Sheridan Report

COVID Crossroads

written by Matthew C. Sheridan

Industry experts have contradictory predictions for what 2021 has in store for our housing market.

Just after Thanksgiving, San Francisco Mayor London Breed issued a statement everyone feared was coming: San Francisco, along with San Mateo county, had fallen back into California’s purple tier designation, which meant that stringent restrictions would be reimposed upon businesses and residents. In a little over a month, the city’s case rate had exploded from near all-time lows in mid-October, closely mirroring the national resurgence of the deadly coronavirus. Weeks earlier, the policy of limited in-door seating at restaurants had been repealed as the numbers began to tick up. Now, a late-night curfew as been imposed along with the closure of gyms, museums, and places of worship.

For months, epidemiologists and historians had warned that, much like the great influenza pandemic of 1918, the fall season—with its colder temperatures pushing people to congregate inside—would lead to a higher infection rate than the previous spring. As predicted, that insight became reality.

Over the summer, San Francisco’s carefully scripted reopening measures resulted in noticeably low case counts and hospitalizations, leading to the reopening of businesses impacted by the local health restrictions. Thanks to the leadership of the mayor and a particularly aggressive health department, along with a population that generally adhered closely to the public health mandates, San Francisco’s approach was heralded as a success story.

That success translated into impressive jobs gains too. Beginning in May, the San Francisco Metro Division (SFMD), which includes San Mateo county, had steadily added back nearly 80,000 jobs. This was after losing almost 190,000 jobs in the months of March and April when the shelter-in-place orders were instituted. Across the city, parklets and street closures have sprung up, which has allowed restaurants to move more dining outdoors. In parts of North Beach, the neighborhood rightfully feels like an Italian piazza now with tables lining the streets and sidewalks.

October saw San Francisco’s unemployment rate continue to decline to 6.9% from April’s historic high of 12.1%. Jobs gains reported by the state’s Employment Development Department showed the San Francisco Metro Division had added 16,000 jobs in October, up significantly from September’s miserable gain of only 1,300 jobs. Given the strides the city had made in reopening, it was not unsurprising that the leisure and hospitality category saw a sizable improvement; increasing by 7,200 jobs—with food services and drinking places responsible for 86% of the growth, while the arts, entertainment, and recreation saw gains as well, as did hotel and motels. Professional and business services boosted by 5,000 jobs, the largest month-over increase since March 2020, primarily focused in the professional, scientific, and technical services. And with the ongoing failure of the local school district to return to in-person learning, the private educational sector saw sizable gains, climbing by 2,000 jobs.

Eight months into the pandemic, SFMD still has a long road of recovery to claw back the remaining 111,500 jobs that disappeared this past spring. Job losses year-over-year stood at 9.3% in October, while San Jose’s MSA was far lower at 5.9% in lost employment, and the East Bay continued to struggle with 10.5% annual job losses.

In the months to come, keep an eye on the monthly initial unemployment claims. This trailing indicator published by the State of California indicates emerging unemployment. The local data release lags two to three months behind the statewide numbers (at the time of this writing in early December, the data was compiled through September). During March and April, when the shelter-in-place order was issued, initial claims mushroomed to over 100,000. Over the next four months, the rate stabilized, averaging just under 24,000 claims per month, but in September it jumped to 40,000. In total, some 237,952 San Franciscans have filed initial unemployment claims since the start of the pandemic (this data includes workers who have filed more than once). To note, San Francisco has an estimated population of 897,806.

Since the beginning of the crisis, this column has documented what many now refer to as the Great Exodus of San Franciscans escaping the city following the arrival of the coronavirus and the imposition of public health and work restrictions. Thanks to the trifecta of San Francisco’s density, tech’s remote work rules, and lack of affordable housing, many took the cue and headed elsewhere. The signs of this mass migration are everywhere: lower rents, high vacancies, empty streets.

Now the first hard evidence of this seismic shift in demographics has appeared with the recent reporting by an upstart local news site, Public Comment. An industrious reporter there obtained data provided by the Unites State Postal Service, showcasing the change-of-address requests in San Francisco between March and November last year. According to the article, over 120,000 change-of-address requests had originated in the city with a large majority moving out of San Francisco. Top destinations were Las Vegas, Florida, and Denver, while popular former hot spots Polk Gulch/Nob Hill, SOMA, Mission Bay, and Inner Mission experienced the most households fleeing the city. Flight to suburban Bay Area locales was noticeable, but a significant percentage—28%—was churn within in the city of renters and owners seeking greener pastures in more favorable neighborhoods.

“The exodus out is over,” stated James Wavro, managing broker at J. Wavro Associates, a relocation and property leasing firm in San Francisco. He believes the current glut of vacancies will be filled by the next generations—more Millenials and Gen Z—coming to San Francisco. Wavro, who also serves as the vice president of the Professional Property Managers Association of San Francisco, reports that it will take some time to work through the rental market’s excess inventory. “We’ve plateaued—and we’re starting to see the beginning of activity in the market.”

Others are less optimistic about San Francisco’s path to recovery. “We do not feel this is a temporary short-term condition—as initially anticipated in March,” reported Curt Cournale, president of Cournale & Co., a property management firm in business for 75 years in the city. “The rental market has undergone a significant reset in San Francisco.” Curt believes rents will take some time to return to the rates seen earlier last year. “We’ve been preparing with clients in regard to the exodus of tenants, and about the fact that rents are dropping dramatically.”

Brian Brown, director of leasing and relocation at Vanguard Properties, likens the current rental market to an anthill that got kicked over. “All the ants scurried out and many left; while others stayed to rebuild,” said Brown. “Scurrying to get another bedroom, a bigger workspace, a better neighborhood.” A measurement tool he likes to use for market conditions is the number of rental listings on Craigslist. “In the last week in April, 5,600 listings were advertised—today there are 11,800—it’s more than doubled.” He points out that the numbers exclude available units not being advertised—which means the real number is probably much higher.

By and far, prospective tenants these days are locals, he reports. “Of those applying, 98% are already San Franciscans,” observed Brown. Wavro noted that now is the time for tenants looking for a deal: “You have two or three months of a soft market and then we’ll see it tighten up.”

Most professionals in the business report that asking rents are down by 25%. Erston Pearcy, a leasing agent with Cournale & Co., confirmed this figure and said that, after a lower rental rate, “parking and laundry are the top items tenants are after, and everyone is negotiating.” Erston’s colleague, Cournale, recognizes that tenants are very cognizant of the market. “Some tenants have asked twice over the last six months for rent reductions as they’ve noticed what’s going on in the buildings they live in and what’s happening around their neighborhoods.”

While employment and rental rates are a key indicator to the region’s economy, helpful and early insight on the reopening can be obtained from companies that specialize in the relocation of new or transferring employees into the region. One such “destination services” company is The Right Move Group, a firm that helps guide employees and corporations on relocation matters. Working closely with leasing agencies and management companies, they bring local expertise and personalized service to the relocation space by helping with everything an employee needs to prepare for their arrival to cities like San Francisco.

Allison Stuart is a destination guide with the group, and reports that after months of remote-work practices, she is seeing some companies begin to gradually move essential personnel—if not into the office yet—into the Bay Area. “We’re seeing employees that are mission-critical to projects return,” remarked Stuart. “There are issues related to information security, productivity, and morale” that are contributing to this uptick. Other factors include the burden on some employers of payroll in multiple states, and the obvious “ramifications that some folks are not going to get their full salary if they leave the Bay Area.”

Stuart’s company also anticipates that under the incoming Biden administration, stringent restrictions imposed last year for the H-1B Visa Program—which allows U.S. employment of foreign skilled workers in the tech industry, among others—will be lifted. This should result in hiring in the region, and in turn boost relocations.

Stuart remains positive in her outlook for what lies ahead—as do corporate clients. She expects a ramping-up her window to start at the beginning of the year and continue through July as she intakes new clients settling in the city.

Over a two-week span in November, three pharmaceutical companies delivered the incredible news that large-scale, phase-3, clinical trials had revealed several safe and effective vaccines. Frontline healthcare workers were expected to begin receiving a COVID-19 vaccine by late December. While the manufacturing, transportation, and distribution of the vaccines will take some time for their widespread administration among the general public, the news provided hope and renewed commitment to a world ravaged by the deadly coronavirus, and an economy battered by public health restrictions.

With his family business going back three generations, Curt Cournale knows San Francisco and its boom-and-bust history. Reflecting on the difficulty and cost of doing business here—with the city’s bureaucracy and taxes on small businesses—he points out it’s hard to quell the entrepreneurial spirit: “People do want to open up, and it needs to be fostered as much as possible.” He’s impressed with how resilient San Francisco’s people and local businesses have been. “If you go down Valencia or Hayes streets, you see all these outdoor gathering spots, and you see the energy there; people who say New York or San Francisco is dying are naïve as to what’s going on and as to what will happen in the future.”

Matthew C. Sheridan is an apartment building specialist with Newmark Knight Frank and is the emeritus editor and publisher of this magazine. He can be reached at 415-273-2179.