From the President
by Marc Wilson
Congratulations are in order! Did you know that the San Francisco apartment-building sales market has been crowned the most expensive market for apartment-building sales in the nation for 2004? San Francisco enjoys the absolutely highest average price per unit and lowest capitalization rates (initial returns on investment) in the free world. Doesn’t this revelation seem to make it all worthwhile? I personally am trying really hard not to let rent control, evictions, roof leaks, plumbing leaks, obnoxious tenants, lead paint, mold, litigation, 6.14 Notices, revolving tenancies, illegal subletting, bloated city governments, litter, graffiti, late rents and bounced checks dampen my spirits. Think about it—we own apartment buildings in the most expensive market in the world.
This sales market is a true conundrum. Why are apartment buildings in one of the most over-regulated rental-housing markets in America so expensive? Why are buyers and investors falling all over themselves to pay 15, 16 even 20 times the gross income for apartment buildings in San Francisco? We all know how hard it is to manage property in San Francisco. Why the investor enthusiasm? Why the ridiculous prices?
Rent Control.
The answer is definitely rent control. Think about it—all San Francisco apartment units that are below market are, for all intents and purposes, off the market. These rent-controlled units don’t really count when it comes to supply and demand because the tenants don’t vacate these units. When the supply is reduced, rental prices go up. What do you think would happen if rent control was abolished tomorrow? Do you honestly think that market rents would not decline? Conservatively, 30% of the rental units in San Francisco are seriously rent controlled. The abolishment of rent control would increase the supply of apartments by 30% almost overnight. And what happens when you increase the supply of apartment units by 30%? Rents go way down. I would not be surprised if the abolishment of rent control led to a 35% reduction in market rents across the board.
Rent control, high rents, high building prices and Ellis-Act evictions are the absolute cause and effect as well as the absolute legacy of San Francisco rent-control advocates. Years ago, rent-control advocates rejoiced in the reduction in the allowable rental increases to 60% of the Consumer Price Index (CPI). Parties were held, speeches were given and bows were taken. Fast forward to 2005. San Francisco enjoys the highest market rents and the highest resale building values in the nation. I personally have witnessed two Ellis-Act evictions on my block in the last six months. What in the world did rent-control advocates think would happen if building expenses were ever allowed to outpace building income? Holding allowable rental increases to 60% of the CPI is the worst thing that has ever happened to San Francisco tenants. This is a classic case of the tenant community “eating the golden goose.” The tenant advocates have ruined their own rental market in exchange for winning some local elections. The good news is that tenants have the likes of Chris Daly and Jake McGoldrick as their supervisors. The bad news is that tenants are significantly more likely to be the recipient of an Ellis Act for the very same reasons. The bad news is that new tenants pay some of the highest rents in the United States. The tenant advocates must be so proud. What an accomplishment. Remember, this market is bigger than you and me. This market is bigger than tenant advocates and their handpicked supervisors. No constitutionally viable political or legislative action will save the tenants from this conundrum. Seriously—rent-controlled tenants are literally consuming this rental market. The only hope for current San Francisco tenants and for the next generation of San Francisco tenants is the revisiting of allowable rental increases. San Francisco tenants will continue to be evicted and will continue to pay the highest rents in the nation until a fair and reasonable rental-increase calculation is instituted.
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. Marc Wilson is the president of SFAA. He has been managing and selling San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.