San Francisco's Rents Drop 35% - Long Term or Temporary?

Investor/Agent/Entrepreneur · Dallas, TX · Member since 2016 · 464 posts · 564 votes

Per the Bloomberg article, it seems rent for studios have dropped about 35%, 1 bedrooms 27%, and 2 bedrooms 22% as of November 2020.

I know it's been hotly debated whether cities will die out or not, but I want to look at it from a micro standpoint. I want to hear from those that have a vested interest (they own assets in the SF/bay area) and also those that live there, but have no assets there. I think whether or not you're vested in the city carries some weight as to how you perceive the situation & your future outlook (or desires).

- I'm interested to see if this will be a temporary shift, or a long term impact that could take years/decades to come back to 2019 heights?

- Do you think it will get even worse, before it gets better, based on the trajectory of the graph in the article (and looming moratoriums ending, more lockdowns, etc.)?

- Putting our investor hats on, is this the time to buy, in 2021, in SF (greater Bay area too)?? Even if it doesn't bounce back to the same 2019 levels immediately, like a pendulum the hardest hit should recover at a higher pace, especially when it was external factors...right? Would you all invest in SF now?

Thanks in advanced, interested in hearing all your perspectives! It'll help me to learn as well if you mention if you are a local, and if you do have any business or RE assets in the area, or if you're just providing thoughts as a non-local to SF.

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Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

@Ujwal Velagapudi I own and live in the SF Bay Area. Looking past covid and focusing on real estate, it has been very interesting to watch what has been happening in this local market. The pandemic has really shown a light on real estate strategies and exposed investors who were too reliant on the "up and to the right" trend in both rents and appreciation.

My purchase strategy was much more conservative, so I have been relatively unscathed until now. The one property that I have had some rent issues was underwritten with the anticipation that tenants would move out over time. I just did not anticipate that a pandemic would be the catalyst for tenants to move out. Because of rent control, I did not have an easy way to make units vacant for renovation and repositioning. Currently I am renovating a unit that I hope to complete and on the market by January 1. My target rent rate will be $600 ABOVE what the previous tenant was paying, but still BELOW the market average. The property was cash flow neutral at purchase and has apricated several hundreds of thousands of dollars since its purchase 4 years ago. As I have been doing construction, I literally have people walking in and asking when the unit will be ready for rent and asking if they can apply.

I agree with @Account Closed about the quality of life here. The weather is awesome, the ocean and the mountains are near and diversity of culture is literally second to none. Because of covid, traffic is completely manageable now. I cannot remember the last time I have been in bumper to bumper traffic.

For me the wild card is the political climate of the state. As I type this we are technically under a "stay at home" order. I personally have been lucky as my W2 is considered an "essential service", so I have been out and about during the past 9 months. The issue is that the CA government has thrown the economy under the bus in an effort to control the spread. Putting aside personal feelings on the effectiveness of general lockdowns vs. more focused measures, I believe the real question is if small businesses can survive the changes the government is imposing. Basically, will the economic harm being created by the lock downs be worse than the disease itself? That is a personal conclusion that people have to decide for themselves. But from an economic standpoint the evidence is pretty clear but businesses are starting to rebel...

People will adapt to our new reality with or without covid. Putting aside the global warming debate, I believe that the weather and the location of the SF Bay Area will EVENTUALLY bring people back. The one thing in real estate that we all know to be true is that "you cannot change the location". If an investor has a long game strategy, then I believe the biggest asset to the SF Bay Area market, has not changed.

To answer your last question directly, I am closing a non-residential property on the 21st of this month and I hope to get into contract on another by the end of this month. The only reason I am buying now is that I am doing a 1031 out of a SFR. If I did not have to pull the trigger I would wait until the end of 2021.

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Account Closed
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
5y
I was a long time Bay Area resident and have owned several properties over time. I don't own in SF city but I do have a townhome in Campbell area that I rent out. I had to change tenants in Nov and thought it would be hard. I put up the property on Zillow at a slightly higher rent than the last tenant and had it leased up in 4 days. This was during Covid and heading into the holiday season. So SB my experience was not anything like what the news media is reporting.
I no longer live in the Bay Area (or even the US) and I did see a declining quality of life over the last 5-10 years. The traffic, crime etc all seems to be getting worse. The weather is still awesome and culturally I would not live anywhere else in the US (if I had to go back). I think reports of its death are greatly exaggerated.
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Arlen Chou
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
5y
@Ujwal Velagapudi I own and live in the SF Bay Area. Looking past covid and focusing on real estate, it has been very interesting to watch what has been happening in this local market. The pandemic has really shown a light on real estate strategies and exposed investors who were too reliant on the "up and to the right" trend in both rents and appreciation.

My purchase strategy was much more conservative, so I have been relatively unscathed until now. The one property that I have had some rent issues was underwritten with the anticipation that tenants would move out over time. I just did not anticipate that a pandemic would be the catalyst for tenants to move out. Because of rent control, I did not have an easy way to make units vacant for renovation and repositioning. Currently I am renovating a unit that I hope to complete and on the market by January 1. My target rent rate will be $600 ABOVE what the previous tenant was paying, but still BELOW the market average. The property was cash flow neutral at purchase and has apricated several hundreds of thousands of dollars since its purchase 4 years ago. As I have been doing construction, I literally have people walking in and asking when the unit will be ready for rent and asking if they can apply.

I agree with @Account Closed about the quality of life here. The weather is awesome, the ocean and the mountains are near and diversity of culture is literally second to none. Because of covid, traffic is completely manageable now. I cannot remember the last time I have been in bumper to bumper traffic.
For me the wild card is the political climate of the state. As I type this we are technically under a "stay at home" order. I personally have been lucky as my W2 is considered an "essential service", so I have been out and about during the past 9 months. The issue is that the CA government has thrown the economy under the bus in an effort to control the spread. Putting aside personal feelings on the effectiveness of general lockdowns vs. more focused measures, I believe the real question is if small businesses can survive the changes the government is imposing. Basically, will the economic harm being created by the lock downs be worse than the disease itself? That is a personal conclusion that people have to decide for themselves. But from an economic standpoint the evidence is pretty clear but businesses are starting to rebel...
People will adapt to our new reality with or without covid. Putting aside the global warming debate, I believe that the weather and the location of the SF Bay Area will EVENTUALLY bring people back. The one thing in real estate that we all know to be true is that "you cannot change the location". If an investor has a long game strategy, then I believe the biggest asset to the SF Bay Area market, has not changed.
To answer your last question directly, I am closing a non-residential property on the 21st of this month and I hope to get into contract on another by the end of this month. The only reason I am buying now is that I am doing a 1031 out of a SFR. If I did not have to pull the trigger I would wait until the end of 2021.
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Ujwal Velagapudi
OP
Investor/Agent/Entrepreneur · Dallas, TX · Member since 2016 · 464 posts · 564 votes
5y
Thank you, @Account Closed. I'm wondering if locals, but ones that were further out, are using it as an opportunity to get into places they previously weren't able to afford. Being a former resident in the city, would you invest more during this time ('21, '22) in anticipation of growth back to the city, with rents back near where they once were?

Thanks @Arlen Chou for the details! Staying in LA now, I can definitely feel the frustration in regards to the local economics with small businesses. I do think a lot of locals, who are wanting to stay, are loving the lowered prices and are able to get closer to the city. What exactly do you mean by exposed investor strategies, that were up and to the right? Also, by your conservative strategy do you mean that it was a net even with rent during purchase?
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Arlen Chou
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
5y
@Ujwal Velagapudi let me try and clarify what I was saying. I have felt that too many new investors were coming into the market based upon the recent trend of appreciation and rent charts only showing a trend of going up. Graphs always move to the right, with positive stuff going up, hence my statement of going "up and to the right". In hot markets that have high prices, many people leverage to get into properties without a clear plan on how to raise rents or understanding what the floor of the rental market is for that market. If they don't have a plan to raise rents, they often have not considered what would happen if things went "right and down" on the chart. Meaning their cash position was light and they did not really understand what the floor for the rental market was for their area.
I have not made an investment purchase since 2016 because I could not find something that would allow me to leverage my personal strategies that are based upon my personal resources. My last purchase was a 6-plex in Oakland. The funds used to buy the property were from a HELOC from my primary residence. The price was such that I could come close to the 1% "rule" with existing rents. I had a plan to increase rent by capturing rents on "free for all" parking spaces on the lot and also renting out a storage area. This simple move pushed me over the 1% threshold. The property is in East Oakland, but I had deemed this particular neighborhood to be safe and potentially up and coming. I knew that existing rents were far below market, but at the same time I knew that the tenants would not take "cash for keys" because they were essentially price locked into my unit because they would not have a place they could afford to go unless it was out of the state. Therefore, I knew it would be a waiting game. This was a game I was willing to take as I did not have any of my own money in the deal and I was hitting 1% and therefore cash flowing.
My units are all 1 b/b. My thought was that tenants would leave on their own due to life changes or an eventual down cycle in the economy forcing movement. The part that I did not realize was that a pandemic would be the catalyst for the movement of my tenants and that I would have the opportunity to make changes in 2020. Assuming I can move existing tenants by enticing them into upgraded units or that they will move out on their own, I expect that my COC and the value of my property will be substantially higher at the end of 2021.
I hope that this helped. Good luck to you!
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Derrick Dill
Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes
5y
As someone in escrow to purchase property in bay area right now, properties are still flying off MLS within days above asking price >50k+. Market is extremely competitive still. Traffic is way better.
Pre-covid everyone talks about how rental prices are so inflated and traffic is so bad.. now that there is a correction in rental prices, the sky is falling. Before everyone wants to live in NYC, SF, but the major cities are some of the hardest to live in safely w/ COVID, so people are flocking away from the major cities. Places are shut down, some places are tele-commuting, some places purely work from home.
To me, SF and California will always be a destination for the good weather and opportunities
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Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
I own a few units in the bay and some are in SF city. This year all of them had a lease renewal at par. Meaning no tenants left and for once I did not feel safe raising my rent. So that’s coming from a landlord and seasoned Bay Area investor.
The media definitely loves to play up some trends so that the articles evoke a click and some ad revenue.
The reality is different. Housing market here is hot.
The areas that are under a cloud are new condos in SF and most are in the rincon/east cut area. I own a unit there and on zillow the value is down $100k over the past 3 months.
Now what’s the long term look like? Well I’d watch ONLY ONE metric and that is number of Covid cases. The longer we have elevated Covid, the more risk starts to gather around investments in the bay. People will work remotely and feel ok doing so. The longer that lingers the more pronounced the trend.
But if Covid starts to subside - courtesy vaccines - normalcy starts, then the bay will be back to old ways over the next 12 months.
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Amit M.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
5y
Yeah, there are a lot of bogus click bait type articles claiming 30-35% drop in San Francisco rents. (Oh! The horrors!)
That is only true for specific properties (mostly high rise condos) in specific neighborhoods (soma, downtown areas), and a couple tech heavy hipstery neighborhoods have also fallen a lot (the mission.) I can tell you for a fact that many other neighborhoods dropped almost nothing to 10%. And if you’re holding for the long run, which is most SF investors, who cares?
There is also tremendous hype with the sudden infatuation of work from home. Remember, work from home existed as an option way before covid. It’s not like companies were extolling its amazing benefits back when they had a choice. I believe there will be a strong reaction against work from home once vaccines dominate. People are quickly tiring of: families having to work and deal with kids/family members 24/7 at home; lack of work-home separation; singles feeling very alienated, especially young singles; companies loosing their corp culture due to lifeless and generic zoom interactions, etc. etc.
I think especially a vibrant city like SF, once the people who bailed realize that sitting on zoom 8 hours a day in some boring *** town, with crappy weather and nothing to do, really sucks! You’ll see, things will start to improve later this coming summer, and 1-2 years it’ll be business as usual in SF. Smart peeps are already starting to plot their returns, to secure a good apartment at relatively good rents, including those who have dreamed of living in SF but couldn’t previously afford to, those that were compelled to the East bay, etc., are paying attention. 1-2 years it’ll be like, S.F. landlord- we’re back bitches!
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Amit M.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
5y
^ for SF, most renters have rent control and pay a fraction of market rent. People who pay market rents make way more than the median. as for Sacramento, prop 21 (oppressive statewide rent control, sponsored by a nut) just got flushed down the toilet by CA voters.
Just saw this report on new leases being way up in Manhattan, for the reasons I discussed ^. I bet we’ll see a similar report on SF by summertime :) https://www.millersamuel.com/f...
4 Reply
Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
As @Amit M. rightly points out using averages in SF is a dangerous game and will always lead to the wrong conclusion. There are plenty of positives as well. Bay Area traffic has been rising each week and homeless encampments have been cleaned up in many areas. This week alone we have seen two major IPOs of bay area tech companies which likely have minted several hundred multi-millionaires overnight. I can confidently see a lot of that money flowing right back in to SF RE vs RE of tier 2 / tier 3 OOS cities.
Bottomline - If someone wants to be bearish on SF then they have to be bullish on the virus - meaning they have to hope that the virus stays and keeps growing and spreading. I don’t know which human will want that!
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Ujwal Velagapudi
OP
Investor/Agent/Entrepreneur · Dallas, TX · Member since 2016 · 464 posts · 564 votes
5y
@Arlen Chou It definitely did, thank you for the thought process and feedback!

@Derrick Dill Wow, $50k+ over asking, yeah I'm sure I can see that in some neighborhoods with the market in general being so hot today.

@Justin Thorpe Yeah I definitely agree there are media headlines more for clicks than content. That's an interesting point on the new condos in those neighborhoods. Very true on covid making the biggest impact now and variable to watch out for, hopefully with case counts on the decline.

@Amit M. I do agree there are many drawbacks to zoom, and it was all available before. But how about to justify the cost decrease in being able to hire workers from all over the country (if not world) at much reduced rates? Yes outsourcing existed before as well, but looking from a business owner perspective, we went through a year of remote work and now I see that I could at the bare minimum get certain operations, roles fully completed by someone remote where I don't need to pay high wages for a resident SF employee. Just looking at it from another angle given this experience for all business owners, small to the tech giants. Very interesting to see the new influx into Manhattan too, I think that certainly will happen as I've heard people going to SF to get in on some of the lower rents as well.

@Account Closed That's something I didn't understand as well, from an out of state perspective. I could certainly understand for those that excel with such an ambiance around them, but for generic (non-tech) jobs, roles, etc. there may be other options available now in lower cost of living areas w/telecommuting.
I certainly think the cities will recover, but I'm trying to gauge how much we think that would be. Do you think it's definitely back to Q1 2020 levels within a year or two of the vaccine fully rolled out, or do you think there will inevitably be some population, economic decline? Even a few percent of people leaving the state and deciding not to return (even if working remote for SF company) will still hurt the local market, and will eventually decrease the market rates.
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Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
Time will tell :). Who, say this time of the year last year ever imagined that a pandemic will take over the world and turn it upside down. If anything predictions are becoming very difficult and we just don’t know if this virus will get controlled or not.
I think cities will struggle and decay if Covid is not controlled. Again it’s not the “high rents” that are the problem, it’s basic social distancing that is the problem which is hard to do in cities.
On the flip side cities will thrive if the vaccines work and Covid becomes a faint memory.
So like I said, to be bearish on cities, one has to be bullish on Covid and champion that it lingers around for the rest of our lives. But if Covid is controlled, we have a different script. Cities WILL thrive!
Sure suburbs are great for a 40’s yo like me but they sucked when I was in my 20s. Sure homes are a tad cheaper in the suburbs but I now have to maintain a car or two, so car payments plus insurance, so then let’s add that cost. Plus I see is older families in suburbs and hard to meet young attractive people and every thing closes down at 10 pm. So why would suburbs be appealing to me at 22 or even 32 when I can live a much exciting, vibrant life in the big city? Come Gen Z and the younger mils, I doubt if they want to live in boring suburbs if they had a choice.
1 Reply
Amit M.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
5y
Of course there are several key unknowns regarding overcoming covid. And yes Corp culture has changed due to forced WFH, which will continue in the future more so than prior to covid. But SF is a small city, so it doesn’t take a lot of new people coming back here to change the rental market dynamics, for the reasons I discussed before. Bumpy next 1-2 years, sure. But given all conditions discussed I don’t think that prime cities like SF will be on a long term trajectory of decline.
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Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
What is interesting often in discussions like this is the assumption that we are playing a zero sum game. Meaning SF and CA have to be in decline for city X and State Y to prosper. Because SF is expensive relative to city U in state Z, it’s ripe for a collapse. Hmm has anyone taken the time to compare SF rents with those in major international cities around the world? My own take is that tech as an industry has grown massively in the last 10 years. All the largest valued companies in the world are mostly tech companies. In fact 6 or 7 of the top 10 are in western US and 5 are in the Bay Area. IMHO there needs to be more spread and spillover in the future and continued growth of tech will spur offices and jobs outside the SF Bay Area at a larger scale than before. But that does not mean SF or the Bay Area will start to decline, if anything we should expect a lot more growth.
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Juan Pardo
Member since 2020 · 201 posts · 118 votes
5y
Originally posted by @Justin Thorpe:
What is interesting often in discussions like this is the assumption that we are playing a zero sum game. Meaning SF and CA have to be in decline for city X and State Y to prosper. Because SF is expensive relative to city U in state Z, it’s ripe for a collapse. Hmm has anyone taken the time to compare SF rents with those in major international cities around the world? My own take is that tech as an industry has grown massively in the last 10 years. All the largest valued companies in the world are mostly tech companies. In fact 6 or 7 of the top 10 are in western US and 5 are in the Bay Area. IMHO there needs to be more spread and spillover in the future and continued growth of tech will spur offices and jobs outside the SF Bay Area at a larger scale than before. But that does not mean SF or the Bay Area will start to decline, if anything we should expect a lot more growth.

What do you think of the antitrust case brought on against Facebook? Could more regulation on tech companies make an impact on real estate in SF and the Bay Area?
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Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
@Juan Pardo
Interesting question. I think Facebook will fight it out and do just fine. But there will be drama and a fine they need to pay :). So no impact to SF Bay Area RE IMHO.
We must remember that FB is just one of the larger employees in the area unlike say state X or city Y that depends on a handful of companies. We have FB, Alphabet, Apple, Adobe, PayPal, Salesforce, Genentech, Gilead, Visa, Tesla, Levi’s, Gap, eBay, Intuit, Twitter, Square, Snowflake, AirBnB, Intel, Nvidia, AMD etc etc etc. So it’s a very diversified base of large employers to think one employer makes or breaks RE.
That said, if worst case Facebook is broken off into 2 or 3 companies, we will see an escalation in valuation in each of these companies individually.
Take for example, how the AT&T break up worked out many decades back OR more recently eBay which was broke into 2 separate companies - thanks to activist investors - the market value balooned from 50 billion to 300 billion spread across two companies in eBay and PayPal.
2 Reply
Joe Bertolino
Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
5y
I spoke with a local multifamily broker and two multi family investors that are selling larger properties in Sacramento and doing a 1031 INTO San Francisco. These are not rookies. A lot of smart money is hoping there is a panic and short term exodus out of the Bay because it is a buying opportunity in a world class city where buying opportunities are rare.
2 Reply
Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
The key is the vaccines and the confidence they drive. For example, post vaccines, Mr A continues to interact with his client via zoom meetings. He thinks that’s the “new normal”.
But his competitor Mr B, takes a flight and meets the same client in person. B quickly gains a competitive advantage of face time and a personal connection.
Same for Mr X who moved to the boondocks and works remotely on zoom. His office rival Mr Y however comes to office everyday and is in sight of his bosses. Y gains an advantage over X. Plus X feels left out of office politics and conversations and gets passed over for promotions. Now suddenly Mr X huge suburban spread and low mortgage seems useless and especially useless when X gets laid off. Worst because the state that X moved in has no comparable good jobs.
Well again, the vaccines may not work. Who knows, but if they do, the world better brace up for return to the old normal!!!!
3 Reply
Joe Bertolino
Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
5y
Originally posted by @Justin Thorpe:
The key is the vaccines and the confidence they drive. For example, post vaccines, Mr A continues to interact with his client via zoom meetings. He thinks that’s the “new normal”.
But his competitor Mr B, takes a flight and meets the same client in person. B quickly gains a competitive advantage of face time and a personal connection.
Same for Mr X who moved to the boondocks and works remotely on zoom. His office rival Mr Y however comes to office everyday and is in sight of his bosses. Y gains an advantage over X. Plus X feels left out of office politics and conversations and gets passed over for promotions. Now suddenly Mr X huge suburban spread and low mortgage seems useless and especially useless when X gets laid off. Worst because the state that X moved in has no comparable good jobs.
Well again, the vaccines may not work. Who knows, but if they do, the world better brace up for return to the old normal!!!!

I had a similar conversation with the CFO of a tech company. Just like anything else in life your network is key. You move to Idaho or SLC and work remotely you are locked in at that pay scale for a long, long time. When the world becomes flat you are competing for jobs with everybody and that drives pay down. The average income in San Francisco increased 31% from 2018 to present... That is not happening for remote workers outside of the area. You are also out of sight and out of mind for the people creating new start ups.
1 Reply
Amit M.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
5y
@Justin Thorpe and @Joe Bertolino I agree with both of you. Of course there is a balance to everything, but there is no doubt in my mind that the news and media is disproportionate hyping up one side of the equation.
Joe- interesting anecdote about the Sacramento apartment sellers seeking SF properties. Right now it's largely detente between apartment building buyers and sellers in SF; most owners won't sell at fire sale prices, so buildings are lingering on market or being removed from listings. I'm sure a few will sell at the right compromise for both parties, but not a lot of transactions. So only if the vaccines are a big bust, and we are in the same position 1-2 years from now may prices drop significantly. But if we expect the vaccines to take hold in 2021 then we will start correcting fast enough whereby SF sellers can hold out for better selling prices. I know that SFH's are holding their prices well (sub $2mil, larger homes are selling for a discount.) This also happened in 2009-10, so if you're looking for a higher end home or condo (and I know people who are) 2021 is a time they plan to strike.
As I’ve mentioned before, SF is a very small market, and never has a lot of listings at any given moment. So it doesn’t take much inertia to change the market dynamics. Same thing with rentals. With so many units locked in at below market rents due to rent control, it doesn’t take much to swing the dynamics back to the landlords favor.
1 Reply
Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
While I have my own distrust and distaste for click bait articles, I really do, what was interesting in “click bait” land was a reversal of sentiment on NYC exodus.
Several articles were splashed which laid out stories about people returning back to the great city after hibernating in the suburbs for a few weeks and months and coming back because of hyper boredom and lack of access to shops and other establishments.
I am not saying that makes a trend and sure there is exaggeration in them but it seems sentiment may be changing as young people get tired of dual fatigue from pandemic fatigue + boondocks fatigue.
Much lies on the efficacy and success of vaccines and their success could push a U turn to many a “pandemic blessed” trends. That includes migration to suburbs, uptick in WFH businesses etc say Peleton!
To me the world forward is binary. If vaccines work, cities thrive and exodus will reverse. If they don’t, we will see a sharp acceleration in all the trends we have been seeing for the past 180 days. WFH, suburban migration etc etc.@
Science and Human ingenuity usually has been wining in the last 10 decades over disease for sure. So vaccines may have a chance after all.
0 Reply
Joe Bertolino
Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
5y
Originally posted by @Amit M.:
@Justin Thorpe and @Joe Bertolino I agree with both of you. Of course there is a balance to everything, but there is no doubt in my mind that the news and media is disproportionate hyping up one side of the equation.
Joe- interesting anecdote about the Sacramento apartment sellers seeking SF properties. Right now it's largely detente between apartment building buyers and sellers in SF; most owners won't sell at fire sale prices, so buildings are lingering on market or being removed from listings. I'm sure a few will sell at the right compromise for both parties, but not a lot of transactions. So only if the vaccines are a big bust, and we are in the same position 1-2 years from now may prices drop significantly. But if we expect the vaccines to take hold in 2021 then we will start correcting fast enough whereby SF sellers can hold out for better selling prices. I know that SFH's are holding their prices well (sub $2mil, larger homes are selling for a discount.) This also happened in 2009-10, so if you're looking for a higher end home or condo (and I know people who are) 2021 is a time they plan to strike.
As I’ve mentioned before, SF is a very small market, and never has a lot of listings at any given moment. So it doesn’t take much inertia to change the market dynamics. Same thing with rentals. With so many units locked in at below market rents due to rent control, it doesn’t take much to swing the dynamics back to the landlords favor.

That brings up another question in my mind... with an uptick in people leaving the Bay Area and potentially many of those people being near the lower end of the income spectrum and grandfathered into favorable rent control situations... is this an opportunity for landlords to turn tenants/units and bring rents to market rates? If this happens with several thousand units how does that effect the multi family market?
2 Reply
Justin Thorpe
Member since 2020 · 437 posts · 675 votes
5y
@Joe Bertolino
To me anytime you have tenant churn in a rent controlled unit, it’s a huge upside in future revenue stream.
So yes the out migration of lower income people, if they were also tenants in rent controlled units, is an opportunity. But I feel there is more to come and again it depends on your optimism and confidence on vaccines.
For example in NYC and to some extent in SF, vacancies have risen because of burb migration but more so because of a stop on international migration, student population that did not renew their leases and the thousands of workers in the fashion, theater, tourism industries that lost their jobs and had to flee.
You got to guess if vaccines work, these jobs and people will likely come back. So there will be upward pressure on rents in the next 6 - 9 months. I am not even counting the returning office workers or the gradual fade we will see in remote work.
0 Reply
Johnson H.Pro Member
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
5y
All of the new multifamily development in SF was luxury as that was the only type of MFH development that could pencil out. These developers pushed rents higher and higher because the demand is there. Now that the demand has fallen, its these units that are taking the largest haircuts. The older housing stock for MFH has seem some rent declines but not as bad as these luxury units. Also, it depends on the unit type and area, studios and single room occupancy in downtown are getting hit harder than large 1/1 and 2/1's on the west and south sides of the city.
MFH buildings are still selling in SF and the bay area. Yes, there has been price declines but many of those buildings were overpriced to begin with. Billionaire Jay Paul just spent $73 million on a luxury apartment building in Redwood city on 12/1 that came out to $816,666 a unit. Why would the rich invest here instead of OOS? Something to chew on. I do believe money can be made anywhere but I am local and believe real wealth is created owning real estate here.

3 Reply
Johnson H.Pro Member
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
5y
I wrote this for a few friends but I think its applicable here.

Long term, I think the Bay Area will be fine. There will always be companies that come and go. For example, I remember 10 years ago Salesforce only occupied one building in downtown SF. Over the years they kept leasing building after building to have several in SF and then leased the newly built and tallest building in SF, Salesforce Tower recently. Schwab changed HQ due to an acquisition, Mckesson moved out as well, but leasing up those spaces wasn’t a huge issue. 10 years ago, I never heard of much going on in Mission Bay except for the Giants baseball team. Now UCSF has a huge campus occupying several blocks and the new Chase center is there as well.

The skyline is vastly different in SF compared to 10 years ago as well with a lot more office space. Short term leasing will be slow but I am sure it will get taken up and you’ll see office buildings start being built in a couple of years from now.
Moving a HQ doesn’t necessarily mean all those jobs at HQ get cut and moved to Texas right away, it will take some time and depend on the executive in charge. If the CFO stays in the Bay Area, his team will probably not be getting cut anytime soon. Any big company moving HQ probably still has to keep a large office presence here as talent is scarce. There is a reason why talented software developers get paid huge comps, it is tough to find great talent and some have just became millionaires in a year working at Doordash.

In my opinion, there are a couple of different avenues of migration to the Bay Area. One are college kids coming to the many great schools here in the Bay Area, Sanford, Cal, USF, UCSF, etc, they enjoy the city and their friends and stick around for awhile starting their careers. Yes, many will leave even during good times but we don’t need many to stay to keep the economy growing and thriving. Second are college grads looking to have fun and when the city opens up again, they will come back and rent small studios and coliving spaces because they will be having fun outside most of the time. Third are those coming here for work and I believe when everyone has the vaccine, the office will be open again and people will be back in the office as usual. Fourth is the foreign immigration of folks and that won’t ever stop.

In summary, there will always be new companies that grow and take the place of old companies. Once the city opens up and becomes fun again, people will come back and rentals will bounce back. In the mean time, hold on tight and keep looking for those deals.
3 Reply
Bruce Lynn
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
5y
Sometime rich people just need a place to park their money. The care less about cash flow.
When you have that much cash it gets harder and harder to find places to park it that you believe in.
Often people buy what they know as well. Maybe returns are better in Tampa, but if you live in Bay area and drive by it every day, there is some comfort in buying in the backyard, even if that is not always the best financial decision.
I would guess, but it is purely a guess...that 90% of the real single family investors that own 1-2 properties, own them in their backyard...same town/same state.
At $816,666 a unit.....they need $8000/month in rent or so, right? Can they get that? Can they get close to it? How soon is that rent a reality? Even at paying 50% of their income in rent and being house/apt poor...what % of the population in the area makes $175,000 to $300,000 year to afford that. What is avg Google salary?
I remember though when Ty Warner of Beanie Babies bought the Four Seasons Hotel in NY for something like $400,000/room, everyone thought he was nuts. I think he still owns it and until Covid, was probably a cash cow. Maybe not year #1, but maybe by year #5 and probably now in year 25....probably looks like a genius.
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