A year after the pandemic started, have San Francisco rent prices bottomed out? It depends on whom you ask. 

 

In a pre-pandemic world, Bornstein Law put a finger on the ups and downs of rent prices without giving the numbers a second glance. We didn’t dwell on the fluctuations but now that there is a major societal shift in how and where we live and work, the trajectory of rents clearly deserves more focus.

There’s no shortage of opinions to go around. The San Francisco Chronicle reports that the City’s median apartment rent ticked up 3.4% in March compared to the prior month, the largest increase since COVID-19 reared its ugly head. These numbers were derived from Apartment List, which uses data from newer buildings. Using their yardstick, rents have plummeted 23.2% from the prior year, the steepest drop in the country among major U.S. cities.

 

Others paint a less rosy picture

Zumper says San Francisco rents were flat in March. Socketsite goes a step further by stating the weighted average asking rent for an apartment in the city has not started to rebound and goes so far as to say that average asking rents have fallen to $3,050 a month. The website boasts a massive subset of over 100,000 listings dating back to 2004 to explain the discrepancy.

 

Not to get lost in the weeds

While services use different methodologies, we won’t get lost in charts, graphs, and numbers, terms like "positive net absorption of available units versus vacant units being withdrawn" and decide whose data is closest to the real number by the decimal point. Instead, we’ll offer a bit of soliloquy, get to the bottom line, and suggest some strategies on what landlords and property managers can control.

 

By all accounts, the worst is over

While there may be different numbers, the consensus is that landlords have taken a double-digit bloodbath year-over-year but the hemorrhaging has stopped. The tourniquet may move up or down, but rents will not take a precipitous nosedive as they did during the pandemic. We are not certain if rents have bottomed out or not, but we are confident the major storm has passed.

 

 

People will return to an international destination as companies reign in their remote workforce and students return to campus

Fundamentally, San Francisco has not changed. The Bay Area has a technology sphere that is the envy of the rest of the world. Indeed, it was recently reported that nearly a quarter of Time’s 100 most influential companies call this region home. While working remotely is a phenomenon that is here to stay, not all employees will have the option of a nomadic lifestyle.

We won’t go down the list but several iconic companies have begun phasing in employees’ return to the office with goals to return more workers to the “mothership” by September. By and large, this is what workers want. The majority of employees have expressed a hunger for the connection, camaraderie, and innovation that comes from in-person teams and want a mixture of working in the office and from a remote location.

Higher education is taking a wait-and-see attitude toward how campuses will reopen but are on track to get back to in-person learning by September, as well.

 

Everyone has an opinion, but no one has a crystal ball

There have been many projections floating about where San Francisco rents are headed, and they are all grounded on sound arguments. Some pundits have pointed to encouraging signs, while others reference more dismal market forces, making it difficult to take sides.

You can cite an unbundling of homes, the appeal of city living, the phenomenal ecosphere of tech and education. Or you can take a glass-half-empty attitude by believing that migration to the East Bay and other distant points, coupled with other grievances against San Francisco means that people will turn in their keys and never come back. We do not predict the demise of the city and believe the glass is half full.

On balance, Bornstein Law believes San Francisco will always be on the map and agrees with the sentiment of Zumper CEO Anthemos Georgiades, who early on in the pandemic stated that free-falling rents in San Francisco were not a calamity.

“The city needs to breathe, to rebuild, to re-set its (insane) cost of living to attract the next generation to come here.”

 

A word about rental assistance programs

Throughout the pandemic, Bornstein Law has said that a bird in the hand is worth two in the bush and has urged rental housing providers to work out a mutually agreeable payment arrangement without waiving rent debt but rather, deferring it with an IOU. Enter Senate Bill 91. Even if a judgment can be obtained in civil court, we maintained that it is merely a piece of paper and that the prospect of actually recovering missed rent is dismal.

For that reason, we embraced SB-91 with open arms because it is much more preferable to collect 80 cents on the dollar than to chase rent debt. Many San Francisco landlords, however, will get little solace from the bill because they cannot take advantage of the program. Let’s dive in deeper.

 

A great number of San Francisco will be left in the lurch, but all is not lost

Under the statewide rental assistance program, renters must not exceed 80% of the Area Median Income (AMI). Clearly, that knocks out a lot of well-to-do residents who exceed that threshold.

What we will say about this upwardly mobile, affluent group is that they will have an incentive to pay rent because generally, they are conscientious of their credit and want to secure future loans without a judgment hanging over their heads. So ineligibility for rental assistance funds does not necessarily mean that the tenant will not live up to his or her obligations.

You could contrast these renters with those who would qualify for the city’s own program, which prioritizes tenants earning at or below 30% AMI.

 

Still other tenants will not qualify for rental assistance because they upped and left, but this may be an opportunity in disguise

The whole intent of SB 91 was to stabilize tenancies and keep people housed. There are droves of tenants, though, who have abandoned the properties in violation of the lease, perhaps to seek more affordable housing or move back with their parents on the east coast.

Whatever the reason, landlords must follow a carefully choreographed series of steps when it is suspected that the rental unit has been abandoned. We touch on the protocols here. For some of you, it is a blessing to learn that a problematic tenant has flown the coop, but we have to be careful in following what the law prescribes in order to re-rent the property. Once all of the boxes are checked, the landlord can raise the rent.

When a tenant has left the premises prematurely in violation of the lease, then, it is an opportunity to optimize your investment by attracting new and perhaps more desirable tenants at a higher rent amount.

 

 

There will be no eviction cliff that creates a glut of vacant units because the courts are unable to handle them

Eviction moratoriums for nonpayment of rent were set into place because lawmakers feared that during the pandemic, there would be widespread displacement when tenants with a COVID-related hardship were unable to pay the rent.

It was often predicted that there would be a “tsunami of evictions,” tenants were staring down a “cliff of evictions,” some sort of conjecture along those lines, once the bans on evictions expire. In reality, the courts would not be able to handle a deluge of unlawful detainer actions.

Filing unlawful detainer (eviction) actions for nonpayment of rent is like overeating - filing a lawsuit may provide immediate gratification, but the system cannot digest the number of cases being filed. Come June 30, property owners cannot flip a switch and evict tenants who are woefully behind on rents. The matter must be heard in court, and there is a long line to get in front of what will be a besieged court system.

 

Getting ahead of falling rents with a tenant buyout agreement

Landlords do not have to be beholden to swings of rent prices. They can legally effectuate a vacancy through a tenant buyout agreement whereby the tenant can be transitioned out of the unit in exchange for returning the security deposit, a waiver of rent, compensation, or a combination of carrots.

When a properly negotiated, enforceable surrender of possession agreement is inked with a tenant, landlords can raise the rent once the unit is vacant.

Oftentimes, the landlord will need to make repairs and upgrades in order to increase rents and these refurbishments cannot be made with a tenant still in possession of the unit. With an unoccupied unit, the landlord has the flexibility to perform the work needed to list the rental at a higher market price.

An added benefit to tenant buyout agreement is that the tenant agrees to release all claims that arise from the tenancy. For more information on tenant buyout agreements, we delve deeper here.

 

Rents should be determined on a case-by-case basis 

It’s helpful to keep a pulse on what the rents are around the block, but there are many intangibles when it comes to rent prices. Market comps do not take into account many factors.

What we are most concerned about is the existing relationship with the tenant. Is there a desirable renter? If so, it may make sense to lower the rent or make other concessions when those ideal residents experience a shortfall in income. The reason being, of course, is that a good tenant is worth their weight in gold and it may be cheaper to retain a good tenant than to market the rental to someone else with no guarantee that the new tenancy will work out.

Conversely, a resident who has an indelible bond to the unit and wants to stay for the long haul will have no objection to paying the current rent without a reduction and may even pay a premium to stay in the surroundings they know and love.

 

Parting thoughts

The macroeconomics of rent are good to study, but it all boils down to one-on-one relationships. No situation is alike, so any projections on rent prices should be met with a healthy dose of skepticism because there are many variables to come up with the “just right” rent price.

Supply and demand will always influence rents, but we don’t find that hasty generalizations and predictions are instructive. For over 26 years, our practice has been built on forging, continuing, and reconciling landlord-tenant relationships.

There are many fortune tellers who have more articulately predicted rents than we have, but at the end of the day, it is about managing rental relationships.

The raw numbers, percentage points, and academia go out the window.