The Sheridan Report
By Matthew C. Sheridan
After experiencing the highest vacancy rate on record, San Francisco's residential rental market fell back to earth during the second quarter of 2004, dropping by half to 4.9 percent. The rate, a positive sign for both tenants and owners, indicates the rental market has reached an equilibrium point that promotes a healthy rental housing industry. These U.S. Census Bureau numbers—coupled with recent positive payroll gains for San Francisco and the surrounding counties, along with migration trends that show a continued influx of new residents into the city—point toward a slight improvement in the local economy and the corresponding rental market. Some cautious signals remain, however. The overall vacancy rate has been at 8 percent for the past year, and continued weak economic numbers remain for California and the country as a whole.
The Federal Reserve's much-anticipated series of interest-rate increases has begun, prompting a mild slow-down in home sales across the country. As these rates rise, homeownership opportunities for lower-income Americans will dry up, pushing them into rental housing, which in turn, will boost the multifamily housing industry. Meanwhile, the country's payroll numbers for July and June stunned economists, with job gains of only 32,000 and 78,000 respectively. This shaky job growth prompted many to question the strength of the economic recovery, including the Fed's Chairman, Alan Greenspan, who said the economy had hit a “soft spot.” Add weak consumer confidence, high oil prices, a stagnant stock market and the uncertainty over the presidential election to this anemic job picture, and the hopes for a sustained recovery appear to be stalled.
San Francisco's Metropolitan Statistical Area (MSA), which includes Marin and San Mateo counties, experienced several strong months of job gains during spring and early summer. Since January, the area has gained 13,400 jobs. July witnessed a decline of 3,700 jobs from June—a seasonal regularity. According to the state's Employment Development Department, which supplied the data, “It was the slowest June to July decline since 2000.”
The U-Haul Corporation reports a continued influx of new residents into San Francisco. Their data tracks the number of trucks moving people into versus out of San Francisco, and it shows a sustained increase since the summer of 2003. San Jose, on the other hand, shows a continued exodus of residents since the fall of 2000.
This flow of new residents into the city appears to have helped stabilize San Francisco's rental market after several years of decline. For the second quarter in a row, tenant demand—the maximum rent tenants are willing to pay—has exceeded the asking rents sought by landlords for vacant units. The data, supplied by MetroRent, shows that for the second quarter of this year, the tenant-demand rate for the average unit in the city was $1,783, as compared to the asking-rent rate of $1,765, a difference of $18. During the first quarter of 2004, the difference was $62. More interesting, however, is the average rate over the last year for both tenant demand and asking rents, match up to be exactly equal—$1,749.
When compared to a recent study by Harvard's Joint Center for Housing Studies, MetroRent';s numbers appear slightly high. The Harvard study only surveyed buildings containing 15 or more units, and it showed average asking rents in San Francisco during the fourth quarter of 2003 were $1,536, or $233 less than MetroRent's reported rate for the same period.
| Asking | Demand | |
Studios: |
$1,046 | $917 |
1 Bedroom: |
$1,496 | $1,383 |
2 Bedrooms: |
$2,055 | $1,993 |
3 Bedrooms: |
$2,478 | $2,362 |
4 Bedrooms: |
$3,653 | $3,077 |
All Units: |
$1,765 | $1,783 |
Despite the recent hike in interest rates, the median price for a home or condominium in San Francisco and the Bay Area continues to confound experts. After steadily rising since the beginning of the year, prices dipped slightly in July. This midsummer trend almost always occurs, following the spring and early summer red-hot sales months. According to DataQuick, the median-priced home or condominium in the city stood at $650,000 for July, up almost 20 percent from the same period in 2003.
Despite seemingly insurmountable obstacles placed in their way, San Franciscans’ ongoing crusade to establish homeownership opportunities continues, as evidenced by recent data showing a sustained drive for condominium conversion in the city. Each year, the city holds a condo-conversion lottery, charging applicants $150. Data obtained by The Sheridan Report shows that 937 tickets were sold in attempts by San Franciscans during 2004 to convert their TIC arrangements or apartment buildings into condominiums. The numbers represent almost a two-fold increase since 2000, another glaring example of the contorted housing market we live under.
This fall, San Francisco will once again fill up with the latest batch of new college students and transplants seeking jobs, housing and new experiences. With the economy on a local level heating up—even if slightly—and vacancies set at the right rents in abundance, their welcome into the Barbary Coast should be an easy one. However, if they decide to stay long term, settle down, and buy a home, that is another story.
San Francisco Index
| SF MSA Unemployment Rate | 5.1 % |
| SF MSDA Unemployed | 45,483 |
| SF MSA Employed | 853,333 |
| Help-Wanted Index | 22 |
| Housing-Affordability Index | 12 |
| Median-Priced Home/Condo | $591,167 |
| Residential Rental Vacancy Rate | 8% |
| Average Asking Rent | $1,749 |
| Tenant-Demand | $1,749 |
| Lowest-Priced Rental | $580 |
| Office Vacancy Rate | 19.2 % |
| Gallon of Gas | $2.14 |
(All data listed are one-year averages, except for lowest-priced rental)
Sources: 1: U.S. Census Bureau. Standard error for Q2 2004 was 1.4 percent. 2: California’s Employment Development Department. Data is not seasonally adjusted. 3: U.S. Bureau of Labor Statistics. 4: U-Haul Corporation 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: City and County of San Francisco, Bureau of of Street Use and Mapping. 7: DataQuick. Median home price includes all single-dwelling homes and condominiums, new and resale. 8: John Oldfield with Prudential California Realty. 9: Phillip J. Boersma with Arroyo & Coates; www.phillipboersma.com 10: San Francisco Rent Board
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 and Rental Housing. To subscribe to The Sheridan Report, please visit www.sheridanreport.com. Copyright © 2004. All rights reserved.