San Francisco's Rents Drop 35% - Long Term or Temporary?

[Ujwal Velagapudi]

Per the Bloomberg article, it seems rent for studios have dropped about 35%, 1 bedrooms 27%, and 2 bedrooms 22% as of November 2020.

I know it's been hotly debated whether cities will die out or not, but I want to look at it from a micro standpoint. I want to hear from those that have a vested interest (they own assets in the SF/bay area) and also those that live there, but have no assets there. I think whether or not you're vested in the city carries some weight as to how you perceive the situation & your future outlook (or desires).

- I'm interested to see if this will be a temporary shift, or a long term impact that could take years/decades to come back to 2019 heights? 

- Do you think it will get even worse, before it gets better, based on the trajectory of the graph in the article (and looming moratoriums ending, more lockdowns, etc.)?

- Putting our investor hats on, is this the time to buy, in 2021, in SF (greater Bay area too)?? Even if it doesn't bounce back to the same 2019 levels immediately, like a pendulum the hardest hit should recover at a higher pace, especially when it was external factors...right? Would you all invest in SF now?

Thanks in advanced, interested in hearing all your perspectives! It'll help me to learn as well if you mention if you are a local, and if you do have any business or RE assets in the area, or if you're just providing thoughts as a non-local to SF.

[Arlen Chou]

@Ujwal Velagapudi I own and live in the SF Bay Area. Looking past covid and focusing on real estate, it has been very interesting to watch what has been happening in this local market. The pandemic has really shown a light on real estate strategies and exposed investors who were too reliant on the "up and to the right" trend in both rents and appreciation. 

My purchase strategy was much more conservative, so I have been relatively unscathed until now. The one property that I have had some rent issues was underwritten with the anticipation that tenants would move out over time. I just did not anticipate that a pandemic would be the catalyst for tenants to move out. Because of rent control, I did not have an easy way to make units vacant for renovation and repositioning. Currently I am renovating a unit that I hope to complete and on the market by January 1. My target rent rate will be $600 ABOVE what the previous tenant was paying, but still BELOW the market average. The property was cash flow neutral at purchase and has apricated several hundreds of thousands of dollars since its purchase 4 years ago. As I have been doing construction, I literally have people walking in and asking when the unit will be ready for rent and asking if they can apply.

I agree with @Account Closed about the quality of life here. The weather is awesome, the ocean and the mountains are near and diversity of culture is literally second to none. Because of covid, traffic is completely manageable now. I cannot remember the last time I have been in bumper to bumper traffic.

For me the wild card is the political climate of the state. As I type this we are technically under a "stay at home" order. I personally have been lucky as my W2 is considered an "essential service", so I have been out and about during the past 9 months. The issue is that the CA government has thrown the economy under the bus in an effort to control the spread. Putting aside personal feelings on the effectiveness of general lockdowns vs. more focused measures, I believe the real question is if small businesses can survive the changes the government is imposing. Basically, will the economic harm being created by the lock downs be worse than the disease itself? That is a personal conclusion that people have to decide for themselves. But from an economic standpoint the evidence is pretty clear but businesses are starting to rebel...

People will adapt to our new reality with or without covid. Putting aside the global warming debate, I believe that the weather and the location of the SF Bay Area will EVENTUALLY bring people back. The one thing in real estate that we all know to be true is that "you cannot change the location". If an investor has a long game strategy, then I believe the biggest asset to the SF Bay Area market, has not changed. 

To answer your last question directly, I am closing a non-residential property on the 21st of this month and I hope to get into contract on another by the end of this month. The only reason I am buying now is that I am doing a 1031 out of a SFR. If I did not have to pull the trigger I would wait until the end of 2021.