Trend Alert

Hitting Home

written by Jeremy Williams

The Bay Area rental market is beginning to recover after the pandemic caused a yearlong decline.

Over the past year, San Francisco has experienced a mass exodus of renters leaving town. Many fled to the suburbs or out of state for more spacious accommodations while sheltering in place.

Others left for financial reasons, like the many bar, restaurant, and gig workers who were faced with a loss of income after indoor dining and entertainment shut down.

Month after month moving trucks lined the streets as vacancy rates soared. And now, San Francisco landlords are facing record-high vacancy rates upward of 10% to 20% across their portfolios.

There is a light at the end of the tunnel though, as we are beginning to see a reversal of this trend. In the first couple of months of the new year, there has been a notable uptick in apartment rentals. This article will explore some of the early signs of a recovery in the San Francisco rental market.

Highlights of this article include:

Summary of the 2020 rental market

The decline in rental rates coming to an end

San Francisco as the most desirable tech headquarters

Noteworthy companies continuing to invest in San Francisco

Summary of the 2020 Rental Market
To understand the significance of what we are seeing now in the local rental market, it’s worth revisiting what apartment building owners have been faced with over the past year. The first wave of renters began leaving San Francisco almost immediately after the shelter-in-place orders were announced in March of 2020.

This trend continued as some of the largest tech firms with headquarters in the Bay Area began announcing extended and even indefinite work-from-home policies. In response to this, some landlords rushed to rent out their vacancies at relatively large discounts. Others have held the line, waiting for demand to return. Rental rates continued to drop throughout the year to nearly 25% lower than their pre-pandemic highs.

Zumper’s December 2020 National Rental Report, which analyzes rental data from over one million active listings across the United States, shows the average one-bedroom apartment in San Francisco renting at $2,700 per month; these apartments were renting for closer to $3,200 or more the year prior. This rapid decline in rental rates over the past year has left many landlords and investors feeling unsure about the future of the local rental market.

The Decline in Rental Rates Coming to an End
Fast forward to today: As I write this article in February 2021, there are still a lot of available rentals on the market. However, renters are returning. In their February 2021 National Rental Report, Zumper announced the first positive increase in Bay Area rents since the onset of the pandemic last year. The nearly 1% rental increase for the average one-bedroom apartment may not seem like much, but for property owners it’s a long-awaited sign that the local rental market is beginning to stabilize.

This trend was confirmed by my conversation with Dawn Cusulos of Corcoran Global Living, who specializes in residential leasing and currently has over 100 rental listings. Cusulos is getting more calls on her listings and has signed more new leases in the first couple of months of the year than in the several months prior. “Some people are coming back from San Diego or New York, for example, but a lot of the demand is coming from people who are already here looking to get more space for less money,” she said.

The return of renters who fled during the pandemic along with those who have decided to stay and upgrade their accommodations is a positive sign of  better days ahead.

San Francisco as the Most Desirable Tech Headquarters
Our industry has focused quite a bit on how Bay Area tech giants have responded to the pandemic, as their employees make up a large portion of the renter pool. In the early days of the pandemic, companies like Google, Facebook, Salesforce, and other local tech firms made headlines over their extended remote work policies that would allow employees to work from home until summer of this year, if not indefinitely. This freed up many renters to leave behind their San Francisco apartments to find better accommodations elsewhere. Now with summer just a few months away, employees of these firms are returning, little by little. The relatively small spike of renters returning to San Francisco now may be doing so to get the first grab at available rentals before many of their colleagues return this summer.

In addition to existing firms reopening their doors, there’s still a strong pull for new companies to headquarter in the Bay Area. Initialized Capital, a venture capital firm, recently surveyed nearly 100 tech founders and found that San Francisco is still the number one place for startups to begin operations. This is true even after many of the respondents changed their views on remote work
due to the pandemic.

Kim-Mai Cutler, a partner at Initialized Capital, said, “Everyone is a lot more comfortable hiring remote now, and it’s very hard to put that genie back in the bottle.” The results from a February 2020 survey they conducted showed that only 6% of respondents were in favor of a distributed or remote workforce for a new business operation, with more than 40% saying that they would choose the San Francisco Bay Area as their headquarters.

In this same survey one year later, more than 40% of the respondents said they allow employees to work remotely (compared to the previous year’s 6%), but the preferred location for headquarters and in-person operations was still the San Francisco Bay Area at 30%. Austin and New York were the runners up at only 7% each.  

The future of in-person work remains uncertain, though the Bay Area continues to stand out as the place to be for up-and-coming tech firms.

Noteworthy Companies Continuing to Invest in San Francisco
Noteworthy companies are doubling down on their investments in Bay Area infrastructure. Over the summer, we heard about Google’s expansion of 42,000 square feet of office space in the Two Rincon Tower building downtown. And most recently, Ikea and its parent company, Ingka Group, announced their plan to open an Ikea center in downtown San Francisco this coming fall. The store opening is part of a larger investment of over $260 million to rehab the 250,000 square foot “6x6” building at 945 Market Street. The development, which has been mostly vacant since its completion in 2016, will be the home to a six-floor mall with Ikea as its anchor store.

When asked about the timing of their project, a spokesperson for Ingka Group made it clear that the company believes in the long-term viability of the San Francisco economy. The spokesperson commented that the company “…understands the recent pandemic has had an impact on all cities and retail environments” and that their “strategy is to be close to where many people live and work, and we believe in the long-term potential for 6x6.”

Between Google acquiring more office space and Ikea’s significant investment in rehabbing the 6x6 building, San Francisco is proving its resilience as a place where people want to live and work.

Optimistic Outlook
With a post-COVID rental market on the horizon, San Francisco property owners and investors will need to keep adapting to the environment as it takes shape. While some of the largest property owners in the Bay Area have real concerns about the future of the local rental market, others are optimistic about what we are seeing in the first couple of months of 2021.

Just as renters left in waves over the past year, they are likely to return in waves. Tech workers are trickling back in already in anticipation of their offices reopening this summer. Next is likely to be hospitality workers, once we can enjoy indoor dining and entertainment again. And, hopefully, our artist friends and colleagues will return now that rents are more affordable. In the meantime, we get to enjoy less traffic, and less competition for outdoor dining.

As a San Francisco resident for the past 15 years, I have seen the city undergo several changes. I am excited to see what this next version of San Francisco has in store.

Jeremy Williams is a multi-unit and commercial sales specialist, focusing on the San Francisco Bay Area market. To discuss the findings in this article or to consult on any other real estate matters, contact Jeremy at 415-932-9846 or [email protected].