by Zach Drucker
COVID-19 sent a shockwave through the most expensive housing and rental market in the country—and it could affect San Francisco for years to come. Already immersed in a decade-long housing affordability and production crisis, the pandemic could easily exacerbate these troubling trends even further. As San Francisco leaders work to control a (hopefully) once-in-a-lifetime pandemic and restore the crippled economy, housing trends will be at the forefront of many everyday discussions.
IS THIS THE BEGINNING OF A SAN FRANCISCO EXODUS?
Throughout the years, pundits and headlines have warned that San Francisco faces an imminent mass migration. San Francisco has certainly had its fair share of issues and the results of survey after survey have suggested many San Francisco residents want to leave. Even in the most recent survey conducted by the San Francisco’s Office of the Controller, one in three respondents said they planned to leave the City.
Even so, the mass exodus never came. In fact, according to the California Department of Finance, San Francisco’s population increased by 6,700 this past January. Then, the pandemic quickly reversed that trend. The prediction of the droves of people leaving San Francisco has finally become a reality.
With record levels of unemployment and a stalled economy, residents started to weigh the costs of staying in San Francisco. Many decided to move back home with their parents or relocate to a less expensive city. In March and April of 2020, Zillow reported that some 2.7 million adults across the country moved back in with their parents—80 percent of whom were classified as Generation Z (ages 18-25).
Employees who are able to work remotely also began to question whether San Francisco made sense for them. In an anonymous survey of tech workers conducted by Blind, nearly two-thirds of respondents said they would consider leaving the San Francisco Bay Area, and 20 percent said they would be willing to take a pay cut up to 20 percent if given the option to permanently work remotely from a more affordable city. This gained real traction after many of the City’s major tech companies—including Google, Facebook, Twitter, and Slack—announced plans to allow many employees to work from home even after the pandemic ends.
No longer tied to the office, employees have started to flex their newfound freedom. Some have found a more secluded or serene place to wait out the quarantine (Tahoe’s housing supply hit an all-time low). Others are exploring more affordable tech hubs or the Bay Area suburbs, where buying a house does not feel out of reach. And still, others are pursuing a $10,000 relocation incentive to move to Vermont or Tulsa, Oklahoma. Many newly remote workers have realized that their dollar goes a lot further outside of San Francisco. Why should they stay?
IS RENT BEING PAID DURING THE COVID-19 PANDEMIC?
With the pandemic wiping out cash flow for many individuals, the real estate industry braced itself for a potential wave of tenants unable to make their rent payments. Since the shutdown went into effect, however, San Francisco tenants have consistently paid their rent. In June, 94.5 percent of San Francisco tenants paid their rent in full, and another 2.5 percent paid partial rent.
Those strong numbers might be short lived. Real estate leaders attribute June’s promising showing to stimulus checks, $600 federal unemployment benefits, and tenants prioritizing rent payments. With the enhanced federal unemployment benefits set to expire at the end of July and federal legislators looking nowhere close to a deal on the second stimulus package, the extra supply of cash some tenants have relied on looks in danger of drying up.
Couple the cash flow issues with the bans on eviction set to expire and the country could face an unprecedented eviction crisis. Officials at each level of government implemented eviction protections, but they can only last for so long. In San Francisco, Mayor London Breed’s temporary eviction moratorium banned evictions for unpaid rent up until July 31 and gave tenants six months to pay back owed rent. The Mayor’s temporary moratorium also extends two months after her order expires—a crucial detail for tenants. As long as the City’s emergency proclamation remains active, City leaders can subject the temporary moratorium to one-month extensions.
To take Mayor Breed’s temporary moratorium one step further, the Board of Supervisors passed a measure 10-1 to permanently ban evictions of tenants who fail to pay rent due to the COVID-19 pandemic. The measure only applies to missed payments during the City’s state of emergency and prohibits landlords from charging interest or late fees on COVID-19-related debt. Set to go into effect on July 26, the ordinance must first go through the court system and prevail against the lawsuit filed by real estate trade organizations.
And then there are the tenants leaving San Francisco. Normally, when a San Francisco tenant wants to move before their lease is up, they take the reliable path of finding a subletter. Anyone familiar with moving in San Francisco knows that finding someone to sublease should only take a few weeks at most. Now, however, the main supply of subletters—college students and interns—has completely disappeared. With higher education and internships going virtual (if they still happened at all) finding a subletter might be downright impossible
Without subletters to take over, many tenants had no choice but to break their lease. Results from the San Francisco Apartment Association’s recent survey found that 7.5 percent of renters broke their lease over the last three months. That means one in thirteen renters either paid the termination fee, negotiated an early termination agreement, or outright breached the terms of their contract and risked legal ramifications.
COVID-19 CAUSES SAN FRANCISCO RENT TO DROP, BUT FOR HOW LONG?
When the price of rent drops in San Francisco, even by a single percentage point, it comes as a welcomed relief to renters. Unfortunately for renters, San Francisco rent prices have increased year after year, making San Francisco the most expensive market to rent in the continent. This is precisely why the news that came out over the past two months was even more unbelievable.
In May, the median rental price for a one-bedroom apartment in San Francisco dropped by a shocking 9.2 percent year-over-year to $3,360. Unheard of numbers, but the slide did not stop there. Rent prices in June plunged a record-setting 11.8 percent from the previous year to $3,280, making it the largest slide among major American cities. In the five-year history of tracking rent prices, CEO of Zumper Anthemos Georgiades said the company has never seen the market fluctuate like this and described it as “unprecedented for this generation of renters.”
There is no way these numbers can keep up, right? Wrong! At least in the short term they can easily be the start of a trend according to Georgiades. With the combination of remote work and extensive unemployment, he sees “pandemic pricing” continuing to place significant downward pressure on rents across the San Francisco Bay Area. And while Georgiades stresses that rent decreases do have a floor, he also believes rent for a one-bedroom in San Francisco could fall to similar prices in New York City at around $3,000—inconceivable prior to the pandemic.
It appears that tenants have gained the balance of power in the current rental market. With the number of vacancies mounting—rental listings rose by about 25 percent compared to last year—many landlords are rushing to fill their openings by offering incentives that include signing bonuses, months of free rent, complimentary parking, and other discounts. Even existing tenants have found that their landlords will negotiate on rent. Guaranteed revenue on a unit looks a whole lot better than sitting on a vacant unit, even if that means renting it at a lower price.
HOW CONVINCING ARE THE RECENT HOUSING TRENDS IN SAN FRANCISCO?
With ideal conditions for another highly successful homebuying season—low housing inventory and rock-bottom mortgage rates—the pandemic initially laid those plans to waste as it disrupted normal housing practices. After a slow April that saw home sales plummet, but the median price rise, May felt the full brunt of the pandemic. In the year-over-year numbers from May, San Francisco had 44.4 percent of its usual listing activity and saw its median price of a single-family home drop by 4.1 percent to $1,627,540, according to a report from the California Association of Realtors.
Overall, the Bay Area median home prices dropped by 2.5 percent in May, a fairly tame dip compared to the last recession. According to Jordan Levine, the California Association of Realtors deputy chief economist, this could be in part due to the fixes made after the 2008 financial crisis to the fundamental problems with the housing market and shoddy mortgage underwriting. It also helped that most of the job losses occurred in the service and retail industries, where workers in the Bay Area are more likely to be renters than buyers.
These signs do not point to a decline in the housing market, but rather a pause. In looking at how previous pandemics affected housing, a recent study conducted by Zillow found that home prices stayed constant or suffered only a slight dip. This would be consistent with trends happening right now.
In Compass’s most recent housing report, data showed a rebound for San Francisco’s housing in June. Not only did the median house price rise 3 percent from last year to $1.8 million, but the number of listings accepting offers increased 6 percent year-over-year. And with interest rates hitting historic lows, the increase in demand from buyers—especially more affluent buyers less affected by COVID-19 and unemployment—has the Bay Area housing market on a trajectory towards full recovery.
That being said, even as housing activity in the region appears to be recovering quickly, not all counties are recovering at the same rate. COVID-19 and shelter-in-place orders affected urban centers at a faster and more intense rate, which has led San Francisco and Alameda counties to lag behind their Bay Area neighbors in home sales. With city dwellers looking to flee to the suburbs, the next couple of months should reveal COVID-19’s long-term effect on housing activity and price in San Francisco.
WHAT WILL HOUSING PRODUCTION LOOK LIKE AFTER COVID-19?
State leaders know that in order to address the intensifying housing crisis, vast amounts of housing across all income levels must be built—and fast. Back in 2015, as a part of the Association of Bay Area Governments’ (ABAG) Regional Housing Needs Assessment (RHNA), officials assigned the Bay Area a goal to build 187,990 new housing units by the end of 2022. For those familiar with the region, it comes as little surprise that the Bay Area appears unlikely to reach that goal in time. In San Francisco alone, the City produced only one new unit of housing for every 8.5 new jobs between 2010 and 2018.
Even as the region struggles to meet its current housing target, the planning to develop the next eight-year plan is already underway. RHNA recently announced that the new housing target for the Bay Area will more than double the region’s current goal. In order to address the severe lack of housing and meet the expected job growth, RHNA’s new assessment calls for the creation of 441,000 new housing units by 2030. Of those 441,000 new housing units, 114,442 are slated for very low-income residents, 65,892 for low-income residents, 72,712 for moderate-income residents, and 188,130 for above-moderate income residents (also known as market rate).
This is an immense task for a region that has historically had difficulty in adding more housing. This time around, however, state officials have the ability to invoke SB 35—enacted in 2017— which makes it easier for municipalities to approve developments that comply with zoning regulations.
Even as construction has been able to continue through the pandemic with one minor freeze, the major worry now focuses on how the pandemic will affect future developments. With this much uncertainty surrounding the future, housing production could reach alarmingly low levels. The only developments breaking ground right now were already in the pipeline.
Known as a risk-averse industry, developers have stopped submitting development applications and most likely will not start submitting new applications until rent prices stabilize. Despite the current low construction and land costs, developers do not appear to be jumping at the opportunity—a decision they made after the Great Recession, too.
With similar conditions after the 2008 crash, including low construction and land costs, the state experienced an abrupt and steep decline in new housing developments. In the four years from 2008 to 2012, California permitted 50,000 new homes a year, an anemic amount compared to the 200,000 houses built annually prior to the crash. This in part helped fuel today’s current housing affordability and production crisis.
Market-rate housing will come to a halt for the foreseeable future. The only housing development that can move forward according to Ken Rosen, an economist at UC Berkeley, will be affordable housing projects. Due to their reliance on local and state subsidies, a majority of affordable housing can be considered recession proof. However, the amount of housing built this way does not even make a dent in the region’s overall housing goal.
In the current legislative cycle, California legislators have made sure to make housing a top priority. Housing has taken precedent even amongst the various other crises. They have introduced six bills as a part of their housing package. If passed and signed into law, these measures could be the boon to housing that production advocates have been looking for.
WHAT LIES AHEAD FOR SAN FRANCISCO HOUSING?
What is happening in San Francisco is emblematic of housing trends happening across the country. Droves of people have fled the urban center to more spacious suburbs or more affordable cities. Government officials have sounded the alarm bells on a potential eviction crisis as the economy stays at a standstill and federal assistance comes to a close. Rent prices have dramatically declined across the board and home prices have slowly started to experience a resurgence. Yet despite the pandemic and all of these factors, San Francisco remains the most expensive place to live in the country.
While pandemic pricing can only last for so long, officials need to act swiftly and purposely to address the City’s housing affordability crisis. There should be no disputing that housing production needs to continue. If San Francisco wants to have a realistic opportunity of meeting its housing requirements, keeping rent prices low, and holding onto its residents, the production of new housing needs to ramp up immediately.