The Sheridan Report

Vacancy Rate Surges Back Up

by Matthew C. Sheridan

Despite mild regional job gains over the past few months, San Francisco’s residential rental vacancy rate rose dramatically in the third quarter to 8.1%, up from 4.9% in the second quarter. This increase, reported by the U.S. Census Bureau, is the largest quarterly increase since the fourth quarter of 1999 and may be a sign that San Francisco’s stagnant rental market is unlikely to rebound in the near future. The one-year average rate for vacancies stands at 7.8%. Translating this percentage into units means that in San Francisco, on average, approximately 17,000 units sat empty throughout the city during the past year.

These weak numbers from the Census Bureau, which include the normally busy months of August and September, also show up in the tenant-demand numbers tracked by the Sheridan Report. Provided by MetroRent, tenant demand—the maximum rent a tenant is willing to pay for the average apartment—dropped 5% to $1,698 in the third quarter, down from $1,783 in the second quarter. On the other end of the rental equation, asking rents—the price a landlord would like to receive for the average apartment—has slowly ticked upward for the last two quarters. Based on these numbers from the third quarter, rents now appear too high, with the differential between asking and demand, now at $79. In the busy rental market of the second quarter, tenant demand exceeded asking rents by $18

Many expect the upward trend in vacancies to continue in the coming months. “This has been the slowest it’s been all year; there is no velocity in the rental market and very few calls on our vacant units,” observes Craig Lipton of Maven Investments, a real estate brokerage and management firm in the city. According to Lipton, November is usually a slow time of year, and he attributes our bland rental climate to a weak economy and lack of job growth. He notes that “our rents have come down in the last six months, and we’re currently at rent levels of 1997 and 1998.” He does not expect any pressure on rents, nor does he expect any bumps in 2005; rather he just “hopes to maintain the status quo.”

	Asking	Demand
Studios:	$1,059	$985
1 Bedroom:	$1,545	$1,494
2 Bedrooms:	$2,062	$1,848
3 Bedrooms:	$2,557	$2,452
4 Bedrooms:	$3,044	$2,899
All Units:	$1,777	$1,698

In contrast to the weak rental market, mild payroll gains were made in the San Francisco MSA (Metropolitan Statistical Area) that includes the counties of Marin and San Mateo. As reported by the state’s Employment Development Department (EDD), the three-county region has experienced solid increases in payroll since bottoming out last January. Almost 6,200 jobs have been created over the past year, a 0.6% increase. For the month of October, there were 954,700 nonfarm payroll jobs; a year ago the number was 948,500. For the month of October, the unemployment rate stood at 4.2%, down from 5.4% a year ago. In the three-county area, San Francisco had the highest unemployment rate at 5.2%, followed by San Mateo and Marin counties at 3.5% and 2.9% respectively. According to the EDD, October “was the fourth consecutive month with a year-over job increase since April 2001.”

The Bay Area, despite these steady gains, has yet to fully recover from the economic downturn experienced over the past four years. According to a recent report by UCLA’s Anderson Forecast, a quarterly real-estate oriented economic newsletter, the employment situation for the Bay Area has not recovered from the levels experienced during the dot-com boom. “San Jose and San Francisco, the two hardest hit economies in the nation over the 2001 downturn, are still down 19% and 13% respectively from where they were four years ago,” the forecast notes. The report points out that in 2003, San Jose and San Francisco were two of the top cities in the U.S. in terms of median household income (first and third respectively). They predict that the Bay Area “will regain its position as one of the fastest growing economies in the nation in relatively short order.”

Mirroring the local employment data, the U-Haul Corporation reports a continuing influx of new residents into San Francisco. Their numbers show that last summer 5.4% more families moved into San Francisco than moved out. Surprisingly, the data also shows that for the first time since the dot-com bust, people are actually moving into San Jose.
Meanwhile, on a national level, the economy continues to be in a state of flux. With the presidential campaign behind us, Wall Street has perked up a bit. The Federal Reserve is expected to continue its gradual increases in interest rates. Worth noting, however, is that some serious cautionary indicators persist. Job growth, despite a stellar month in October when the country added 303,000 jobs, had extremely weak employment numbers for November, with only 112,000 jobs added to payrolls across the U.S. The national unemployment rate stood at 5.4% in November. Consumer confidence levels, as measured by the Conference Board, also dropped in November, the fourth straight month since July. The board also reported the U.S. leading economic index decreased 0.3% in November, the fifth consecutive month of decline. It cautioned, however, that “these declines have not been large enough nor have persisted long enough to signal an end to the current economic expansion.”

As the rainy months of winter bear down on San Francisco, expect rents to continue their bumpy ride downward, and vacancy rates to edge up even more. Maybe it will be a good time to install that dishwasher.

Sources: 1: U.S. Census Bureau. Standard error for Q3 2004 was 1.8%. 2: California Employment Development Department; nonfarm payroll jobs, not seasonally adjusted. 3: 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. 4: U-Haul Corporation. 5: U.S. Bureau of Labor Statistics. 6: John Oldfield with Prudential California Realty. 7: Phillip J. Boersma with Arroyo & Coates, www.phillipboersma.com. 8: DataQuick. Median home price includes all single-dwelling homes and condominiums, new and resale. 9: 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. 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, DataQuick, U.S. Census, 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 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. For more information, please visit www.sheridanreport.com. Copyright © 2004. All rights reserved.