The San Francisco Rental Market and Why It Matters

For starters, the most recent US Census Bureau estimate (2014) concludes that about 57% of San Francisco’s population are renters.  That’s reason enough, especially when housing affordability is perhaps the major social and economic challenge that San Francisco faces over the long-term.

Rent and Condo Conversion Control.  With strength in numbers comes political power: San Francisco’s Rent Control ordinance applies to the vast majority of San Francisco’s housing stock, regulating everything from the rental increases that landlord’s can charge to existing tenants to how much interest owners have to pay renters on their security deposits.  Other ordinances have severely restricted the ability of owners to “remove” units from the rental market by converting them to condominiums.  Regardless of whether you think these controls are a good or bad idea, they have created an incredibly complicated legal landscape.  Whether you’re a tenant or an aspiring landlord, it pays to know your rights.  Here’s my favorite cheat sheet, courtesy of the Law Firm of Bornstein & Bornstein.

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Home Prices:  Chicken and Egg.  Furthermore, the correlation between the price of renting and owning is well-known, as this fascinating article from the Economist  shows. All things being equal, high rental rates tend to make buying – for those who can – a more attractive option.  When rents fall, home prices may fall too due to less demand.  Conversely, high home prices may swell renter demand while falling home prices may entice more renters into buying.  Of course, other factors are at play too:  rents and home prices will fall if employment drops, interest rates increase, wages fall, etc.  This is a complicated “chicken and egg” cycle – my guess is that while we can say there’s a correlation, it’s probably impossible to say which comes first.

Rents Seem to Be Falling Right Now.  Based on conversations with many agents over the last several months, including my rental specialist colleague Laura McNabb Gray, there seems to be little doubt that rents have softened over the last 6 months, particularly at the high end. Laura cites as an example a nice 2 BR unit in Cow Hollow that she could have gotten $5,500 for a few months ago that is now sitting unrented at $4,500.  The chart below shows how average rents across the city have completely leveled off over the last three quarters.  Ditto Marin and Oakland.  After the spectacular rent appreciation rates we’ve seen since the economic recovery started in late 2011 (see second chart below), that should come as no surprise.

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Thanks to reader Xavier for spotting this interesting Curbed article on rental appreciation over the last 60 years, quoting research by ex-Googler Eric Fischer.  Fischer’s conclusion:  despite rent control, rents have gone up an average of 6.6% per annum. The primary culprit: lack of rental units, a factor that is highly resistant to change in this town.  Unsurprisingly, he cites robust wages and employment as factors as well.  It would take significant drops in these to dent the overall upward trend in rents long-term.  No wonder SF seems to remain a perennial favorite for rental income investors, despite the regulatory headaches and high cost of entry.

Rents by Neighborhood.   For those detailed information by neighborhood, or who are just looking for a pad to rent, I like ZumperPadmapper, and Zillow. Here’s a neighborhood heatmap from Zumper.  Note that the data is from September of 2015, so rents may now be lower than those shown. Finally, CurbedSF often has good stuff on neighborhood rental trends and sometimes even on specific buildings.

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Rent or Buy.  My favorite calculator that compares the costs of each remains this one from the New York Times.

As always, questions, comments and referrals are very much appreciated!

Misha

 

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