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

General Real Estate Investing
5yFollow

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

Ujwal Velagapudi
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.

2Reply
109 views

Most Popular Reply

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.

8Reply
See this reply in the discussion

45 Replies

Jump to latestLatest
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Johnson H.

    Very well said. I go back to the late 90s and think about the “cast of characters” ie companies that dominated the valley then, all or most have vanished but the valley has grown 10x more relevant and powerful as newer and more innovative companies have come in.

    Interesting how the old HP campus is now the new Apple campus. The old Silicon Graphics campus is now the Google campus and the old Sun Microsystems campus is now the Facebook campus. I think the bay will continue to shine and thrive a long as innovation is happening here and companies will indeed come and go!

    I think however the state government needs to address the high tax rates. If that is addressed, we are in for a bonanza. I also think some cities outside the bay - for example Austin & Dallas will see massive acceleration in new business setup and RE prices over the next 24 months and some of it because our state government is asleep at the wheel.

    4Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Bruce Lynn

    How does 816k translate into 8k in rent? If you plonk 20% down, you borrow about 650k and pay a monthly mortgage of about 2700. I’d love to know the bridge between the 2700 and the 8k you are mentioning.

    Also I think using averages can be misleading. Google salaries can vary and especially so if you work at Google and your partner just scored a few million in the Doordash, Palantir or AirBnB IPOs. I am not saying that is the norm but it just underscores how naive it is to take “average salaries”.

    1Reply
  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    5y

    @justin Thorpe .....$8000 in rent is the 1% rule lots of investors strive to achieve.  As far as the average salary, I'm thinking of who rents vs who buys.  If your partner just scored a few million at DoorDash IPO, I would think they might be buyers vs renters.  If you are an investor and want to make decent rental returns and cash flow it is not naive at all to think about average salaries of who will rent your investment property.   I used to live in Foster City, but been away long enough not to know what people make around there any more or what they are willing to pay in rent, but I would think the # of people who can afford and then willing to pay $8000/month in rent are limited.  Sure there are some that like to rent and don't want to own.  There are people there on the 3year rotation plan on their way up, etc, there are docs in residency (but they only make $60,000/year) , etc....but even given all that I would think the # of people willing to pay that much in rent are limited, but then again maybe there is a nice niche there.

    0Reply
  • Dave SpoonerPro Member
    Rental Property Investor · Cincinnati, OH · Member since 2020 · 869 posts · 823 votes
    5y

    Markets like SF and NYC have been real estate outliers and outliers tend to regress towards the mean. This is a bit of forced regression but it would not surprise me if rents dip or at the very least slow their growth.

    I don't think those cities will die by any means, but I do think WFH is going to have an impact. Why spend $8k in rent if you can live and work in a mid-sized city and pay less than a quarter of that? As that becomes more accepted, it will likely become more common.

    Again, this won't destroy the markets in these cities, and I doubt a 35% dip is realistic, but I wouldn't be surprised at some shift downwards.

    [email protected]
    4Reply
  • Steven Hu
    Colorado Springs, CO · Member since 2016 · 39 posts · 6 votes
    5y

    Compared to COVID, which is a temporary thing, companies fled out of the Bay Area is more of permanent importance. If employers are fleeing, employees would follow sooner or later. These big old companies are milking their property’s RE value, not so much innovative value.

    0Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Bruce Lynn

    I have been investing in the bay for 20 years and have accumulated a sizable portfolio and equity on them, not one time did I use the 1% rule. If I did I would have never started. This is a different market and one mostly plays for appreciation vs cash flow. If you look historically asset prices have appreciated and given outsized returns.

    At some point in your investment cycle you end up getting both appreciation and cash flow.

    But the 1% won’t work unfortunately.

    3Reply
  • Johnson H.Pro Member
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    5y

    I don't know where this $8k rent number came from, no one is paying that in those units. A new development there won't be getting the 1% rule. They are probably paying 3-4% cap rate and getting low interest rates in the 2-3.5% range with an interest only period of 3-10 years since its a huge loan. The money isn't made on day one, its on the future rent increases on the property. When those rent increases fall to the bottom line, divided by the low cap rate, that is where you get your appreciation. Cash out and repeat. That's how the game is played in the bay area. 

    4Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    As I look through some of the comments I am reminded of my own mystification of markets like NYC or Paris or London and say why on earth would people pay so darn much to live in a crowded city in a shoebox or live in the deep suburbs and spend 1 hour each way on a crowded train just to get to work.

    Well I said that because I was just as outsider looking in and trying to make their world fit into mine. I see a lot of that in comments from folks who don’t live in the Bay Area or invest in this market but are trying to evaluate the market like any other tier 2 or tier 3 US city.

    Clearly it gets to an apples vs oranges compare. Same for us bay folks, we are out here thinking why would people live in state X or Y where it’s hot as hell or freezing in the winter etc.

    Fact is 90% of the US population happily lives outside California and in cities that may not have great weather and hence it’s just not right to use the “Bay Area lens” to evaluate.

    1Reply
  • Johnson H.Pro Member
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    5y

    @Justin Thorpe Good points. I do believe you can make money in real estate anywhere, but you need to understand how the game is played locally and for that asset type. For the majority of us mom and pop investors, we either have to buy at a discount to market value, buy a value add building/project, or do something in the middle in order to continue to scale. 

    0Reply
  • Michael Smith
    Property Manager · Portland, OR · Member since 2020 · 11 posts · 16 votes
    5y

    @Ujwal Velagapudi , temporary. I have no experience as an investor in the Bay Area, but this likely a price correction, and I wouldn’t bet against Silicon Valley.

    Some projections have home prices increasing 10% there in 2021.

    Also it’s the worst kept secret that we up in Portland have been piggybacking off the flow of transplants from the Bay for a while now.

    3Reply
  • Brian Garlington
    Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    Others on this thread will debate me in this..... but over the long term

    Prices of property will be higher in San Francisco 10 years from now than they are today.....

    The best way of Investing in San Francisco would be if the property is already vacant.... set your own market rent and.....


    Here’s where I will lose most of you...

    Also if the tenant has a Section8 voucher..... you are not AS restricted with rent control.... you have more leeway with evictions IF you promise the housing authority and courts that you will replace the evicted tenant with another Section 8 tenant.....Plus, (most, if not all of) your rent is guaranteed to come in, even if the tenant loses their job.

    3Reply
  • Natalie Schanne
    Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Ujwal Velagapudi - How much of the rent declines do you think are a function of existing homeowners, now working remotely, putting their properties on the market for way less than they should because they’re not professional investors? (Or are these statistics only on multifamily apartments?). If I’m making $100,000+/year working for Google and they told me I don’t need to come back in person until next summer, I probably am considering renting my $1m home for $3000/month. Or I am dropping my lease when it comes time, moving southeast where the cost of living is less, and returning when things open back up and I have to return to the office. I met many New York residents who dropped their lease when it came up this past year and moved to North Carolina or Florida or Texas because they could work remotely at half the rent (or less!) without a problem. They’ve said their plans are to go back to the city when their employers ask them to. But for now, they’re optimizing. And many are already bored and frustrated with having to drive to do anything. I lived in Center City Philadelphia for five years and didn’t need a car at all. I really liked that way of life, however now that I’m back in the suburbs where I’m taking my life in my hands if I walk along the roads where nobody’s expecting me, I drive everywhere and going 15-50 miles to go to a restaurant is totally normal. Whereas in the city I had 50+ excellent choices within 20 minutes walk / 1 mile.

    3Reply
  • Samara HuntleyPro Member
    Investor · Charlotte, NC · Member since 2020 · 124 posts · 189 votes
    5y

    @Ujwal Velagapudi nothing is forever. I believe they will come back with time. It’s still got the weather and desire for a city to thrive. Of course the desire has dwindled but i know it will bounce back after we get through this in a few years time.

    3Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Natalie Schanne

    First of 35% is a wildly inflated number. In my own experience it’s like 10%. That’s because I normally would have increased rent by 10% and this year it’s been 0%.

    I also think only portion of the vacancy is from people moving to cheaper suburbs or out of state. The rest is from lack of international migration and student population that is staying remote for now.

    To me this is like a “coiled spring”. Post vaccines people will come back in droves. These trends have everything to do with social distancing. If/once confidence returns, there will be a one time bump in traffic and I see a lot of people wanting to move back to the city.

    In the end quality of life, jobs, social environment drive long term migration. It all comes down to solving Covid. If Covid is solved, it’s one world. If it’s not it’s a different and pessimistic world for cities.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    San Francisco has the nations most restrictive landlord tenant laws and they just passed a wealth tax on companies who have physical presence in the city. Wait for the exodus. On top of that the pandemic has made remote work mainstream. Some San Francisco based companies have told employees they can permanently work from home. Even the city itself has been going downhill for years, getting dirtier and less pleasant to visit. There are other surrounding cities that are much nicer.

    1Reply
  • Ujwal Velagapudi
    OP
    Investor/Agent/Entrepreneur · Dallas, TX · Member since 2016 · 464 posts · 564 votes
    5y

    Appreciate all the feedback, very interesting points as I'm finally reading through all the posts! Great discussion on the impact of remote work, SF employers, rent controlled units, etc. 

    Overall, i don't see how there isn't some short term (6-24 mos.) impact, more so than other cities. Even a few percent more. Long term, I think the appreciation will not be quite as high, in relative to other cities nationwide, as it was in the past couple of decade in the Bay. 

    Certainly the city will bounce back, as will the country & world. But the level of impact I think will be up for debate till it actually happens, it's very tough to quantify and look at a micro picture as it relates to the country.  

    1Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Ujwal Velagapudi

    I have been investing here for 20 years and I will say a lot has changed.

    What has not changed is the gap in the optimism of local investors vs others. In the last 2 decades I’d be hard pressed to find any friend, relative, acquaintance who does not live/ invest in the Bay Area speak optimistically about it. For them the crash is “always around the corner” and the market is “over priced” and how SF is a “disaster in the making”!

    I am a local investor, so my optimism is definitely on the other side of the continuum. But I acknowledge that Covid brings us into unchartered territory.

    That said, I am curious to see where the money made in the recent IPOs and the stock market is going to land. Also my friend who deals exclusively with rich wealthy investors is telling me her call volume is up from overseas clients looking to snap up RE in larger markets.

    4Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    Betting against the SF Bay Area is like betting against Wesley Snipes in a Wesley Snipes picture.  Since 1849, this area has shown unique resilience in the face of every imaginable setback and a unique capacity to remake itself virtually every decade.  Haters, please keep hating because that leaves more opportunity for those of us who get it.       

    2Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free