Mighty Small

No Quick Fix

written by Kilby Stenkamp

Make thoughtful decisions and stay informed to keep afloat in an uncertain market.

After years of feet-on-the-ground experience as a renter, property manager, property owner and realtor, I’ve learned the hard way that sometimes you just have to go with the flow. There’s always a learning curve, and the only thing you can count on is change. I have spent years double guessing the market with moderate success. The recent events have left me pondering: Some days I feel general malaise, not knowing what to think; other days I am a powerhouse. We were already up against new statewide rent control, and now we’re in the middle of a global pandemic. The million-dollar question I had for several investors and property owners was, “Would you buy in the current market?” Overwhelmingly, the answer was, “yes.”

There’s no question the rental market has softened, and there’s no easy answer on what the future holds. There is so much information out there, and it changes daily. Stay informed and make thoughtful decisions. Find good resources for accurate information. The San Francisco Apartment Association and local attorneys can guide you in the right direction. A good way to stay informed is through SFAA’s virtual Lunch and Learn classes. Last week I joined a class about changes to the SFAA lease that was taught by two local attorneys. It was extremely informative. Like most of you, I was recently faced with rent forbearance, rent negotiations and notices to vacate, among other things. For a minute I turned into Henny Penny. Since that meltdown moment, I buckled up and made the decision to move forward and deal with the problem head on.

I reached out to Tim Brown, an associate and real estate investor, for his market perspective. Brown remains positive, even though he’s dealing with the same issues we’re all becoming familiar with. One of his properties has five of thirteen units vacant. They’re smaller units without parking, where the desirability of the neighborhood declined as businesses closed, creating a stressful living situation for existing tenants. We’re seeing a slow absorption of vacant studios and one-bedroom rentals as tenants move into larger flats. Brown is willing to lower rents to re-create cash flow, knowing that tenants generally don’t stay forever in smaller units and at some point, the market will rebound. He was quick to point out that smaller units without amenities are getting hit—some areas harder than others. In his opinion, the migration to larger flats and cohabitation will no longer be a trend a few years from now. But in the meantime, don’t sit too long on a vacant unit. Find out how to stay competitive to get your unit rented while not giving it away.

Brown has been through a number of challenging markets: 20% interest rates, the earthquake, the collapse of dotcom. Compared to other challenged markets, he says today’s pandemic buyer is fearless. People were paralyzed immediately after the shelter-in-place order. Now they’ve had time to think and look at options. There’s been a general shakeup and people are making large life changes. Some buyers are tired of paying rent for the same four walls when they can buy at historically low interest rates. Others are looking at investments and second homes. There’s opportunity in any market.

As always, a savvy owner-user or investor won’t shy away from the 2-4-unit market if the property makes sense. In anticipation of declining rents, many of Brown’s investment buyers are automatically padding their numbers with an 8% to 12% reduction on tenants paying market rent. They are also looking for property with build-out or build-up potential. Many properties offer the possibility to add one or more axillary dwelling units (ADUs).

Because of our extraordinary situation, I ran numbers differently than I have previously. We didn’t see the COVID-19 impact in March. Most of the sales that closed in March went into contract in January or February, prior to the shelter-in-place order. The initial impact of the SIP order brought just about everything to a screeching halt. So, I ran numbers from April 1 to July 30 of this year, comparing them to the same timeline in 2019.

In the 2-4-unit category, from April 1, 2019 to July 30, 2019, there were 189 sales, properties averaged 46 days on market and sold for an average of 105.25% over asking price. The median sales price was $2,099,000. In the 2-4-unit category, from April 1, 2020 to July 30, 2020, there were 57 sales. Properties averaged 40 days on market and sold for an average of 103.26% over asking price. The median sales price was $2,120,000.

I was unable to show tenant-occupied properties, and so I anticipated that the sales volume would be down. I did not expect such a dramatic difference in the number of sales. What was even more interesting is there are currently 134 active listings in the 2-4-unit category. I was pleased to see days on market had slightly improved, percent of sales over asking adjusted slightly downward, and the median sales price went up. Predictions are almost impossible at this point, as we are moving in real time with the pandemic, softening rents, increased vacancies, new rules, and ballot measures limiting a landlord’s options—many of which will be challenged in court.

I spoke to another associate, Johnny Bayview, who owns property in… you guessed it: Bayview. He’s been a true pioneer, and it has paid off. The bulk of his portfolio is subsidized with Section 8 and Veterans Assistance. He has had only one request for a rent reduction, no vacancies, and has received no notices or requests for rent forbearance. He has managed subsidized property for years and has learned how to make it work for him. He has found that because so few landlords will accept Section 8 and subsidies, he has the ability to pick strong tenants. Some of his rents are actually slightly above the current market. Historically, he has never had his rents rolled back. Subsidized tenants are not for everyone, and he’s shared a few good stories over the years. It was nice to hear that he’s managing better than most of us.

We will get through this, just as we’ve gotten through challenging markets in the past. Get involved and support organizations that look out for small property owners. Stay in touch and stay informed. Don’t forget to check out the SFAA Zoom classes (see page 42 for a schedule and class descriptions). 

San Francisco remains a great city and has always been resilient. When times get tough, we get going!

Kilby Stenkamp is a realtor at Vanguard Properties. She can be reached at kilby@vanguardsf.com or 415-370-7582.