“San Francisco Housing Crisis” Hits Market Limit

SF Apartments Offer Move-in Incentives as Tenant Demand Slows

Wolf here: Rents in San Francisco have soared to levels that are out of reach for middle-class households. Many have been living in rent-controlled buildings for years, and they can hang on. But if they get evicted, which is happening with increasing frequency, they often cannot find a place they can afford and are thus forced to leave the city. This includes teachers. It’s called the “San Francisco Housing Crisis.” But it’s not a crisis for landlords, builders, and banks.

But now change may be afoot….

By Neil Gonzales, The Registry:

Offering rental incentives is not uncommon in the apartment industry generally. But it is if it’s happening in San Francisco.

“It’s a relatively recent phenomenon,” said Patrick Carlisle, chief market analyst for the San Francisco-based Paragon Real Estate Group. “It is unusual” given that the city’s apartment market has seen “frenzied demand” over the last few years.

But as that demand—though still strong—has eased up partly because of a hiring slowdown; apartments have started to offer incentives to prospective tenants such as a rent-free month.

The newer, particularly bigger complexes primarily are the ones giving concessions rather than the older apartments, and this trend is expected to continue as deliveries add to the market’s inventory.

Almost 8,000 market-rate units are currently under construction in the city, according to Katerina Cheok, San Francisco market analyst for online rental-listing company Apartments.com. “So these concessions are likely to continue as these apartments” are delivered and seek to have their units occupied as quickly as possible, she said.

The incentives are also a way for new apartments to stay competitive. “They are competing for the same renters for these brand-new units,” Cheok said.

In contrast, older properties already have established tenants—who tend to remain put, she said.

Among the newest apartment communities with an incentive offer is the 162-unit Civic at 101 Polk St. The Civic, which is about 60 percent leased, is giving new tenants one month free of rent if they move in now.

The 273-unit Azure at 690 Long Bridge Street has a similar offer on select units, Cheok said. The Azure, which opened a year ago and is now 95 percent occupied, “is just trying to lease up its larger units.”

The 27-unit building at 280 Brighton Ave., which just opened and is about 20 percent pre-leased, is offering the first month free on all its apartments, she said.

The 320-unit Jasper at 45 Lansing St. opened late last year and had been offering one month free on certain units up until recently, she said. The Jasper discontinued the concession once it hit 90 percent occupancy.

“Every building in the city is offering some sort of concession,” said a staff member from one of the buildings, who did not want to be identified. “It’s just the market. It’s to stay competitive. You fall behind if you don’t have a concession.”

But the concession-giving is also tied to a pullback in the pace of hiring that started last fall, Carlisle said.

According to his analysis of state employment numbers, San Francisco saw the number of employed residents go down by 900 between December 2015 and April 2016 compared to it being up 4,000 the previous year and up 5,700 two years ago for the same timeframe. Overall, the city was home to 535,500 working people as of April.

“So there are 900 fewer people looking for apartments,” Carlisle said. “It created a definite softening in the market.”

He pointed out that while the average asking rent has skyrocketed over the past several years it began to plateau toward the end of last year. According to Paragon statistics, San Francisco rents remained at about $3,620 a month between the third quarter of 2015 and the first quarter of this year.

“It’s the first time in five to six years” such a leveling off of rents has occurred, Carlisle said.

The slack in the market has forced a major apartment landlord to lower revenue projections for the second time this year, leading to a domino effect across the multifamily landscape.

Chicago-based Equity Residential has announced that lease revenue from its properties is expected to grow no higher than 4.5 percent this year, down from a previous projection of up to 5 percent. The company already made an adjustment in April when it tabbed the growth at 5 percent, down from an earlier estimate of 5.25 percent.

The company attributed the latest revision to “recent underperformance” in its San Francisco portfolio and “continued weakness” in New York, Equity Residential said in a statement. “While occupancies and renewal rates in these markets continue to perform in line with the company’s expectations, new lease rates are not meeting original projections due to new rental apartment supply.”

In the immediate wake of Equity Residential’s new adjustment, other apartment owners saw their stock value fall. San Mateo-based Essex Property Trust stock, for instance, fell nearly 4 percent right away.

The rental market could just be hitting a lull before heating up again, Carlisle said, but he cited concerns such as the recent volatility in the global market and falling valuations of technology startups.

However, Cheok believes the apartment market in San Francisco will remain robust over the long haul. “Owners will still see good growth,” she said. “We don’t expect significant dips in rents. Significant demand will continue … with the number of people moving into the area.” By Neil Gonzales, The Registry

And a mega-landlord prepares for downturn. Read…  It Starts: Apartment Glut in San Francisco & New York City

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  23 comments for ““San Francisco Housing Crisis” Hits Market Limit

  1. Bay Lanlord says:

    10 steps forward and 2 steps back…

    Sure there’ll be a pull back, as there have been for over a 2 centuries in this region. In the meantime the long term trend is up.

    The sky is not falling over SF! Perhaps for a few late REIT developers, owning rental property in the Bay Area is damn good deal.

    • marty says:

      Really? What’s the cap rate? I’ll bet you can cash out and buy 2-3x the properties elsewhere in the country with lower property taxes, higher cap rates and have a much higher cash flow.

  2. Keith says:

    The time will come when current financial engineering will cease to have the desired effect. The pull back will be much more severe than anyone could have imagined. All those that put their trust in real estate, art, commodities, gold and silver will find out that deflation is indeed a bitch. It will come on like an overwhelming surprise as they watch the value of their holdings vanish in the blink of an eye. Those that have planned wisely, the ones that have sat on the sidelines waiting, and those that have liquidated their holding early, will scoop up real estate and other assets, that have been sold at fire sale prices, for pennies on the dollar. It may not happen tomorrow, but the day is fast approaching.

  3. Patrick says:

    Wait till they have to start offering first 6 months free on 1 yr leases. Apt construction here in South Bay and SF is on a tear like I’ve never seen in 20 years. Thousands of units are opening this August and countless more high density housing developments going up for 2017 & 18. I have zero doubt that I’m watching the biggest housing glut ever created in the Bay Area.

    On the housing front, I’m seeing homes (that used to sell on opening weekend) sit on the market for over a month. Once the Vancouver housing bubble gets it’s inevitable ‘disorderly correction’, the Bay Area is next on the hit list as Chinese can’t get out fast enough to break even.

    These are just one of many bubbles set to pop over the next 5 to 10 years. What’s different about the coming Greater Depression is that clusters of major crisis’ are going to be spaced out across years; it won’t be just ‘one thing’ that hits all at once, like in 2008. Prepare for the long-term cause this one’s sticking around for decades.

    // Greater Fools Indeed – Long Popcorn

  4. DKing says:

    I live just across the bay from SF in Oakland in a upscale neighborhood called Rockridge. In 2010 I rented a 1 BR apt for $1475. The same 1 BR apt in my building rented for $2800 in June 2015. A couple of months ago another 1 BR in my building rented for $2500. So maybe it really is cooling off.

    • Wolf Richter says:

      Thanks DKing for the update from your neck of the woods. I’m starting to hear about these sorts of rent reductions. But it takes a long time for these things to show up in overall statistics.

    • RAF says:

      I lived in Mountain View (south of SF, same town as Google HQ) for the last two years and recently moved because we were paying too much for not that great of an apartment. Before I gave notice I was talking to my neighbor who said the landlord tried to raise his rent but ended up actually lowering it to keep him in the apartment when he threatened to move out if they raised it. This was BEFORE they knew we and another tenant were planning on moving out. It was a small building, so any vacancy has a big hit to overall occupancy rate. They ended up offering our unit at $100 below what we signed on at 2 years ago, and it took a month to rent out.

      Mountain View is being developed like crazy with new housing development along El Camino (main road). It seems like any old shopping center or building is being torn down and replaced with 5 story apartment complexes. I don’t know who is going to move into these places if tech hiring is indeed slowing down since very few other professions would be able to afford the rent. I think that current landlords will have to start offering discounts or promotions to keep tenants/sign new ones once this housing comes online.

      • DKin says:


        In Oakland, rental units are rent stabilized if the building has 3 or more units. The rent can be raised approx 2 – 3 % (depending on inflation, rent stabilization board) every 12 months. In my apt building referenced above, the landlord raised the rent about 2% every 18 months or so. Almost a year ago I moved in with my girlfriend to her 2 BR apt. The rent here is $2200 a month and the landlord has not raised it in 4 years.

        The prospect of renting in a place without rent stabilization is very different and is much more unstable.

  5. Coaster Noster says:

    I admire the work that Wolf does, because he always backs up what he says with some statistical information. The commentors who provide catch-phrases and “strong” warnings (e.g. “Prepare..cause this one’s..”) never seem to have any data. With the velocity of information increasing, the complexity of the financial landscape increasing (e.g., how does one TRILLION in student debt play in??) anyone commenting is merely doing the “dartboard” approach, with a vanishingly small chance of accuracy.
    “But…scary is gooood!!!”

    • Petunia says:

      I worked on Wall St. in mortgage derivatives in the 90’s before subprime. I knew back then that it wasn’t going to end well. The only surprise in the blow up was how long it took, twenty years.

      The derivatives market is a flawed market. They sell income streams that cannot be guaranteed, and cover the losses by rolling over the contracts. This is a model you can sustain for a long time, over twenty years from my observation, but not forever. The same is true of the student loan business. People are scared and they should be, but when everybody is in on the scam, it can go on a long time.

  6. Gustave says:

    I too live in the Bay Area and my general feeling is what we’re infor is a housing, rental, unicorn and employment bubble.

    When those start popping it will make 2008 seem like a walk in the park, just one snowflake away from an avalanche…

  7. michael says:

    2008 marked the beginning of a depression. The government and the Federal Reserve created a temporary illusion that the market cycle could be suspended. They only delayed the event. Brace for impact.

  8. Shawntay says:

    I live in SF. In my condo-like rental complex, we signed in 2013 at $2600 at that was after a prorated discount month. Three years later they have told us our rent for a large 2br/2bth will go up in the vicinity of $3500 give or take a few $100 upon renewal in Sept. Many of the tenants we’ve come to know have moved out in the past 6 months since news of the crazy increases have spread. The interesting thing is that after a lull in people moving in (7 empty units at one point) they have appeared to fill in the vacancies with section 8 renters. This is obvious to the few of us older tenents who remain. Interesting way to get the outrageous rent rates that people are no longer willing to pay.

    • interesting says:

      “Interesting way to get the outrageous rent rates”

      i think that’s pretty common, I’ve talked to a few people that, when i mention finding tenants for their rentals, the reply is always “there’s always section 8.

      • Shawntay says:

        I didn’t know that. Many of the properties I’ve seen on Craigslist have said “no section 8” but I guess that may be a difference between moderate multi-unit properties and privately owned homes.

    • Shawn says:

      Hilarious man, which means they are not making any money off those units. They rent them out to create the illusion of full occupancy.

  9. Paulo says:

    Here’s something for you guys to chew on. (There are alternative lifestyles to $2500/month rentals.)

    I live in a rural area, but 6km from me there is a village of 350-400 people. You can buy a nice view home, (of the ocean, estuary, and mountains) for $175,000 cdn. You can buy a newly renovated condo, 1 bedroom 650 sq feet for $45,000. All houses overlook a park, large ponds, and playing fields. People can stand on their decks and watch their kids walk to school. There are numerous parks and conservency areas with walking trails around…. that start after a 5 minute walk from your house. A regular home (3 bdr) with no ocean view..just the park, sells for as low as $139,000 cdn. There is a newly renovated restaurant on the waterfront a 5 minute walk away, and a Govt. marina to keep your boat in. Or, you can trailer your boat to the ramp and launch for free at Rod and Gun Club’s boat ramp. The old hotel has been recently purchased and is undergoing a renovation. It has a pub that also sits on the estuary. That is also just a 5 minute walk away. 10 km from the Village there is a very nice little golf course, actually it is georgeous, membership is $600/year. There is also a new hotel and pub situated nearby. 45 minutes away there is a city of 35,000 for your major shopping needs. There are no traffic jams and the area is blissfully silent after supper.

    Hold your mouse over the picture for a slideshow.


    or go to google images

    Needless to say, we have a lot of economic refugees here from all over the world. It puts things in perspective. If you need a city fix Victoria is a 4 hour drive. Vancouver is a ferry ride after a 2.5 hour drive. Skiing is 45 minutes away at Mt. Cain.


    • DKing says:


      Sayward looks like a great place to live. Unfortunately, as a certain type of licensed medical professional, I cannot do my job in Canada. But as to your point about moving to a less expensive and less metropolitan area, it is something that my girlfriend and I talk a lot about. In my field, wage increases have not kept up with the cost of living in the Bay Area. In certain parts of rural California (that are very undesirable places to live because of climate, air quality, lack of culture or recreation), wages in my profession are actually higher because no one wants to live there. We are considering moving out of state as well.

      There are reasons why we might stay here in the Bay Area or move to another metropolitan area. Mostly it comes to down jobs. I would have more flexibility and options for work as would my girlfriend who is in sales. Another factor is schools – we don’t want to have to move again if the schools in the small town we move to are terrible.

  10. chris Hauser says:

    yes, they’ve hit the wall of oversupply and the unicorns aren’t gushing cash like they were, nor are the apps appearing like magic beans,

    it’s just arithmetic divided by gravity.

  11. Estimated_0 says:

    What is the total number of apartment units in San Francisco presently? Interested in how big an inventory increase 8,000 units would be.
    In Atlanta, apartments are going up on every street corner. 9,000 units delivered in 2015, forecast 10,000 units in 2016. Occupancy is 96% and rents increased 8% last year.
    However, the local developers and real estate investors I talk to have thrown in the towel on apartments — cap rates are so low, and institutional appetite so insatiable, the local folks are priced out of the market — this is true in all types of CRE, not just apartments.

    • Wolf Richter says:

      The SF Planning Department’s Q4 Pipeline Report lists 62,500 housing units (condos and apartments) in the pipeline, from “building permit filed” to “under construction.” If completed, they’ll increase the city’s existing housing stock of 382,000 units (houses, condos, coops, and TICs) by over 16%.

      Many of the new condos coming on the market are purchased by investors to be rented out (I know a couple of them myself). So condos too are hitting the rental market.

      Most everything getting built right now is high-end – though the city forces developers to either include some “affordable” units in the building, or in another building, or pay some amount of money into a fund. As prices at the high end start coming down, they’re pressuring the levels beneath them…

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