As we close out the second quarter (and our first full COVID/SIP quarter) we have a lot of new information on market activity, legislation, data as well as new trends. It had already been a challenging couple of years for San Francisco landlords with political developments regarding sales, evictions and rent control coming into effect, seemingly one after another - but COVID-19 is a health and economic crisis of another magnitude. First, let’s look at local and statewide legislation.

San Francisco Legislation.

The COVID-19 Tenant Protections Ordinance is headed to court. On June 29th a lawsuit was filed in San Francisco Superior Court to suspend the city's temporary eviction moratorium. If you recall, the moratorium stops evictions for nonpayment of rent. Keep in mind SFAA reported that 97% of renters continue to pay rent during the crisis. SFAR, SFAA, Coalition for Better Housing and Small Property Owners of San Francisco Institute are the groups backing the suit.

So what is on the books now?

On June 26, 2020, the Mayor extended the order prohibiting evictions for nonpayment if the tenant was unable to pay due to financial impacts of COVID-19 (between March 13, 2020 and July 31, 2020) until six months after the order expires (the eviction cannot occur until January 31, 2021), regardless of whether the tenant notified the landlord or provided documentation. The tenant is still nominally required to provide notice and documentation (with no requirement as to when), but failure to do so does not affect the tenant’s ability to claim the eviction protection described above. Landlords are prohibited from charging late fees or interest (on past rent). Also, landlords cannot evict tenant for not paying back rent once the moratorium is lifted. Back rent would be considered “consume debt;” therefore not grounds for eviction. So what are your options as a landlord? Sue in small claims court or negotiate debt for keys.

Coincidentally, the legislation also helps landlords seeking relief. Revenue from the November ballot measure (that would double the tax rate on real estate transactions above $10 million) would provide funds to reimburse landlords who have been financially hit by the pandemic. Of course, the measure needs to pass and I have not seen definitive guidelines for landlords to apply.

In other local legislation, Prop D (storefront vacancy tax) implementation has been delayed until 2022 (was scheduled for 2021).

Statewide.

There are many pieces of legislation floating through various committees and I will cite what I know below. As of now, we can report that AB2501 and SB939 are both dead. AB2501 was an attempt to halt foreclosures in apartment buildings during the coronavirus crisis. SB939 was the legislation that would allow commercial tenants to negotiate rental obligations under their leases, and if unsuccessful in their efforts, to terminate their leases with limited financial consequences.

AB828 would prohibit a person from taking any action to foreclose on a residential real property while a state or locally declared state of emergency related to the COVID-19 virus is in effect and until 15 days after the state of emergency has ended, including, but not limited to, causing or conducting the sale of the real property or causing recordation of a notice of default.

SB1410 would create a fund to cover at least 80% of a tenant’s rent that they couldn’t pay due to the pandemic for up to seven months, if the landlord forgives the rest.

Ab1436 would not provide tenants with direct financial aid, it would give them more time to make up their unpaid rent and take the threat of eviction off the table.

On to the local market.

Rent forbearance rates remain incredibly low. April 6%, May 3% and June 3% (and 2.5% made partial payment). But, an unwelcome trend is that renters are breaking leases in unprecedented numbers. A survey from the SFAA estimated that 7.5% of renters in San Francisco have broken their leases in the past three months.

Those numbers fare much better than what we see for commercial landlords. 57% percent of commercial tenants - like restaurants and retailers, did not pay rent in May, according to the apartment association survey. Delinquencies in commercial mortgage-backed securities jumped by 213 basis points in June to 3.59% from 1.46%. It was the largest one-month spike since Fitch Ratings began tracking the metric nearly 16 years ago. The hotel and retail sectors are seeing the worst delinquency rates. Locally, landlords of commercial storefronts are in for a major correction. A lot of those tenants (businesses) will not reopen and the prospect of finding a suitable tenant could be grim. Now would be the time for the Mayor or Supervisor’s to get on my bandwagon of allowing owners of ground floor commercial space to convert it to residential use.

Looking at office space in the second quarter, signed new leases totaled a paltry 266,000 square feet according to brokerage Cushman & Wakefield. That was the lowest level going back to the 1990s. The previous low of 556,640 square feet was in the first quarter of 2009 during the Great Recession. The data does not include renewals. A silver lining for commercial landlords; the office market has yet to see asking rents drop. June’s asking rent of $83.11 per square foot annually was up slightly from the first quarter.

Apartment rent rates have clearly slipped. New work at home standards have pushed many “commute-adverse” San Francisco residents to look elsewhere for more in terms of housing and quality of life. Listing activity for rentals in San Francisco has jumped over 50% since the end of February. In June, rent prices (year-over-year) dropped more than 9% in San Francisco, 15% in Mountain View and Cupertino was down 14%. SFAA projections put the vacancy rate in San Francisco rising to 20% before pandemic starts to ease. Prior to the pandemic; vacancy rates hovered around 4%.

The median one-bedroom price of $3,280 (-11.8% y-o-y) in San Francisco is still the most expensive rental market in the country, followed by New York, Boston and nearby San Jose and Oakland, which are tied for fourth.

Keep in mind Long-term investors who avoided over-leveraging their properties have ridden out several economic crises over the last 30 years and will do so again. There will almost certainly be opportunities for savvy buyers.

Market Rent Trends