SF Apartment : May 2016

THE PRESIDENT'S REPORT

Market Rent Maintenance

by Eric R. Andresen

This month’s edition of SF Apartment Magazine focuses on building maintenance. In writing this President’s Report, I’ve found myself recognizing some failures and shortcomings in my own maintenance policies—thus making this not only a perfect opportunity to update some of my own procedures, but to share these thoughts with all of you.

I have found that many of us “triage” our building maintenance relative to the unit with the lowest rent: that rent-controlled unit that is half (or even less) of what the market rent would be. Basically, we’re saying that $1,000 per month rent deserves $1,000 per month in services, and nothing more. This attitude is natural, of course, and is a direct result of our being bombarded with excessive regulation, unfair legislation and basic disrespect when it comes to being recognized for the important housing services that we provide.

But while minimal maintenance efforts may sometimes be appropriate inside that low-rent unit, they should not be applied in regard to the general condition of the rest of a property. In fact, in today’s market, I think we are doing ourselves a great disservice if we still hold to this antiquated attitude toward building condition and maintenance. Unfortunately, I have found this approach in many of the properties in my own company’s portfolio, so if you fall into this category you are definitely not alone!

In today’s market there is an ever-increasing disparity between market rents and those rents that are being paid by long-term rent controlled tenants. The gap has become huge in many cases, and it will grow as time goes on and the market continues to climb as a result of a severe lack of supply. The problem, however, is that we’ve become conditioned to focusing on that lowest rent, basing building maintenance and improvement decisions on the fact that the low-rent tenant may not warrant the extra effort.

But that means that the new market-rent tenant who just moved into your property isn’t getting full value for their higher rent. They’re paying $3,000 per month, for example, but you’re still only providing $1,000 per month in services. It’s an understandable reaction considering our disdain for rent control, but think about it for a minute—which tenant do you really want to cater to? I hope that you want to take care of that new tenant, especially now that the market is beginning to show signs of softening. We’re going to want to encourage these new tenants to remain for a while.

When there are low-paying residents, we tend to hold off on doing major improvements for a longer period of time. New roofs, exterior painting, interior improvements and more all seem to be put off longer in buildings where there are rent controlled units. But when we do this we are ignoring the fact that there probably are a few high-paying residents who deserve better. Imagine paying top dollar but feeling like you’re not valued. That’s not much of a way to keep that high-paying renter in your building!

Appropriate maintenance can also help you when it comes to marketing your building. It’s a no-brainer that clean, well-maintained buildings show far better and command higher rents. Clean buildings also bring in more potential applicants, giving you a better chance at securing reliable and trustworthy tenants. That’s nothing new, right? In today’s rental market, finding good tenants hasn’t been quite so much of a concern, but I think we have a new challenge ahead of us that we all have to be prepared for.

For the past couple of years I have been saying over and over again that we are all going to be challenged by thousands of brand new units that are being built throughout the city. New construction is going to dramatically change the game in the coming years. San Francisco has not added significant new housing for decades, so none of us here have had to compete with those shiny, polished, amenity-laden brand new units. But it is my contention that we will have to learn to compete, and do it soon.

Over the next few years there will be as many as 10,000 brand new housing units loaded into our San Francisco market. Compound that with the pressure that will come from more than double that number of new units coming online throughout the rest of the Bay Area. While the demand for housing in San Francisco indicates that we could probably absorb three or four times that many units, the reality is that even this moderate increase in new units (both rental units and owner-occupied condominiums) is going to have an impact on our market and we’re going to have to be prepared.

Part of that preparation is our level of building maintenance. A run-down, dirty building will stand little chance when competing for the potential tenant that has the option to live in a brand new unit—or in an older unit that’s been appropriately maintained. And don’t think you’re safe just because you have that “special” San Francisco Victorian-style unit that everyone wants. You’re not alone, and other owners with those same units are going to be competing for those same potential tenants. Don’t let them get ahead of you!

Additionally, here’s another factor that I’ve been seeing. A whole bunch of us are fixing up our vacancies beautifully; installing granite countertops and hardwood floors, new fixtures and stainless steel appliances, and doing designer paint jobs. The units look amazing! But the prospective tenant has to enter the building through a run-down entry, walk through dirty halls, and deal with depressingly dark common areas to get to that unit. How does that work? Common sense says this isn’t right, but how many of you, in all honesty, haven’t even considered this when marketing your current vacancies?

Reality check: We are now getting rents on vacant apartments that are exponentially higher than anything we could have hoped for, rents that I doubt any of us could have anticipated just a few years ago. We can all attribute this current hot market to a housing demand that has not been met with appropriate amounts of new construction. But as noted above, that demand is not going to remain like it is today. We’re near a peak in the current market cycle, and if you’re managing your building right, paying attention to potential passthroughs and keeping up with allowable increases, many of you are likely doing fairly well financially, in spite of the rent controlled tenancies in your properties.

With this in mind, I propose to all of you that right now is probably the best time to put a little effort and investment back into your properties—while we are still at the peak of market conditions and before upcoming competition begins to erode our opportunities. Like it or not, expenses will continue to rise, just like they always have, but market rents will not match what we’re experiencing today.

So here’s my challenge to all of you. Adapt to our new market conditions, and start thinking in terms of the new resident you have, rather than the long-term rent controlled tenant down the hall. Maintain your buildings at the level of the highest-paying tenant, not the lowest one, and work to provide the type of housing that you would expect if you yourself were paying that new market rate.

Eric Andresen is the current president of the SFAA. He owns and operates both West Coast Property Management and West Coast Property Maintenance Company. He can be reached at [email protected].