Free Speech

By Jim Forbes

San Francisco's rental rates hit a new high this summer, and for the fourth year in a row, the increase has been around 20 percent. As further proof that rents in the Bay Area are ascending to new and heretofore unachieved heights, the median priced two bedroom in San Jose also jumped astronomically, adding 25 percent over April's lull, and 27 percent since last year.

San Francisco's median priced two-bedroom rentals, at least as advertised, now stand at $2,500 per month. In San Jose, the same unit is $1,500. Although I had started to believe that the NASDAQ had became the dominant financial influence over our City's real estate values (when the NASDAQ's crashed in April of this year, from 5,000 to 3,500 rental rates in the City did slide from $2,250 to $2,100), now I'm not so sure.

First off, all that the NASDAQ has done is stop crashing. True, it rebounded to 4,000 for a day or two, but it's not that high as I write this article and it wasn't in July when I did the rental survey. Second, nothing from my computer database of facts and figures, or from the Internet, could have foretold such an incredible climb on top of an already incredible base. Not per capita income, COL, home values, population or the price of North Beach cappuccinos could have suggested that we were going to see another 25 percent rent increase. We are, as the old Star Trek show used to say, "going where no man has gone before."

Or are we?

One way to become more comfortable with the price of real estate in the Bay Area, and San Francisco in particular, is to travel to other wealthy, congested, forward-looking lands. This summer I chose to visit Europe, and as part of our itinerary, we spent six days in London.

Now besides contributing in name the style of most of our buildings, London and England have little connection with San Francisco. English immigrants tend to prefer Los Angeles and New York and San Franciscans tend to vacation in Italy or France. But nevertheless, it's hard to imagine London's real estate prices differing much from ours, or at least from our closest counterpart, New York. Yet my findings were that real estate in London is much more expensive than San Francisco. And I mean much more. In fact, real estate is so expensive there, people pay by the week instead by the month. It is expensive even if you pretend that their currency—50 percent more valuable than ours—is equal to the buck. And if you don't believe me, go online to www.winkworth.co.uk, one of London's realty firms, and check out the listings. There, you will find two-bedroom flats in good, but by no means better than our best neighborhoods, going for 2,000 pounds. Per week. In other words, $12,000 per month.

In fact, in the better parts of that town, one pound-per-week-per-foot was not an uncommon asking rent, or "let" as they call it. That's $80 per-foot per-year. Only a few buildings in San Francisco can compete with this return, none of them are residential, and nearly all owned by Shorenstein.

How is this possible, you ask, and what does it mean to you? It means that if you are a landlord in the UK, the British have got their priorities straight, what with all that landed gentry stuff. First the taxman (there is a 17.5 percent Value Added Tax on everything, including rent), then the landlord, and if there is anything left over, Andy Capp can have it. This includes the shopkeepers. I was astounded at the rents the little cafes, laundromats and galleries were paying in the two-hundred-year-old squares and markets that exist all around London. Only our Union Square area could compare, and then it really can't. It made it easier for me to pay the $4 for a cappuccino or $9 to dry-clean a pair of pants. Even at those prices I couldn't see how most of the businesses could make it.

Only London office rents seem to be on par with our already outrageous figures, and this is because San Francisco is most out of whack in this type of commercial rentals, which is due exclusively to the increased demand from the dot.coms. But the wealth these firms have generated, although considerable at the top and in some cases trickling down to those below, still has not hit the pocketbooks of the average consumer or renter to the same degree that London's population already possesses.

As a result of the astronomical apartment rents, there have been recent reconversions of many old residences in fancy neighborhoods like Mayfair, Chelsea, and others, a reversal of a trend that had begun as a result of the office shortage caused by the German bombing during the Second World War. But don't get me wrong; offices in London are also expensive. Top office space in London's financial districts exceed $100 per foot on a regular basis, making it the most expensive commercial city in the world as well. Only Tokyo can really give it a run for that title, although San Francisco would like to believe it has a shot at the crown.

So the point to this analysis is this: San Francisco rents can go higher. Even though I don't believe San Francisco can compare to London when held to that city's cultural standards—after all, we just don't have the theaters and museums and parks and commercial vibrancy that London has—everyone I spoke to in England and elsewhere in Europe stated unequivocally that San Francisco was one of their favorite cities in the world, if not their favorite. Few gave London top billing. So why shouldn't our town be more expensive?

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Jim Forbes is president of Urban Properties, a real estate investment and brokerage firm. He is a SFAA board member and the publisher of the SF Property Report. He can be reached at 415-922-8998 or at his Web site at www.propnews.com.