The Sheridan Report
by Matthew C. Sheridan
San Francisco’s red-hot rental market continues to sizzle as the last pieces to the rental-housing puzzle are put into place to create a “perfect storm” for landlords. High interest rates, strong employment gains and San Francisco’s eternal charm are all boosting the rental market back towards—dare I say—dot-com levels (not quite yet, though). Strong rents and successful leasing, however, only come to those willing to provide quality housing at reasonable prices.
Inflationary concerns continue to rattle financial markets across the globe, as oil prices drive down consumer confidence and people keep a close eye on their pocketbooks. The Federal Reserve appears intent on continuing its program of increasing interest rates. In fact, notes from its May meeting show it considered raising the Federal Funds Rate by 50 basis points, instead of the usual 25. The housing market across the country has taken the hint, and mild signs of slowdowns are popping up everywhere.
Across the Bay Area, home sales have slowed, but prices continue to tick slightly upward. The story in San Francisco and the surrounding counties of Marin and San Mateo has been continuing job growth. The numbers from this past April showed that unemployment for the region was at 3.9%, down from 4.6% a year ago. According to California’s Employment Development Department, the region gained 11,900 jobs between April 2005 and April 2006. The monthly gain was even stronger between March and April of this year, with the San Francisco region tacking on another 3,500 jobs.
“In contrast to the prior 16-year average of slight job decline between March and April, a significant employment gain occurred this year,” reports the EDD.
The healthy employment market is also reflected in the Conference Board’s Help Wanted OnLine Data Series. The index—new to “The Sheridan Report”—measures new, first-time online jobs, posted on more than 1,200 major internet job boards. In April, for San Francisco, the number of online help-wanted ads was just under 73,000, up almost 73% from a year ago when the number was 41,900. Translated into the number of ads per 100 persons in the labor force, San Francisco stood at 3.35, just below San Diego’s 3.43 per 100—the strongest job listings ratio in the country.
These real and future gains in employment are clearly impacting the local rental market.
As people shy away from the housing market due to rising interest rates, the rental segment has exploded. “I cannot believe the amount of activity in the rental market,” exclaims Phil Fernandez, a San Francisco landlord with several buildings throughout the city. “Out of 72 units, 2 are being rehabbed, the rest are rented out—no vacancies!” Upon turnover, Fernandez is able to increase the rents, and usually rerents the units in a single day. He always sets the rents a little below the market to help establish an exceptional pool of tenants from which to choose.
Surging rental rates are also reflected in the data provided by MetroRent. The average asking rent for a typical apartment unit in the city stood at $2,066 in the first quarter of 2006, up over 10% from the same period a year ago. Meanwhile, San Francisco’s residential rental-vacancy rate stood at 6.1% in the first quarter of 2006, down slightly from 6.9% a year ago. (This data is provided by the U.S. Census Bureau and covers both the San Francisco and Oakland metro areas.)
The days of tenants lining up to fill out rental applications are back. According to Allison Chapleau, a real-estate agent with Marcus & Millichap who also currently manages an apartment building on Russian Hill, the rental market has become much more competitive. “There are a huge amount of people looking to rent due to rising interest rates and an unwillingness to jump into the housing market,” Chapleau explains.
Her observations are confirmed by Kathleen Gilheany, a broker with SFR, a real-estate firm specializing in luxury homes and rentals. SFR’s typical tenant profile is double-income, younger (27-to-35-year-old) couples in high-end career jobs. Thirty percent of her clients move to San Francisco from out of town, with the rest moving out of a house or upgrading their rental unit. Gilheany has experienced an uptick in this upper end of the rental market and attributes much of the activity to fears about a possible housing bubble. “As the median home price soars, people have grown hesitant, unwilling to jump into the home market, instead they’re staying in luxury rentals,” comments Gilheany.
She also confirmed the fact that has been repeated over and over in “The Sheridan Report”: rental units must be in tip-top shape in order to fetch top dollar. Units must be clean, have a fresh coat of paint and everything needs to work. “Units should be updated with garbage disposals, dish washers, and hopefully washers and dryers—if not in the unit, then in the building,” instructs Gilheany.
Meanwhile, Chapleau reports that the apartment building sales market has stabilized. “People are still out there looking for a good deals, while sellers continue to receive good prices,” observes Chapleau. Sales figures from the first quarter of this year show a slight drop in prices from the previous quarter for both the 5-9-unit market and the 10-plus-unit sectors. But there is still a lot of activity. “There are tons of people with free equity out there, but don’t expect buyers to pay more today than yesterday,” she cautions.
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.