No Sign of Slump in S.F. Rental Market

Sunday, July 13, 2008
Marni Leff Kottle
San Francisco Chronicle

San Franciscans looking for double-digit price gains in real estate don't have to search far.

The city's rental market has shown remarkable resilience even as home sales dropped to their lowest level in decades and median home prices have begun to decline after years of seemingly unstoppable growth. "The rental market and the housing market don't always move in lockstep," said Jeffrey Mishkin, first vice president of Marcus & Millichap Real Estate Investment Services. "Housing prices aren't driven by the same factors as rental prices."

The strength of the region's economy, a lack of new rental units being built and high gasoline prices, which increase demand for close-to-work housing, are three significant reasons that rents have continued to climb even as the for-sale housing market has hit the skids, economists said.

Over the past year, the average rent for a San Francisco apartment climbed 9.6 percent to $1,926 month, according to Marcus & Millichap, which is based in Encino (Los Angeles County) and brokers sales of apartment buildings in San Francisco and other cities.

The vacancy rate in San Francisco was 4 percent at the end of the second quarter, according to Marcus & Millichap. The strong growth is counter to price declines seen in the for-sale market. San Francisco's housing market had its worst May in 20 years while the median price for a house or condo in San Francisco dropped 5.4 percent from the same period a year earlier, according to DataQuick Information Systems. DataQuick will release information on June sales this week.

San Francisco is one of just a handful of cities that is posting rent gains, according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. "The national housing market is just awash in space and that is weighing on both prices and rents," Zandi said. "During the housing boom, we simply overbuilt."

Rentals expected to slow

Still, Zandi and other economists say that even San Francisco's rental market, where demand perpetually outstrips supply, won't remain immune forever. Economists expect rent growth to begin to slow in the second half of the year under pressure from a faltering economy and the region's declining for-sale housing market.

For now, though, people who track San Francisco's rental industry, from economists to landlords to tenant advocates, say the market is undeniably strong.

"We're seeing extraordinary rents," said Ted Gullicksen, manager of the San Francisco Tenants Union, a nonprofit group that works on behalf of the city's renters. "It's just amazing."

Across the city - from traditionally expensive neighborhoods such as Pacific Heights and the Marina to ones once considered affordable such as the Mission - rents are reaching new heights, Gullicksen said. Studios in the Marina are renting for more than $2,000 a month, with two-bedroom apartments in the neighborhood going for more than $4,000 a month. The cost of renting a one-bedroom unit in the Mission has climbed to about $1,400 a month, while two-bedroom apartments are going for close to $3,000, according to Gullicksen, whose group tracks rents but doesn't keep formal statistics.

The market certainly appears to be tilted in favor of landlords, according to Joe Preis, president of MetroRent, an online listing service. "The market is the tightest we've seen it in a while," Preis said. "We get paid by both landlords and tenants, and by looking at who is paying, we can get a sense of the market."

The number of tenants willing to pay MetroRent for information jumped by about 50 percent in the past three or four months, according to Preis, although he acknowledged that at least some of that growth is seasonal. Experts say San Francisco is sort of the real estate equivalent of the perfect storm for rent growth.

Healthy economy a draw

"People want to live in San Francisco," said Mishkin, the Marcus & Millichap executive. "The economy is relatively healthy. People who want to live in the city are finding jobs. That, complemented by the supply constraint in the city and the affordability gap between renting and owning, provide the city with a pretty good recipe for occupancy." Strong job growth - job creation in San Francisco is the second-highest in the country, trailing only Houston - is the major factor driving demand for rental units, said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

"We're adding new jobs, but not many new apartments, so it's no wonder that rents go up," Rosen said. "We just don't build rental apartments here, so there are a lot of supply constraints."

The tighter credit market has also left some would-be buyers unable to secure a mortgage to buy a house or condo, driving up the number of people seeking to rent apartments, Rosen said.

At the same time, some potential buyers who would qualify for a loan are being pushed into the rental market by uncertainty in for-sale housing, said Janan New, executive director of the San Francisco Apartment Association, a trade group that represents the city's building owners.

Waiting out uncertainty

Spooked by a housing market that is far from stable, some people are simply unwilling to take the plunge, she said. "People are uncertain as to which way prices are going to go," New said. "Prices could fall further, or they could stabilize. As long as that's the case, people will rent until the period of uncertainty passes."

It's exactly that uncertainty that led Todd Rosoff and his wife, who are expecting a baby this year and hunting for a bigger space, to seek a rental rather than purchase a home. "We didn't think we'd be missing out by renting," Rosoff said. "A year from now, I think the housing market is still going to be in tough shape." Renters like Rosoff are playing a big role in keeping the market tight, according to MetroRent's Preis.

"Even though the prices of homes have come down, it's still not enough," Preis said. "There's no rush for people to move out of places that they can rent for a reasonable price compared to buying."

But eventually the faltering economy is going to catch up to San Francisco's rental market, said Marcus & Millichap's Mishkin.

"San Francisco is doing better than almost everywhere else, but it's still clearly a slowing economy," Mishkin said. "There is a lot less business in many businesses." As the economy cools, rent growth is going to slow, creating a more balanced relationship between the rental and for-sale markets, economists said.

"Historically, the single-family market and the rental market move in tandem," said Zandi of Economy.com. "Over the last several years, the rental market and the single-family market have diverged significantly. Over the next year or two, I think we'll see the normal relationship between house prices and rents restore itself."

Growth expected to narrow

While rents rose significantly in the second quarter, experts say that the growth is likely to taper off over the rest of the year. Marcus & Millichap is predicting that the average asking rent will end the year at $1,967 a month, a gain of just 5.7 percent from 2007. The firm expects little change in vacancies.

Some rental agents say a shift may already be beginning. Inventory is rising as homeowners who are unable to get the sale prices they are seeking have started to rent their homes instead and wait for the market to improve, said Clara Laines-Welch, a leasing specialist at McGuire Real Estate, who has been renting units in San Francisco since 1984.

"This market right now is going to level out as more comes on market," Laines-Welch said. "The market will start to adjust and correct itself."

Neighborhood rents, vacancies

A move from Civic Center to Russian Hill or the Embarcadero will cost the average tenant more than $1,000 per month.

Neighborhood Rent

Change

from 2007

Vacancy

rate

Russian Hill/Embarcadero $2,550 +6.9% 2.1%
Marina/Pacific Heights $2,193 +5.8 2.3
Civic Center/Downtown $1,467 +11.7 2.4
South of Market $2,427 +12.3 4.1
Haight-Ashbury $1,866 +9.9 4.3
Richmond/Sunset $2,130 +12.9 7.1

The firm bases its data on buildings with five or more units, and its average rent figure includes units that range in size from studios to four-bedroom apartments.

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