the sheridan report
Over the Edge
by Matthew C. Sheridan
Blattis. Starboard. Colliers. These commercial brokerage firms have for-rent signs slowly popping up all over town. At first, there were only a few. Then a few more went up. Now numerous for-lease signs dot the vacant storefronts in glitzy shopping districts like Union Street, yet another ominous sign that the chaos that has rocked the real-estate and financial markets worldwide has trickled down to our own little mecca.
With its favorite pastime of placing moratoriums on development, the San Francisco Board of Supervisors helped ensure the epidemic that started in places like Las Vegas, Miami and Detroit would not reach our beloved city—until now. But the downturn is here, and just as office rents and home prices have dropped, so, too, will rents.
Look up, and out of the corner of your eye, you’ll notice a lot of for-rent signs hanging from the second story of apartment buildings. Over Christmas, these signs remained up—typical of the season—but as the New Year began, they stayed put. The slow, steady rise in rents since the dot-com collapse is over, and the future for San Francisco landlords may even be eerily similar to the rental collapse of 2002.
Despite the dismal employment situation nationally, the job markets in San Francisco and San José had remained somewhat healthy. Now, these regions have also become infected, and those job gains have become job losses. After almost four straight years of growth, both metropolitan regions saw year-over-year declines in November 2008, with the San Francisco market losing 1,500 jobs (0.1 %) and San José shedding 3,900 jobs (0.4%).
In San Francisco, financial services, along with real estate and retail trade all realized sizable losses. There was one bright spot, however. According to California’s Employment Development Department, “Professional and business services registered a net expansion of 1,300 jobs compared to last November. Gains concentrated in professional, scientific and technical services such as computer systems design more than offset a loss concentrated in temporary and other employment services.” Unfortunately, San Francisco’s unemployment rate is up overall: 5.7% versus 4.0% one year ago.
San José faired worse. Its unemployment rate is now 7.2%, compared to 4.9% a year ago. While the numbers year-over-year were bad, the monthly change between October and November was even worse; this is an especially gloomy sign given that this is usually a time when employers are adding jobs for the shopping season. The EDD reported that “manufacturing posted a net decrease of 1,900 jobs, nearly double its average 1,000-job drop for October-to-November over the prior 18 years.” Professional and business services contracted by 1,500 jobs, with the largest cutbacks occurring in employment services and computer systems design and related services. “Meanwhile,” according to the EDD, “retail trade gained 1,500 jobs over the month, only half the number of jobs it typically adds for the holiday shopping season between October and November.”
The prospects for improvement appear dim, however. According to the Conference Board, the number of new online help-wanted ads continue to decline in the Bay Area. For the month of November, both San Francisco and San José MSAs saw sizable year-over-year losses, dropping 31% and 35% respectively. For San Francisco, the number of new online ads stood just under 60,000, down from a high of 86,000 a year ago and 66,000 just one month prior.
Jobs helped lead the local rental market back to life over the last five years, and jobs will lead it back down. If employment is the bellwether for rents, then the local rental market is going to take a hit sooner or later. If owners behave anything like they did six years ago—in complete denial that the market has changed—then they’ll be even more ill during this downturn. The idea that people who lost their homes in Antioch to foreclosure will transition into rental housing in San Francisco and fill the gap here is absurd. They are likely moving elsewhere or moving in with family.
Landlords in the East Bay, where the labor market turned south a year ago, have been lowering rents since last fall, and consequently they are down 8% to 10%. According to Fred Morse, an apartment owner in Oakland, “We are getting a few folks applying that are moving from the more expensive San Francisco rental market and those leaving North Oakland are having their deposits mailed generally out of state or to cheaper areas of Oakland.” He’s also seeing some tenants transition into ownership despite the subprime mess: “We had one Rockridge tenant who just bought a house at a good price, but with 50% down.”
Another trend that hasn’t gone unnoticed: tenants losing their jobs. Paul Gaetani, a property manager at Gaetani Realty, a family-run property management firm in San Francisco, said he is seeing a lot of tenants having to break their leases. “We’ve seen a lot of tenants move to Oakland, where the rents are cheaper,” remarked Gaetani, who has lowered rents slightly, but not by much. “It’s getting harder to fill vacancies compared to a year ago,” said Gaetani, adding, “On the commercial side—storefronts, offices—we are really feeling it— rents have gone down considerably.” Looking forward, Gaetani is not optimistic: “It’s definitely going to get worse before it gets better.”
In a recent article in the UCLA Anderson Forecast, Senior Economist Jerry Nickelsburg predicted continued gloom well into 2010: “The state is going to share the national recession with negative economic growth through the middle of next year and high unemployment into 2010. The U.S. recession will be unevenly felt across California. The Inland Empire, Orange County, the East Bay and the Central Valley will be hit the hardest as the recession provides a double whammy with a generalized downturn in demand and a postponement of a recovery in residential construction.”
In a recent presentation to business leaders, economist Christopher Thornberg of Beacon Economics predicted the current recession will be bad, but will stop short of a depression. The economy will recover by mid-2010 and housing will bottom out shortly, but will be unable to recover until 2012, reported Thornberg.
While the talk of rents dropping is slowly becoming a reality, RealFacts, a rental-rate reporting service, released their fourth quarter numbers from 2008 showing that asking rents declined slightly for both San Francisco and Santa Clara counties. The crystal ball hiding in my Excel data shows that was the peak.
Google’s share price tumbled below 300 by the end of the year, down from a high of 700 just a year ago. Similarly, Apple’s stock was cut in half over the last year. Now, even Google has announced layoffs. It was just a short time ago that property managers were commenting that in every applicant pool they would always find at least one Apple or Google employee vying for an apartment. I would guess those days are over.
Head down to the counter at DBI‘s Mission Street headquarters some early Monday morning. Even at this hour, the place is usually bustling. But these days, it looks like a ghost town. No permits, no plans, no nothing. This town is shutting down. I wouldn’t hold my breath on a second tower at Rincon Hill.
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. Matthew C. Sheridan is the editor of SF Apartment Magazine. Copyright © 2009 by Black Point Press. All rights reserved.