The crash is over in America’s hardest-hit rental market, but cheaper housing may be around for a long time to come.
After an exodus of residents during the pandemic, San Francisco is starting to see people trickle back as the economy gradually reopens. They’re moving into buildings that had lost tenants for months, pushing rents higher for the first time since the lockdowns took hold last spring.
The boom times are far from back, though. Many of the tech companies that turbocharged San Francisco’s economy are embracing permanent remote work, giving their highly-paid employees less incentive to lease pricey studios and one-bedrooms near the office. The result is that apartment owners have lost the pricing power they once had in a city known for its high housing costs and gaping inequality.
“It’s going to take years for the average landlord’s revenue to get back to pre-Covid levels,” said John Pawlowski, an analyst at real estate data and research firm Green Street. The drop in rents means that higher-end apartment buildings in the city are now worth at least 20% less than before the pandemic, he said.
Landlords have already taken large hits. Revenue at San Francisco buildings owned by Essex Property Trust Inc., one of the largest West Coast apartment owners, fell 17% in 2020, the most of any of the company’s California markets. Related Cos. has resorted to incentives like three months free rent and $2,000 MasterCard gift cards to woo tenants to its luxury high rises.
Parkmerced, San Francisco’s largest apartment complex with more than 3,200 units, is offering leases with $5 deposits and $5 for monthly parking while waiving fees for pets and applications. Parkmerced’s vacancy rate climbed to 25% last year from 6% in 2019 when $1.56 billion in mortgages were issued for the property, according to information compiled by the loan’s trustees.
It’s a similar trend that’s playing out in pricey cities such as New York, and the effects are even more pronounced. San Francisco suffered the greatest increase in net population outflows from its urban neighborhoods last year among large U.S. metropolitan areas, according to research from the Cleveland Fed. That was both due to people leaving and because the pandemic stymied the typical inflow of young people moving to the city for new jobs and higher education.
Ironically, it was San Francisco’s locally-grown tech industry that enabled remote work and the mass departures. After the pandemic silenced the sports venues, nightlife and food scene, paying high rents didn’t seem worthwhile. Now, after one of the nation’s strictest lockdowns, indoor restaurants, cafes and museums were permitted this month to reopen with restrictions.
As vaccines bring the promise of a return to normal life, rents have stopped spiraling downward. They bottomed out in January 27% below their level at the start of the pandemic, according to data from Apartment List. In February, the average-one bedroom rent rose 1%, the first month-over-month gain in a year, to just over $2,000 a month.
“It’s a turning point,” said Igor Popov, the chief economist at Apartment List. “People are moving back in, but we’re not jumping back to pre-Covid rents because the group occupying those units are different and have different price points.”
Lindsay Albert, a director of programming for an arts organization in San Francisco, was among them. She left the city last April because she felt uncomfortable living with roommates in a pandemic.
After spending eight months in Tomales, a rural hamlet north of the city, Albert returned at the end of last year and began renting a one-bedroom in the inner Richmond district for $2,000 a month in January. It’s more than she was paying to live in a group house at the start of the pandemic, but about $1,000 less than the one-bedroom units she was looking at a year ago.
“I feel like I’ve won the lottery,” she said as she rattled off the amenities, including a living area big enough to fit a six-foot table and a couch with a chaise, as well as proximity to Golden Gate Park and the Presidio. “I’m 34 years old and I haven’t ever been able to live alone.”
The broader return of residents, and rents, depends on the pace of vaccinations and reopenings, Popov said. “There’s a lot of latent demand for urban amenities,” he said. “People really want to go to restaurants and bars and concerts.”
Outdoor dining has revived street life in residential neighborhoods like Nob Hill, Hayes Valley, the Mission District and Valencia Corridor. On weekends in the Marina District, Steiner Street closes to cars and fills with diners feasting on calamari, sourdough bread, craft beer and Napa chardonnay.
“They have that life and vitality not too dissimilar to what they were pre-Covid,” said Miles Garber, vice president of research with real estate marketing company Polaris Pacific in San Francisco. “While things have improved recently, there’s still a long ways to go.”
Some of Garber’s friends who worked remotely from places like Utah’s ski resorts or Hawaii’s beaches are moving back in anticipation of being required to report to office desks. Other friends left permanently, accelerating long-planned moves to single-family homes in the suburbs where they can raise a family.
“Instead of moving two years from now, it became two months,” Garber said.
He took advantage of lower prices to relocate from a studio to a one-bedroom apartment in Nob Hill for $2,500 a month — a roughly $600 post-Covid discount.
The recovery seems to be fueled, in part, by San Franciscans bent on reviving its place as an arts and counter-culture mecca after the last decade’s big-dollar tech dominance. That may imply longer-term pain for luxury buildings designed to appeal to young knowledge-industry workers.
Developers of more affordable projects are forging ahead. Builders Urban Land Development and DM Development received planning commission approval this month for an apartment building in the Mission District. The 168-unit project includes 23 reserved for below-market rentals and a ground floor dedicated to community art space.
Before the pandemic, San Francisco faced a shortage of almost 24,000 affordable units for low income renters, according to the California Housing Partnership, a deficit that falling prices on high-end apartments may not dent at all.
“We’re in such a hole,” DM Chief Executive Officer Mark MacDonald said. “We’re not going to catch up in our lifetime.”