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Real Estate Execs Say San Francisco Could Be Slow to Recover

  • Equity Residential, which operates 2,516 units in San Francisco, reported 87% occupancy in its downtown rentals and called the market outlook "concerning"

  • The real estate trust said it offered 2 months free rent to at least 70% of applicants in San Francisco between July and October

  • Likewise, AvalonBay Communities, which operates 1,718 units in the City, reported plunging occupancy and record turnover last quarter

Two real estate firms with significant holdings in San Francisco, Equity Residential and AvalonBay Communities, told shareholders this week that their assets in the City could be slow to recover.

Together, the two real estate investment trusts own 18 apartment complexes in San Francisco totaling thousands of units, and executives at both companies described a sharp drop in demand coupled with an uncertain outlook for the market.

“San Francisco is our most challenged market, although it is not the same everywhere,” said Michael Manelis, chief operating officer at Equity Residential, which operates 10 buildings in the City largely in downtown, SOMA and Mission Bay. “Overall, occupancy is now below 93%, while our downtown assets are 87%.”

Equity Residential’s San Francisco holdings, which total 2,516 units, include 77 Bluxome, Azure Apartments at Mission Bay, and SoMa Square Apartments. The company’s comments, which came by way of a quarterly earnings call this week, corroborate recent data showing high vacancies and plunging rents in some parts of the City.

Manelis said that Equity Residential’s downtown buildings granted heavy concessions to new tenants last quarter, including 2 months of free rent to between 70% and 75% of applicants between July and October 2020.

The company reported a “slight” improvement in lease renewals in October, but told shareholders that San Francisco may recover more slowly than other urban centers like New York City.

Mark Parrell, Equity Residential’s CEO, cited “a combination of work from home and just quality-of-life concerns [in San Francisco]," calling the market outlook "concerning."

“As long as the pandemic by the spring starts to wane and we have it under control, I think people want to be back in New York,” he said. “In San Francisco, I just think it might take longer frankly.”

Remote work policies have led some San Francisco residents to ride out the pandemic elsewhere, though many also express a desire to return should their employers encourage on-site work again.

It's not clear how many employers will do so, however. Some leading tech firms, like Twitter, Facebook and Salesforce, have permitted employees to work remotely at least through mid-2021, or in some cases permanently. The consequences are significant for the City's fiscal outlook: the SF Controller's Office estimates that remote work could sink revenue from gross receipts taxes by 10% and payroll taxes by 8% in fiscal 2020-2021.

AvalonBay Communities, which owns eight San Francisco apartment buildings totaling 1,718 units in San Francisco, reported this week that occupancy in the City was at 90% to 91%.

The pandemic combined with “civil unrest” led to a turnover rate above 85% in the City, representing the highest turnover rate in its portfolio, according to AvalonBay’s chief operating officer Sean Breslin. He noted, however, that most former AvalonBay occupants moved less than 50 miles away.

Asked whether the value of its San Francisco buildings had declined, Breslin said it was “anyone’s guess” because so few real estate deals are taking place in the City’s urban core this year.

“I’m not aware of any downtown urban core asset being brought to market in this environment,” he said.


Image by Jake Buonemani
Image by Rasmus Gundorff Sæderup

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