The Scary Truth About Leasing Real Estate In San Francisco

I don’t own real estate in San Francisco, so I may be a little late to the party compared to people who live there and people who work in the real estate industry there.
But until lately, I didn’t know commercial office lease rates in the San Francisco area have tracked the NASDAQ, and residential leases can be expected to increase by 10% annually.

Let’s start with the commercial leasing volatility. Venture Capitalist Bill Gurley tweeted a fascinating graph in 2013, which shows dollars charged per square foot for Class A office leases in San Francisco roughly tracking the NASDAQ from 1996 through 2013. Maybe that’s not unusual because you could probably make a graph of other things tracking the volatility of the NASDAQ, but it’s interesting by contrast to residential leases in the same area, which have steadily increased.

When I heard my friend’s experience finding a 3 BR apartment in a bedroom community NE of Berkley last week, I got curious. An hour north of downtown San Francisco, but an easy commute by train, it has small town ambience and good schools, so rents are skyrocketing right now.

He followed up on a craigslist ad, visited the apartment complex, and was given a rental application indicating the unit would be available August 15 and the rent would be $2850 per month. So far, so good.

He filled out the application and went back to the rental office the next day, and waited for another couple to leave before he turned in his application. The assistant said, “You’re lucky. This complex is being sold and your application is the last one we’re taking before the sale. Those people who just left? I couldn’t even show them an apartment. They have to wait ‘til the sale closes next month. And then rent on your unit will be $3350. But my manager said we will honor your lease application as written yesterday.”

My friend swallowed hard and asked, “When my lease renews, how much will it be?”

The leasing assistant replied, “We are limited by law to 10% of the lease amount annually. It cannot increase more than that.”

So, I guess my friend should consider himself lucky to get an apartment $500 per month below market, right? And lucky that his lease will only increase by $285 per month next year, and $313 per month the following year, etc. Multi-year leases are not available.

Emily Badger wrote a Washington Post article last week entitled, What It Would Actually Take To Reduce Rents in America’s Most Expensive City. She concluded, not surprisingly, “… if San Francisco wants the cost of housing to go down, there are three clear ways to get there. The city could build more of the stuff. Or it could hold out for falling incomes or job losses among the people who compete for housing.”

In September 2015, Zillow stats revealed San Francisco residents spend an average of 47% of their income on rent, and the median personal income is $85,500. These Bay Area stats put its problem in sharp perspective for the rest of us.

Blogger Eric Fischer recently created another fascinating graph, this one tracks residential San Francisco rental data since 1950, and his conclusion is, “After adjusting for the Consumer Price Index, real rents have only gone up 2.5% per year and have only quadrupled in effective cost in 60 years. It is still an alarming increase.”

I’m pretty sure my California friend would agree. How about you?