as a year ago. The numbers, however, appear to be slightly skewed towards the larger units; studios, one bedrooms and two bedrooms, all continue to exhibit higher asking rents than tenant demand.
It is clear, however, that the tenant demand numbers don’t correspond with the vacancy rate. “It’s not consistent—it simply doesn’t jive with the 9.8 percent vacancy rate,” said real estate broker Forbes. He adds however, that if (a strong if) the tenant demand numbers are correct, it could be an indicator that rental prices might be poised to increase and the market may have hit bottom. The likely scenario, however, is that rental prices will probably continue their decline with holdout owners simply confused by the national headlines proclaiming strong job growth, hopeful that similar trends will occur here on a local level.
Jackie Tom, a tenant search and placement specialist, believes rents have definitely gone down, “We went through a huge slump; a lot of people have moved away seeking work.” The feedback she receives lately from tenants reflects their frustration with the quality of the properties out there. “Tenants have to sort through a lot to find a decent place,” said Tom. Like Gaetani, she believes a good leasing strategy is to upgrade apartments and improve tenant amenities, believing that not only does this increase the property value but gets them rented.
The silver lining here is that if the rental market continues to soften, with owners continuing to drop rents, San Francisco will suddenly become a more affordable and desirable place to live. People, priced out of the city’s tough rental market for years, will start charging back into San Francisco from places like Oakland.
We live in a paradoxical world here in San Francisco. Contrast for a moment the thousands of empty apartments found throughout the city with a Byzantine policy that restricts condominium conversions, and you begin to understand why our city is failing us.
| Unemployment | 6.4 % |
| Unemployed | 25,758 |
| Employed | 375,358 |
| Help-Wanted Index | 22 |
| Housing-Affordability Index | 12 |
| Median-Priced Home/Condo | $568,417 |
| Average Asking Rent | $1,741 |
| Tenant-Demand | $1,728 |
| Lowest-Priced Rental | $490 |
| Office Vacancy Rate | 20% |
| Gallon of Gas | $2.02 |
(All data listed are one-year averages, except for lowest-priced rental)
Sources: 1:U.S.
Census Bureau. Standard error for Q1 2004 was 1.9 percent.
2: California’s Employment
Development Department. Data is not seasonally adjusted. 3: U.S.
Census Bureau.
4: U.S. Department of Labor.
Data is not seasonally adjusted. Region includes San
Francisco, Oakland and San Jose areas. Shelter is defined
as rent of primary residence, homeowners’ equivalent
of rent and shelter away from home. 5: MetroRent. Graph
represents the average asking rents for all unit types.
Tenant demand is defined as the maximum rent a prospective tenant is willing to pay for an apartment. 6: The Conference Board. Data is derived from help-wanted classifieds in the San Francisco Chronicle and the San Francisco Examiner; the benchmark stood at 100 for the year 1987. 7: Office of Federal Housing Enterprise. The Home Price Index measures the average price changes in repeat sales or refinancing of the same single-family properties involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac.
8: DataQuick. Median home price includes all single-dwelling homes and condominiums, new and resale. 9: John Oldfield with Prudential California Realty. 10: Phillip J. Boersma with Arroyo & Coates; wwwphillipboersma.com. 11: BT Commercial Real Estate. 12: San Francisco Rent Board. 13: Santa Clara University and the Bay Area Council. 14: The Conference Board and the University of Michigan.
San Francisco Index Sources:
(in order of appearance) California Employment Development Department (items 1-3); The Conference Board, California Association of Realtors, U.S. Census, DataQuick, MetroRent (items 7 and 8); San Francisco Chronicle, BT Commercial Real Estate, and AAA of Northern California.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. The Sheridan Report does not make any guarantee, warranty, or representation as to the completeness or accuracy of the information contained herein. Matthew C. Sheridan is the editor of the San Francisco Apartment Magazine, Rental Housing and the PPMA News. To subscribe to The Sheridan Report, please visit www.sheridanreport.com Copyright © 2004.