The Sheridan Report
by Matthew C. Sheridan
After experiencing years of stale and declining rents, San Francisco landlords are enjoying mild gains in the residential rental market. The reversal in the market reflects the gradual but sustained improvement in the local economy as well as the benefits from a declining home-sales market. Recent employment growth and falling vacancy rates, coupled with rising interest rates, have awakened the rental market, with residents retreating from buying homes and settling instead for rentals.
In San Francisco, the gradual drop in home-sale prices from their summer highs may signal the long-awaited correction to our housing market. Beginning this past August, the median sale price for new and resale single-family homes and condominiums declined for two months before recovering in October. Meanwhile the rental market has turned the corner, with leasing activity on the rise.
Recent data provided by MetroRent best illustrates the current trends in the rental market. For the past few years, we have tracked tenant demand, the maximum rate a tenant is willing to pay for a given apartment. This number almost always stays below the asking rents offered by landlords for the average apartment unit in the city. But just after the first quarter of 2005 when tenant demand was just $3 below the average asking rent, the indices inversed; and the spread between them has grown, with tenant demand now exceeding asking rent by $76. Since we began tracking these statistics, asking rents have always led the demand rate (with the exception of the first two quarters of last year). But now, the tides have changed.
For the third quarter of 2005, asking rents stood at $1,858, up almost 5% from $1,777 a year ago. However, compared to the highs realized during the dot-com boom, rents remain off by over 20%, according to MetroRent. Meanwhile, tenant demand stood at $1,934, up almost 14% from a year ago, when it stood at $1,698.
“We have seen an increase in rent of 10% this year, but we are off 30% from the heights of 2001,” comments David Gruber, who manages his family's portfolio of rental properties. He attributes some of the uptick in rents to the rise in interest rates and the cooling of the housing market. “For awhile, we had a lot of turnover—half of our tenants were purchasing TICs or condos, or new housing down the peninsula and across the bay—all trying to get in [to the housing market] before it got away from them.” Now the saturation point for the need-to-own set has apparently been reached, and people are sticking to renting.
Leasing agent Gavin Coombs agrees with Gruber's assessment. "We're seeing higher rents generally now compared with the last few years, largely due to a cooling in the sales market and also due to seemingly improved job-market conditions in the region, attracting more prospective tenants to the city," observes Coombs. Gruber, who also serves as a San Francisco Rent Board Commissioner, remains concerned that there is still not enough job growth in the city and believes the rental market will just cruise along for the time being.
Establishing the right rents, proper marketing and upgrading units remain the keys to attracting tenants. “People are still searching for units with gas stoves, dishwashers and laundry,” reports Jackie Tom, a leasing specialist in the city. Units that have parking continue to command the highest rents, she adds. On the marketing side, Gruber (who discontinued advertising in the Chronicle a few years back) now exclusively uses Craigslist to advertise his rental units, as well as communicating by word-of-mouth and with just plain old signage. He rehabs every unit upon turnover, installs new kitchens and includes dishwashers. "Everything will be rented if it's priced right—if not, it will sit," Gruber exclaims.
"It's going to be the best we have seen in a while,"Tom predicts, referring to January, one the busiest rental periods of the year. The recent increase in rents is not all across-the-board though. She cautions that they apply to properties that are clean, updated and those that have the amenities and appliances that tenants are seeking.
| Asking Rents Q3 ‘05 | |
| Studios | $1,103 |
| 1 Bdrm | $1,570 |
| 2 Bdrms | $2,179 |
| 3 Bdrms | $2,735 |
| All Units | $1,858 |
Vacancy Rate
Meanwhile, the region's residential rental-vacancy rate dropped
to 8.6%, down from an all-time high of 11.4% in the second quarter
of 2005, with a margin of error of 3.8%. Provided by the U.S. Census
Bureau, the data includes both the San Francisco and Oakland metro
areas. For San Francisco, the vacancy rate is closer to 5%-6%,
as reported by several national real-estate brokerage firms, though
their surveys usually favor newer, larger apartment buildings.
The following are third-quarter vacancy rates for other West Coast
cities:
| Portland: | 8.7% |
| San Diego: | 6.6% |
| San Jose: | 7.7% |
| Seattle: | 6.8% |
A Rush to Get Out
The sales market for homes in San Francisco peaked this past summer,
and owners will likely experience a gradual adjustment to the market.
According to sales data provided by John Oldfield of Prudential
California Realty, the last hurrah for sellers began in the second
quarter, when home, condo and TIC prices all jumped significantly
across the board. But by the third quarter, prices began to retreat.
Recent data from the San Francisco Association of Realtors, however,
suggests a slight bump in sale prices for the month of October.
Overall, though, it appears the Federal Reserve Board's methodical
increases to the Federal Funds Rate over the past year-and-a-half
have finally had their intended consequence.
"We were way overdue," observes Bonnie Spindler, a realtor with Zypher Real Estate, commenting on recent declines in San Francisco's housing market. “We were supposed to get an adjustment in 2000, but it didn't happen.” She sees a glut of inventory in the market—double what it was just a few months ago—while the number of buyers has remained the same. She believes the market is now flooded with sellers trying to get out. "Everyone decided this was the top of the market."
The weekly Brokers' Tour listings, published by the San Francisco Board of Realtors, jumped to over 50 pages recently, doubling what it was a year ago. "We are back to a more normal market—to some it may seem abnormal,"says Michelle Balog of Pacific Union Brokerage. The days of selling a listing in a single weekend are gone, according to Balog, who believes the time is right for buyers and sellers to make deals, not just "write checks." Price reductions are not uncommon, and the properties that are selling are well prepared for sale. While prices are down from their summer highs, they still remain above prices from a year ago. "The sky is not falling," cautions Balog.
New Online Help-Wanted Index
For the past two years, “The Sheridan Report” has run figures from
The Conference Board covering the local help-wanted market by monitoring
the want ads in the local papers. As we suggested a few issues
back, the impact of online listings—especially Craigslist—has diminished
the relevance of this index, which severely dropped locally in
recent years. This past summer, The Conference Board launched a
new index that monitors online job postings. The Help-Wanted OnLine
Data Series™ provides a monthly count of unduplicated help-wanted
job ads for the first time on over 1,200 major internet job boards.
The index measures the number of new online help-wanted ads per
100 participants in the labor force. The figures from October show
that San Francisco, with 2.96 job ads per 100 persons in the labor
force, continues to lead the way among the 52 metropolitan areas,
for which data is published, followed closely by San Diego (2.93)
and San Jose (2.70).
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 the East Bay's Rental Housing magazine. For more information, please visit www.sheridanreport.com. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.