Tenderloin Heights
by Jim Forbes
Down, down, down. This seems to be the continuing direction for San Francisco apartment rents. For the ninth time in the past ten quarters, the median priced two-bedroom rent dropped.
The numbers are fairly serious. For the fiscal year ending March 31, 2003, the median advertised rate for a two-bedroom flat or apartment in San Francisco was $1,795, down 10 percent from a year earlier and 27 percent from the spring of 2001. Compared to the blistering high of $3,000 in October 2000, the decline is almost 40 percent.
And we are not alone—though it might feel that way. In San Jose, the median rent is off 30 percent from the high (they never reached as high as San Francisco's rental peak). The asking rents here have returned to 1997 levels, both in terms of the actual dollar amount and in relationship to the Consumer Price Index. San Jose is back to 1998 figures. What else can we say?
The job market is also reminiscent of an earlier time. San Jose/Santa Clara unemployment rates have been well in excess of 8.5 percent for several months now, and San Francisco's rate is almost 7 percent. We have not experienced these heights since the recession of 1994. Jobs are the vital ingredient that drives rents. As a result, we can safely assume that rents will continue to slide, especially since we are just starting to feel the effects of the current layoff of thousands of government workers. On a national level, more civic workers were laid off in April than in any other single sector since the layoffs in the transportation industry following the terrorist attacks of September 11, 2001.
What could help turn these events around? Short of the development of an entirely new and lucrative industry, time is the cure for what ails us. Here in San Francisco, with high-tech jobs already gone, nearly all our traditional industries are now being battered in one way or another, with both the tourism and retail sectors hardest hit recently. Other painful areas include investment banking and Chinese restaurants. About the only sector apparently experiencing success are multiplex cinemas, often a beneficiary of hard times as evidenced during the Great Depression.
What then should we anticipate? The cessation of the war in Iraq should help. Now that anti-war protests have ceased, hesitant shoppers will hopefully return to downtown. Even this is a mixed bag, for the protests brought many out-of-towners who spent their "peace" dollars at San Francisco bookshops and second-hand thrift stores. Further, with the American occupation of Iraq consistently bringing bad news, there are many Americans who will continue to resist being bullish on our economy until all combat is over and the risk of terrorism substantially subsides.
There is also the potential for a future tax cut at the federal level. Allegedly, the president's plan will create one million new jobs with a few, hopefully, sprouting up here. Lately, the tax cut appears to be running into some political trouble. Even if it did work (which I doubt, for supply side economics is not what is needed right now), there is not yet much to take to the bank.
Then there are those menacing federal deficits. Some analysts are predicting the federal deficit could hit $500 billion this year alone—without any potential revenue loss from tax cuts. This type of shortfall does nothing for business and consumer confidence. If interest rates stay low, as I expect them to do, deficit spending tends to alarm consumers, sending them back into their homes rather than out to the shopping malls. Perhaps consumers feel they are responsible for their share of the debt, an assumption that I guess could be correct.
Moreover, as states are implementing drastic spending cuts — largely in health and education—they are forced to raise revenues in order to maintain standards that are already very low, further taking money out of people’s pockets. Or, if the local jurisdictions cut services, they shift the burden of the cost to the end user, the result of which is the same — less money for people to spend on those things that might grow the economy and, most importantly, create jobs.
This ballooning budget deficit could have negative effects. The traditional concern that budget deficits will cause high interest rates is a relative one in today's super-low interest rate environment. That is, even if rates were to rise a full 100-basis points, they would still be at significantly low levels vis-à-vis the past. Yet for many recent apartment building purchases, a 1 percent addition to adjustable loan rates could easily throw many investments into negative cash flow. This is especially true if purchased during the past four years at normal Gross Rent Multiples of 10 or more on rents that are no longer achievable.
Traditional thinking from the 1970s and 1980s maintained that a $100 billion loss in government revenue could cause a 1 percent hike in interest rates. During the heady times of the Clinton era, however, government revenues climbed some $500 billion over a six-year period, yet interest rates only dropped 1 percent. Thus, even if the budget deficit balloons to $500 million, which is a possibility this year, interest rates will not go up five points. We might see them go up that 1 percent, and again this could prove damaging enough to bury some real estate deals.
Most important, keep in mind that a rise in interest rates even at a relatively small 100-basis points could cost the economy the one million jobs promised by Bush’s tax cut. Once again, jobs are what drive rental rates.
The opinions expressed in this article are those of the author and do not necessarily reject the viewpoint of the SFAA or the San Francisco Apartment Magazine. Jim Forbes is president of Urban Properties, a real estate investment and brokerage firm. He can be reached at 415-922-8998 or at his Web site at urbanjmf.com.
The opinions expressed in this article are those of the author and do not necessarily reect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Jim Forbes is president of Urban Properties, a real estate investment and brokerage firm. He can be reached at 415-922-8998 or at his Web site at urbanjmf.com. Copyright © 2003 San Francisco Apartment Magazine