The rental market is in turmoil after jobs and people left, and price discovery has set in. Falling rents are a market-based solution to the “Housing Crisis.”
By Wolf Richter for WOLF STREET.
The median asking rent for one-bedroom apartments in San Francisco, after the two highly-hailed-and-touted increases in a row, fell 2.5% in July from June to $2,720, according to Zumper. Since June 2019, the median asking rent has fallen 27%:
There is a peculiar phenomenon in the local media in San Francisco: When rents were spiking a few years ago, they lamented the “Housing Crisis,” where teachers couldn’t afford to live in the City where they taught. And they clamored for subsidies to resolve this situation. Then rents plunged, starting in mid-2019, and instead of praising this as the market-based solution to the Housing Crisis, they painted it as some dark nasty phenomenon that needs to be stopped. This was particularly the case late last year.
And when rents ticked up in May and June for the first time – we’re talking about “asking rents,” a market aspect we’ll get into in a moment – the local media hailed it as the great recovery of San Francisco, though it would worsen the Housing Crisis that they had lamented earlier. And now asking rents fell again…
The rent decline is the market-based solution to the San Francisco Housing Crisis a few years ago. When a place gets too expensive, and the narrative changes as jobs vanish because companies leave, and people leave, then, well, prices adjust. San Francisco has been through this before.
Don’t get me wrong: $2,720 in median asking rent for a one-bedroom apartment is still ludicrously expensive, and it makes San Francisco the most expensive rental city in the US, ahead of New York City, though there are ZIP codes in Manhattan and Los Angeles that have higher rents than the most expensive ZIP code in San Francisco.
So $2,720 in rent, while 27% lower than it was two years ago, is still not a steal.
There are all kinds of data out there – including USPS change-of-address data, population estimates by the California Department of Finance, and labor force data by the California Employment Development Department – that show that the population, including the working population, of San Francisco has declined even as new apartment buildings were completed and added inventory to the market. This changes the dynamics of the market.
The Department of Finance reported in May that San Francisco County’s population, after slowing growth in 2018 and 2019, fell in 2020 by 1.7%, or by 14,800 people, which knocked the population down to 875,010 – the lowest since 2015:
Even as the population fell by 14,800 people in 2020, a total of 4,048 new apartment units were completed and put on the market, according to the Department of Finance. A decline in population combined with an increase in apartment inventory has a salubrious market-based impact on a crazy rental market.
Other measures are the jobs and labor force data from the California EDD. The number of residents in the City with jobs, including jobs outside the City, plunged last spring and has recovered some, but in June was still down by 49,400 people, or by 8.8%, from where it had been in February 2019:
The labor force – residents in the city who are either working or are actively looking for work –plunged in the spring of 2020 and continued to zigzag lower as people were leaving the City until reaching a low point in January 2021.
The labor force has begun zigzagging up, but as of June was still down by 32,400 people from February 2019.
This decline reflects some people who stayed in the city but have retired or quit their jobs or got laid off but are not looking for a job, and it reflects people who left the city. And this too changes the dynamics of the housing market:
Now don’t get me wrong: San Francisco is still an immensely crowded and congested city. It’s just a little less crowded than it was before.
Indications are now that the net-outflow of people – more people leaving than arriving – has run its course. Some people are still leaving, but others are returning, and some new people are being brought in by employers.
Eviction bans are still in place in San Francisco. There are programs under way to use taxpayer funds to pay rents. This further distorts the view of the rental market. Once these eviction bans and landlord subsidies end, there may be another wave of move-outs that may jostle the apartment market further.
This is a market in turmoil. Renters are shopping for cheaper and better places, so there is a lot of churn. Landlords are trying to fill their units. But some cannot compromise too much on their asking rents if they have to toe the line with their lenders. Incentives help overcome this issue.
Then there is this: as rents dropped, some of the people that had shacked up two, three, or four roommates to an apartment, could spread out a little, creating some additional demand for rental units that wasn’t driven by people coming into the city, but was driven internally.
The price discovery with Asking Rents.
“Asking rents” is the rent that landlords advertise on various apartment listing services for their available rental units. Computers gather the asking rents from all major online sites. So “asking rent” here is not survey based, but based on advertised rents.
But asking rent does not indicate what actual rent landlord and tenant finally agreed to, and what incentives this involved such as “two months free” or even “three months free” or “free parking for six months,” or whatever.
If a one-year lease comes with “two months free,” the lease is for 14 months at the price of 12 months, and the monthly “effective rent” just dropped by 14% from the rent in the lease. Incentives have been all the rage in San Francisco. And they’re not reflected in the data.
And asking rents do not indicate if those apartments will be successfully rented out at those rents, or if they will remain vacant.
So asking rents is a measure of price discovery. You put a rental unit on the market at a certain asking rent, perhaps an ambitious asking rent, and if no one shows up, you lower the asking rent.
“Median” asking rent means that half the units on the market were advertised with rents that were higher, and half with rents that were lower.
So the median asking rent is an indication of where landlords hope the market may be, and if incentives are involved, the market is going to be a lot lower. And what we’re seeing in San Francisco is a market that changed dramatically over the past two years, and now landlords are in price discovery mode.
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