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San Francisco Rental Market Shows 'Very Early Signs' of Recovery

Updated: Feb 21, 2021

  • Equity Residential, which owns nine apartment buildings in San Francisco, reported "very early signs of recovery" in the market

  • Equity and other large landlords offered heavy concessions last year to attract and retain tenants as renters left San Francisco in droves

  • AvalonBay Communities, another large landlord, said it sold a 154-unit building in San Francisco at 8% to 10% less than a buyer likely would have paid pre-pandemic

  • A Zumper report noted a slight uptick in median rents in January 2021, marking the first month-over-month increase since the pandemic struck

After leading the nation in rent declines over the past year, there are signs that San Francisco's residential rents may have bottomed out.

According to Zumper, January 2021 was the first month since the pandemic struck that median rent for a one-bedroom ticked up slightly. Median rent was $2,680 in January, marking an increase of 0.8% over the prior month. San Francisco saw the largest declines in rents of any city in the U.S. last year.

"It's likely too early to determine if this is an inflection point in the Bay Area, but it could be," wrote Zumper analyst Neil Gerstein in a recent blog post.

San Francisco is still the country's most expensive rental market, but saw a sudden and significant outflow of residents as pandemic lockdowns took effect last year. Some real estate executives say there are signs of a homecoming among some of those outmigrants.

"San Francisco remains our most challenged market, but even there, there are some very early signs of recovery," said Mark Parrell, CEO of Equity Residential, on a call with investors this week. "Anecdotally, [we are hearing] stories from our teams...that people who left to go to other areas like Denver and Sacramento are coming back."

"It hasn’t manifested itself into a large percentage yet, but the positive is that we haven’t heard any of that for months," Parrell added. Equity Residential, a real estate investment trust, owns nine buildings in San Francisco totaling about 2,500 units, and saw its occupancy rates plunge last year.

Rent fell in virtually every neighborhood in the City last year, with the steepest drops found in Hayes Valley (-37.5%), Lower Haight (-30.7%), Civic Center (-30.3%), and South of Market (-30%) according to Zumper data provided to Public Comment. Only the Central Sunset and Bayview neighborhoods saw a very slight increase in median rent.

Equity Residential plans to offload some of its San Francisco assets, which are clustered mostly downtown and in SOMA, if the price is right: "In San Francisco I would say we’re probably down 10% or so in value, and we’re starting to hear from people who want to buy and ride the recovery up," Parrell added.

The timing and size of any real estate recovery will likely depend on the trajectory of the pandemic, and decisions by major employers around whether to incentivize a return to on-site work.

Just this week, Salesforce, San Francisco's largest private employer, said that it would allow most of its roughly 9,000 local employees to work on a flexible basis permanently. That arrangement will permit employees to come into the office only part time, or in some cases not at all. Along with a number of other large employers, including Yelp, Dropbox, and Twitter, Salesforce plans to downsize its office presence in San Francisco accordingly.

"The expectation is that a recovery will lag the reopening to pre pandemic levels by at least two quarters," said Ed Mermelstein, an investment attorney and founder of One & Only Realty. "The big question is when will we see a complete reopening."

AvalonBay Communities, another real estate investment trust that owns several apartment buildings in San Francisco, said this week that it sold a 154-unit apartment building in the Diamond Heights neighborhood.

"I would say a year ago that asset probably would have sold for 8% to 10% more, although it's hard to know...because it was a rent-controlled asset," said Matthew Birenbaum, chief investment officer at AvalonBay.

Birenbaum noted that the company closed the deal before the beginning of the year, at which point Proposition I, a ballot measure that raised the local transfer tax for such deals to 6%, took effect.


Image by Jake Buonemani
Image by Rasmus Gundorff Sæderup

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