July 2021: Q2 San Francisco Apartment Insider
I hope all is well with you and your family as we are in the midst of the City reopening. I don’t know about you, but for me it’s great to finally go outside sans mask. One aspect of visual communication that I took for granted was seeing and reading facial expressions. Obviously, this is hugely important in a professional environment when investors are making buying and selling decisions.
Good news; according to many local media outlets (some semi-reputable, others not so much), rent rates are rapidly rising! The first month-over-month increase came in January at 0.75%. Rents then slipped again between February and April before rising in May and June. In reality, landlords are seeing more “interest” in their vacant units, rates are moving north but not in dramatic fashion - regardless, it’s definitely a great sign of pending recovery.
San Francisco is still the most expensive California rental market with one-bedroom rents in June landing at $2,790 and two-bedrooms at $3,690. The City saw a 5.3% month-over-month rent growth for one bedrooms; the largest monthly increase since the start of the pandemic and 2.5% for two bedrooms. Year-over-year, rents are still down in June; 14.9% for one bedrooms and 15% for two bedrooms.
From an "on-the-street" trend perspective, I’ve seen interest skyrocket for two and three unit properties with at least one vacant unit. Owner occupiers are very active in the 2-4 unit segment as they compete (and lose out) on the extremely competitive single family market. If you have a small income property with a vacant unit, give me a call to discuss.
Political Update
Tenants still do not have to pay rent (they only need to pay 25% in order to avoid potential eviction) and landlords still have a limited toolbox to deal with non-payment. The eviction moratorium (CDC, State and local) are all still in effect. The CDC says they will not impose another extension, the Gav/Gov will give away more free money to garner opposition to his recall, and I would not expect San Francisco to provide any favors to landlords. The Gov says he is committed to paying all back rent for delinquent tenants, but we will have to wait and see on this. There are state funds available to tenants (to pay back rent) but I am not seeing many landlords receiving such funds.
I do know that San Francisco Superior Court has beefed up on resources as they expect a wave of small claims filings. I still believe there will be a lot of keys exchanged for past debt prior to entering court.
Downtown/Office Update
The second quarter was a relatively good one for the city’s office market (compared to the past 15 months). The city saw 11 lease transactions over 50,000 square feet — compared with one renewal transaction by Goldman Sachs for 90,000 square feet in the first quarter of the year — and more than 1.6 million square feet in leasing activity. Looking at net absorption (the net amount of leasing during the quarter), it was negative, coming in at -2.38 million square feet. And the city's office vacancy hit a record high of 20%, up from roughly 16.7% in the previous quarter.
Office tenants deciding to reoccupy spaces previously listed for sublease or taking advantage of lower rents are slowly chipping away at an unprecedented inventory of sublease space, which surpassed 10 million square feet.
Average direct asking rents are now slightly below $80 per square foot. While asking rents in trophy buildings generally remain over $90 per square foot, Class C space is averaging less than $55 per square foot.
On to the apartment numbers for the quarter:
