November 6, 2013

Rent Growth Slows In San Francisco Amid New Developments And Resistance

While the development of 8 Washington Street might have hit a (no) wall in San Francisco, over 1,000 new housing units will be finished the fourth quarter of 2013 for a total of nearly 3,500 new units in San Francisco this year, five times the number completed in 2012.

With construction in San Francisco continuing to ramp up and “renter resistance” to rents in the city starting to surface, Marcus & Millichap is expecting the average effective rent in San Francisco to end the year at $2,490 a month, up 4.7 percent over the past year versus 9.9 percent in 2012.

"Effective rents dipped in two of the past three quarters, and broader use of leasing inducements could occur at properties directly affected by nearby construction in 2014. Average effective rents at 2000s-vintage assets have climbed to 45 percent of median household income, up from 37 percent just two years ago. As renters commit to an extra $6,000 per year in rent payments, the incentive to "double up" or move to more affordable communities with mass transit options is rising."

Also noted: "With rents so high, the cost of vacancy is exacerbated in the current climate, giving apartment managers further incentive to proactively reset monthly rates to avoid loss to lease," which might be a bit counterintuitive and a little leverage for leaseholders to keep in mind.

First Published: November 6, 2013 9:00 AM

Comments from "Plugged In" Readers

The best way to stop the ridiculous rents in this city is to build lots of new, non-luxury units. The perfect examples are complexes like Trinity and Nema.

These places aren't cheap by any stretch, but they're at least affordable to young techies. And when those same techies are on the market for an apartment, they'll realize they can either live in a brand new highrise in the middle of the city, or a 100 year old shack in the corner of the Mission.

Pressure from above (Trinity) and below (Oakland) will eventually squeeze out overpriced Mission shacks and put their rents back into the "expensive but reasonable" category.

Posted by: OMN at November 6, 2013 9:33 AM

Hey, supply and demand does work sometimes.

Now what about applying the same principle on all the rental stock?

Posted by: lol at November 6, 2013 10:07 AM

This is actually fantastic projection data, as it completely belies the false claims that new housing will only add to the problem, will raise prices not lower them, etc. All economic logic in the world proves this wrong, but with SF's supply being so constrained we haven't really had the opportunity to test it. Now, we have several large rental complexes coming on in Mid-Market, and to a lesser degree SOMA (Rincon Hill 2). This will be a strong test of whether large scale development in places like Mid-Market/SOMA really does make housing more affordable, or at least slow down the crazy increases, in the rest of the city.

And in my wildest fantasies, this would help overturn the extremely conservative zoning of the Western SOMA plan, although I know deep down that ship has long sailed.

Posted by: JWS at November 6, 2013 10:08 AM

@JWS Yeah I have never understood the 'stop building' reaction SF seems to have every time their is a housing crisis.

Today's 'luxury' is tomorrow's 'dated'. Build all the 'luxury' condos/apts you want. It just makes yesterday's luxury look old and tired, aka affordable.

Posted by: badlydrawnbear at November 6, 2013 10:41 AM

I think part of the reaction is to the overbuilding in the neighborhoods with the single family homes that are sky high and the lack of a real counter-balance to the housing market so that real people earing minimum wage can afford. Or people earning under $100K. Also the homeless situation is still very bad. So we have seen new apartments for the last few years and there is no change apparent just high rents and high prices. Maybe the supply and demand will work ultimately it just doesn't work today.

Posted by: noe mom at November 6, 2013 11:22 AM

I don't believe that any serious amount of new construction has come onto the market for a while. New development collapsed in 2009 and is just not recovering.

Posted by: NoeValleyJim at November 6, 2013 11:53 AM

@noe mom - Did you read the data? Rent growth is slowing, and analysts are pointing to 1,000 or so new units as a major catalyst for the slow growth. It's my understanding that 6,000+ new units will be coming on in the next two years or so. As a city, we have not had a large enough batch of new inventory at one time in order to see if it would slow growth, and eventually reduce rents. Now we have some proof this is working (although any undergraduate could tell you as much on Day 1 of Economics 101).

Posted by: JWS at November 6, 2013 12:24 PM

It's not a question of belief, NVJ. It's merely a question of walking around the city. Apart from all the new condo/rental buildings on Market west of VN all the way to the Castro, you have the Trinity apartments multiplying its number of rental units (only halfway done, btw), then 2RH, the 2 new "Infinity Towers", etc, etc.

1000s over 1000s of new units are being added.

That's no insignificant. Sure there could be 10,000s more units added and they would be filled up fairly easily, but we're in a pretty intense building boom.

Posted by: lol at November 6, 2013 12:26 PM

Really lol? Units under construction reduce the price of housing? Tell me how that works, I really don't understand your logic.

I believe that only completed units actually on the market can have an effect on home prices, not units currently under construction.

Since 2008, only about 1,710 units were built each year, compared with an average of 2,220 each year between 2004 and 2008, according to the department.

Now, five major dwellings that were approved before 2008 and stalled during the recession have been restarted.

Posted by: NoeValleyJim at November 6, 2013 1:23 PM

Trinity for one is adding quite a bit of supply already. NeMa is adding supply right now. The demand is still very high, but some supply is coming. The construction market is very active. Maybe not in Noe Valley though. But Valencia, Mission, Market, SOMA, Rincon Hill, Mission Bay...

Posted by: lol at November 6, 2013 2:09 PM

If you believe even a tiny bit of EMH, you should know that units currently under construction will ABSOLUTELY have an effect on home prices. It won't effect rental prices until very close to completion, since rental terms are much shorter, but for-purchase housing? You'd have to be a fool not to look at what will be coming on the market in a few months or years when making an offer to buy OR sell.

Posted by: anon at November 6, 2013 2:22 PM

The question was why do people think the breaks should be put on building when the "more" building is helping to bring prices down...that may be true or they may just stabilize, put my point was that people think everything is too expensive and they see the construction (aka as remodeling)of sfh(like all the high end stuff in Noe/Mission and a few other places)and they say stop the high end stuff because all it is doing is making everything more expensive. And all those cranes in the skyline have not translated into any thing yet. And the bulk of apartments up until now have been high end. People are struggling today, they can't wait on tomorrow for a place to live that may be cheaper than it is today.

Posted by: noe mom at November 6, 2013 2:50 PM

of course rent growth has slowed. rents jumped over 20% in most cases. it will continue to slow through the holidays and resume in february/march.

Posted by: anon$random at November 6, 2013 3:05 PM

noe mom,

the housing market so that real people earing minimum wage can afford

Minimum wage being in the range of $10/h in SF, your expectations are that someone making $1350/month after taxes is going to afford something in SF?

It was not true 5 years ago, 10 years ago, even 30 years ago. SF has always been expensive.

People are struggling today

What people? Some are doing better than others. People with lower incomes have been commuting from the EB for decades.

The City cannot afford social housing in proportions that would make a significant dent into the market for the "minimum wage people who are struggling" or whatever that means for you. Its affordable housing policy has only one tool: rent control.

They are shoring it up with new legislation EVERY SIX MONTHS because it has created such insane imbalances that there are heaps of cash to be made by kicking people out.

Yeah, social engineering in housing is not working. But let's expand it and see if it will work this time around. LOL.

Posted by: lol at November 6, 2013 3:52 PM

People are struggling today.

I just looked back at an old tax return from 2007. My income has increased five-fold since then. I was wondering why I don't feel more "rich" but then it occurred to me that my spending habits have evolved from buying cars to buying houses. Also I have a young child and full-time nanny, all of which costs.

Can't wait for her to start kindergarten so I can save that nanny money. Maybe buy another house.

Posted by: Jimmy the House Flipper at November 6, 2013 4:00 PM

I just went to the Trinity web site. They have one 1-bedroom available for rent. It really doesn't seem like most of the units have come on the market yet. They will soon though. NeMa is similar, it is still mostly empty.

I look forward to seeing what the flood of units that will be coming on the market soon will do to rent prices.

Posted by: NoeValleyJim at November 6, 2013 5:15 PM

Plenty of people are already in the finished Trinity buildings, NVJ. Better than the web site, I suggest you pass by the area between SOMA Grand and Trinity Place on Mission. It's one busy area now.

Posted by: lol at November 6, 2013 5:31 PM

This is a temporary supply blip. SPUR thinks SF needs 5k units *per year* indefinitely - I think that's correct. So the relief in prices to come (that may have just started) will be short lived, since this mini-boom is an artifact of the near-shutdown during the financial crisis.

And there is no way SF politics will allow 5k units per year...the average has been about 1500. The only hope for the region is Oakland and San Jose.

Posted by: Frank C. at November 6, 2013 8:00 PM

New development collapsed in 2009 and is just not recovering.

Ooops, I meant to say "just now recovering" not "Just not recovering." My bad, sorry.

Posted by: NoeValleyJim at November 6, 2013 9:17 PM

OK, never mind...

I think the right amount of new units is being added to keep the demand in check.

Remember that cycles always go that way. They start with the bottom of downturn where we think everything is lost, then what we consider a "tepid" or "sticky" recovery and the belief that we are not going fast enough. The top of the cycle is usually characterized by a total lack of restrain. We will come soon to that point I think and we'll say "it's different this time".

Posted by: lol at November 6, 2013 9:32 PM

It's a good question weather the new building going on over the next 2-3 years will keep rents in check. Most of the new bldgs were designated as rentals, but I bet you that some, especially those not mostly jr. 1br/1br like trinity, will be sold as condos.

* key question is what percent of new units will be for sale condos, and I don't think it's easy to say. If anyone finds sources on that, I'd be happy to review.

Basically I think most new bldgs are mapped as condos anyways, again, maybe trinity and soma tiny unit bldg are different. But I'm quite sure that most institutional money prefers building/selling/getting their money out. It's a different, more complicated, and risky proposition to build new, manage and maintain for rent over the long haul.

That calculus will have significant bearing on rents over the next 2-3 years. And my bet is that a lot of projects will be repositioned for sales.

Posted by: 49yo hipster at November 6, 2013 11:07 PM

the twitter ipo will reignite the insanity

Posted by: meep at November 7, 2013 12:03 PM

Yup, and an IPO in tech is not the end game. If the company does well, it's usually the beginning of a larger growth cycle. It gives companies the cash to design new products, expand their reach, monetize the users, all of which adds more manpower at all levels to SF. TWTR's valuation is currently 1/2 of General Motors which is currently pretty successful in its revival.

SF sure is one of the luckiest cities in the world. We attract the best and brightest. Now all these people need to live somewhere, but there's nothing new in that problem.

Posted by: lol at November 7, 2013 12:21 PM

The twitter ipo will help SF tax revenues and will leader to a better city. It's already having a very positive effect on mid market. Hopefully twitter will continue to invest in that area

Posted by: Moto mayhem at November 7, 2013 5:41 PM

And the Tenderloin Poverty Pimp (TM) know it very well. Anything pulling the area up will automatically lead to crime and poverty coming down (or more precisely, moving out).

They made some noise at the Twitter HQs this morning, with more journalists and micro-bloggers than actual protesters.

Did I mention some were Tweeting about the protest?

Posted by: lol at November 7, 2013 5:54 PM

Why would anyone protest? This is good for everyone

Posted by: Moto mayhem at November 7, 2013 6:06 PM

The addition of housing in the city is a very good thing if you want to keep rents down on existing properties in a city , its simple supply and demand.

But that said, being able to add / redo housing can have a negative impact on existing biz or residents if they find their neighborhood being revitalized. It means that commercial spaces find their rents going up or they get evicted, and residents can find their neighborhoods radically transformed.

So if you live in the outer districts the construction is a great thing, but if your living in the SOMA, Bayshore, Mission, or near Van Ness to name just a few parts of SF these can be unsettling times.

But with about 10,000 units of housing being built or approved and some 350 or so stories of commercial space its hard to deny we are in the midst of the largest building boom SF has seen since the rebuild after the 1987 Earthquake.

Posted by: Joseph A at November 9, 2013 4:16 PM

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