What’s new in the San Francisco rental market since the pandemic?
Finding a place to rent in San Francisco now is a different proposition than it was back in February 2020.The pandemic was a game changer in the real estate industry. Ever since, the world has had to change and adapt to new ways of operating for the foreseeable future.
The changes in work setup and lifestyles gave people the upper hand in choosing where to live. People continue to move out of San Francisco either by choice or by necessity. They cannot enjoy the city amenities because of health restrictions, and feel that it makes no sense to pay high rent because of that.
In this report, we will discuss the current state of renting in San Francisco and what that means for people who are looking to move to the city.
People Are Moving Out of The County
Many are now leaving San Francisco. It shows an unprecedented drop in the city’s rental prices, roughly 20%, compared to a year ago, according to Zumper. This is also the first time they have recorded rent prices of median homes to go below $3,000.
There are now fewer people moving into San Francisco compared to New York City. Because of this, Zumper predicts that New York City may overtake San Francisco as the most expensive city in the country.
Preferred Home Improvements
Home improvement influences the trend in migration. One of the key drivers of all this movement is looking for more space at home. Rich Barton, the CEO of Zillow, recently said in Zillow’s Q2 quarterly earnings call:
“Zoom meetings are changing the way families think about space and privacy. Home offices are in high demand. Backyards are more desirable than parks and gyms. Work-from-home policies are eliminating the commute for many.”
Professionals adapting to this new work setup where the home has become their new workplace.
Small spaces feel constricting and make it hard to separate home and work life. With a bigger space, spare rooms become home offices and classrooms. A backyard can also offer a space to work with an outdoor feel and without the danger of getting infected.
Rental homes near public transit are no longer a top priority. Many big tech companies in San Francisco are allowing employees to continue working from home. Google and Facebook allow their employees to work from home until July 2021, and permanently in the future for Twitter employees.
Another indication that people are moving out of San Francisco is the city’s sales tax revenues. Between April and June 2020, San Francisco’s sales tax revenues dropped a whopping 43% to $30.8 million compared to last year. Restaurant and bar sales were down 65%, while Los Angeles and San Diego have seen increases in each of these areas.
Avoiding The Risk of Wildfires in Northern California
California experiences a large number of damaging wildfires every year between August and October. Most prone to such damage is the surrounding Bay Area in Northern California.
In 2020, more than 4 million acres of land burned in California wildfires, displacing many people from their homes and forcing them to move elsewhere.
Because of the risk and damage, it was recently announced that residents of 8 Northern California counties are now eligible to apply for federal grants and low-interest loans to cover uninsured losses that were caused by the wildfires.
But, rent prices in nearby areas, such as Sonoma, reportedly jumped by 36% during wildfire season. But with more people now leaving the city, it will help even outgrowing rent prices.
High Vacancy Rate Means Low Rent Price Opportunity
It is now clear that there is currently low rental demand in San Francisco.
As a counter-move to this impact in their business, many rental property owners in urban centers started offering different types of concessions to entice new renters who might be looking to upsize without leaving the city.
Concessions are generally considered a leading indicator of an imminent drop in rental prices since landlords will often attempt to offer short-term concessions to renters in order to avoid permanent, long-term price drops that will be harder to change if and when markets pick back up.
Zillow recently reported that the number of rental listings nationwide that included some form of rental concessions increased from 16.2% in February 2020 to 30.4% in July 2020. These concessions often take the form of free weeks of rent or a waived/reduced deposit, with 55% of surveyed renters reporting that they received at least one concession in their lease.
Rental and Housing Laws
California enforced a statewide eviction moratorium preventing residents who lost their income from being evicted due to unpaid rent. Governor Gavin Newson signed into law AB-3088 which extends the eviction moratorium from March 1, 2020, to January 31, 2021.
However, renters are required to pay at least 25% of their rent for the months of September 2020 to January 2021. If they fail to comply, landlords would be allowed to file for eviction beginning February 2021. Beginning March 1, 2021, a landlord would be able to seek collection of any previously unpaid rent in small claims court.
California 2020 Election Propositions
There are currently a handful of statewide ballot propositions in the 2020 election that will affect the real estate market in various ways. The goal of this discussion is not to provide an editorial opinion on how to vote on each of these propositions, but rather to present the facts and information to further your understanding of the current rental market and real estate issues facing San Francisco and California at large.
All of the information provided below is presented by Ballotpedia, a nonpartisan nonprofit that aims to simply provide “accurate and objective information about politics at all levels of government.”
California Proposition 15, or Prop 15, is a “Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative.” Prop 15 aims to amend the California State Constitution by “requiring the commercial and industrial property to be taxed based on their market value” rather than their purchase price. This amendment would take effect in 2022. Excluded in this proposition are residential properties and areas deemed as commercial agriculture, as well as property owners with $3 million or less in California holdings.
The additional tax revenue forecast, once this amendment is in place, will range from $8 billion to $12.5 billion per year. These proceeds will be directed toward funding public schools, community colleges, and local government projects.
Prop 19 is “Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment.” This measure would change the rules for tax assessment when eligible homeowners choose to transfer their homeowner taxes from one property to another.
Currently, homeowners over the age of 55 or with severe disabilities can transfer their tax assessments within the same county to homes of equal or lesser market value. It also allows the tax assessments for inherited homes to be passed from parent to child or grandparent to grandchild even for properties that are not used as a principal residence. This can only be done once in a person’s lifetime.
With the proposed change, eligible homeowners (which now includes people whose homes have been destroyed by wildfire or disaster) would be able to transfer tax assessments anywhere within California, even on a property of higher value than the current one, and be assessed an upward adjustment for that transfer.
Homes passed down from parent to child or grandparent to grandchild, and not used as a primary residence, will be reassessed at market value at the time of transfer. This can be done up to three times instead of just once. Finally, any savings or additional revenue garnered by the state would be directed toward fire protection services.
California Proposition 21 would “Expand Local Governments’ Authority to Enact Rent Control on Residential Property.” This proposition has the potential to have the most direct impact on San Francisco’s rental market.
If passed, Prop 21 would allow local governments to institute rent control laws on properties that are more than 15 years, monitor rent-controlled properties, and allow rent increases up to 15% over the course of three years at the beginning of each new tenancy. However, it would exempt people who own two or fewer homes from any of these rent control laws.
Read about our insight on How Rent Control Works in San Francisco.
Things are changing so rapidly nowadays with COVID-19 that it’s difficult to predict too far into the future. Nonetheless, here are a few key takeaways if you are already a renter or planning to move to San Francisco, or are considering investing in the San Francisco market.
Current and Prospective Renters
Leverage on the low rent prices in San Francisco. You may be able to find a bigger space or more desirable location for an equal or lower price. If you have no plans of relocating, you may negotiate down your rent. Your landlord may also take the initiative to offer you, or a new renter, concessions like free weeks of rent or free parking for a limited time.
For property owners in the San Francisco market, or considering making a new investment in the market, keep in mind that it may take a bit longer to find someone willing to rent out your space. It may take time for the rental market to find its equilibrium. Until then, you may need to offer some additional rental concessions in order to entice people to rent out your space, or entirely lower the rent until you find the right renter.
Also, statewide propositions having the potential to change property taxes and rent control can happen from time to time. For instance, during an election. Hence, it’s necessary to check the latest real estate market trends in your area before deciding to commit for the long term. If you are keen on property investing, check out our recommended best cities to invest in real estate rentals.