The Sheridan Report
by Matthew C. Sheridan
Astute apartment building owners in San Francisco could see the signs months ago: rising interest rates, mild employment gains, strong sales prices, healthy vacancy rates and, most importantly, persistent growth in rents. In short, it’s going to be a very good year.
After four straight years of declining employment, San Francisco finally bounced back from the hemorrhaging job losses that occurred after the dot-com collapse. For 2005, the metropolitan region, which includes the counties of San Francisco, Marin and San Mateo, experienced a net gain of nearly 9,000 jobs over the prior year. The city’s unemployment rate, meanwhile, stood at 4.1% in December, the highest in the three-county region, according to the state’s Employment Development Department.
The area saw a gain of 8,800 jobs between December 2004 and December 2005, the “12th consecutive month the metropolitan area has posted a net gain on a year-over-year basis,” according to the EDD. Contrasted against the massive job losses that occurred between 2001 and 2004—when over 140,000 jobs disappeared from the San Francisco Metro Area—the employment gains may be a signal that San Francisco and the Bay Area are on the mend. But cautionary signals persist.
“Overall, we are disappointed,” commented Lawrence Souza, referring to the job numbers for the Bay Area. “If we go back in time and look at the employment-growth cycle for all metropolitan areas, it is slower than what we saw in the late 1980s and 1990s.” He predicts a gain between 40,000 – 50,000 jobs for the entire Bay Area for 2006—much slower than a decade ago. “In 1996 the region produced 80,000 jobs—I am not sure we will ever see that again,” said Souza, a real-estate economist with the Johnson-Souza Group.
He observes that when the data is dissected, the sectors that are adding the most jobs are in low-paying positions in the service industry as well as construction, which is real-estate oriented. If the housing market cools down, which some signals suggest, he predicts a slowdown in employment. For a robust economy here, gains in the information and manufacturing sectors are needed, according to Souza.
He remains hopeful though, as venture capital has started to flow back into the region and Silicon Valley has sprung back to life. Many of the newly employed in the Silicon Valley want to live in the city, drawn to the nightlife and culture San Francisco has to offer. “These younger workers want to live in the city and commute down to their jobs,” commented Souza.
Vacancy Rate
In the fourth quarter of 2005, San Francisco’s residential
rental-vacancy rate continued to drop from the historic highs seen
earlier last year. According to the U.S. Census Bureau, San Francisco’s
vacancy rate fell to 5.0%, down from 8.6% in the third quarter
of 2005. The margin of error was 1.2% and includes the Oakland
Metropolitan Area. These numbers are in line with the vacancy
rate reported by major national real-estate firms such as Hendrick’s & Partners
and Marcus & Millichap.
The dropping vacancy rate bodes well for rents, as the supply of available units continues to shrink. According to RentSlicer.com, the average asking rent for an apartment unit in the San Francisco area stood at $1,587 as of last month. This free online service combines rental-listing data derived from Craigslist and maps generated by Google (sf.rentslicer.com).
San Francisco landlord Ivan Balarin quickly rented two units in less than a week recently using Craigslist. The previous tenants had been renting for 10 years and paid $1,000 a month. After putting $10,000 a piece into upgrading the units (located in the Upper Market area), he rented them at $1,700 each. A landlord for over 27 years, Balarin believes in properly maintaining his building and suggests landlords should address problems as they come. “There is no such thing as a small problem—take care of all problems immediately; don’t leave them for tomorrow.” Some further advice: “Document everything. Put it in writing. Do not assume anything.”
As rents steadily climb upward, so do sales prices for apartment buildings. With interest rates continuing to rise, many potential first-time homeowners will be discouraged and will be pushed into rental housing instead. “Many will remain content as renters, instead of venturing out to buy,” observes Phillip Boersma, an agent with Arroyo & Coates. He believes this will increase the rents throughout the city at a steady pace. “Larger apartment building owners should stand to benefit from these increasing rents.” He predicts that apartment building sales prices will remain strong, but will not outpace the high price appreciation seen over the past few years.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. “The Sheridan Report” does not make any guarantee, warranty or representation as to the completeness or accuracy of the information contained herein. Matthew C. Sheridan is the editor of the San Francisco Apartment Magazine and the East Bay’s Rental Housing magazine. For more information, please visit www.sheridanreport.com. Copyright © 2006 by the San Francisco Apartment Magazine. All rights reserved.