‘Q1 Apartment Property Insider; April Report
I hope this email finds you and your family safe and healthy. Real estate is definitely not the top priority as we deal with family, working from home and hoping we can quickly get back some form of normalcy to our daily lives. But life and business continues around us as we all know (and hope) there is a quick end to these unprecedented times.
How the local apartment real estate market fully reacts to the COVID-19 crisis will not be known for some time but the common consensus is that rent rates will continue to fall. Last quarter I reported that rents began flattening out in Q4 amid high occupancy rates in the region and millennials were increasingly exiting the rental market (and transitioning into the purchase market).
I am not going to get into the usual array of charts and data points. The following few months will be more impactful as they will reflect on current economic and employment challenges. But, in short, San Francisco apartment rents slowed in March to a 0.9% growth rate, which was not a normal pattern as we experienced a 4.8% growth in March of 2019. Oakland followed the pattern with a 2.7% increase for March, which was down from 8% last year at the same time. Despite the slowing of rent rates, the San Francisco average rent reached $3,667 in March (only lagging behind Palo Alto and Menlo Park for the Bay Area). For reference, the national average rental rate in March was $1,474.
We know the economy is struggling and will continue to struggle in the coming months, but ideally we could see a rebound towards the end of 2020 with rents expected to follow. Pre-COVID-19 projections showed year-over-year rent growth will reach 4.2% in San Francisco in 2021, up from a negative -1.6% in 2020. But, with San Francisco service, hospitality, retail and labor sectors getting decimated by COVID-19, will these employees (and tenants) have sustainable jobs to return to in the months after we exit the crisis? Time will tell; some will exit the landlord business while other amass their funds to prepare to pounce on apartment properties in the event of significant increase in inventory.
With rosy projections for 2021 a lot of landlords are going to wonder how they make it through 2020 when local and statewide politicians are enacting tenant protections (for non-payment of rent) and multiple non-profits are calling for “rent strikes” amidst the current crisis.
What are the new tenant protections? Governor Newsom and Mayor Breed (and most all other California mayors) announced a moratorium on evictions in non-payment of rent cases (currently in San Francisco to June 21st). What does this mean to a landlord? In short, tenants who lost income due to COVID-19 cannot be evicted for failing to pay rent. The tenant still “owes” you the rent; you simply cannot evict them. This is temporary and there is a documented process for this non-payment request. Expect some tenants to reach out to you and request some latitude as it relates to their hardship. But you’ll also likely get radio silence from some tenants and others may use this crisis to try to extract a reduced rent rate from you. You will definitely want to consult your attorney for best practices as it relates to these matters. These instances need to be well-documented as I expect to see many non-payment cases go for many months and at the end, there will be some buyout negotiations with tenants requesting you to forgive some or all of the arrears in exchange for keys. If you need a Rent Forbearance Agreement to use with one or more of your tenants requesting non-payment, just let me know and I can email you a copy.
What about your mortgage? If your cash flow is cut, where are your “protections?” Well, if you’re a small landlord, Newsom (possibly) has something for you. You can get a 90 day payment “relief” if your lender is participating in his program here. If you are a large landlord, you are likely on your own and will need to reach out to your lending partner to work out an arrangement.
All landlords will also want to review their insurance policy and reach out to your carrier to see if you have valid claims (i.e. lost income, expenses on cleaning units/common areas where infected tenants reside(ed), etc.) due to COVID-19.
The California Apartment Association and the San Francisco Apartment Association are both good resources to keep up to date on your obligations in these unprecedented times. You can also find a quick FAQ from CAR here. Also, as referenced above, if and when you get your first non-payment of rent case, consult with your attorney. Expect legitimate cases, but also expect some to take advantage of the eviction moratorium.
That is it for now. If you have a desire to buy new apartment properties or are interested in a valuation on your existing properties, or if you know of someone that could use my help, let me know. I’m happy to help.