Question

Wall Street Journal article: San Francisco apartments market - Read the article and answer the questions at the end

Once Booming San Francisco Apartment Market Goes in Reverse City’s vacancy rate rose to 6.2% in May, up from 3.9% only three months ago

By Will Parker June 18, 2020 5:30 am ET

Rents in San Francisco, the most expensive apartment market in the U.S., are tumbling as the city’s vaunted tech sector sheds jobs and more tenants leave the city.

The apartment vacancy rate in San Francisco rose to 6.2% in May, according to apartment data firm RealPage. That’s up from 3.9% only three months ago, after stay-at-home orders went into effect and more people in the city decided not to renew their leases.

San Francisco’s median rent in May for a one-bedroom apartment was also down 9.2% compared with a year ago at $3,360 a month, according to listings platform Zumper. That was still the highest monthly rent of all major U.S. markets, Zumper said, and a reminder of how steeply rents in the city climbed before their more recent descent.

The dot-com boom of the 1990s drove San Francisco real-estate prices and fueled rent increases, while zoning limitations and high construction costs have kept new apartment supply in check. In more recent years, a growing number of tech employees have flocked to San Francisco, with more opting to take buses to nearby Silicon Valley corporate campuses from the city rather

than living in the suburbs.

Tall Buildings, Lower Rents Apartment asking rents are dropping in majormetros across the country Percentage change in median one-bedroomrents from May 2019 to May 2020 Source: Zumper Boston Los Angeles Chicago Denver 0-7.5% -5 -2.5 Now, the pandemic is upending San Francisco’s workforce more than in most cities, remaking part of its corporate landscape. Several large, high-paying companies, including Yelp Inc., and Lyft Inc., have begun laying off workers in the city. LendingClub reported to the California Employment Development Department earlier this month that it was permanently laying off 306 San Francisco employees.

San Francisco-based startup Stitch Fix Inc., meanwhile, is looking to save costs by hiring or relocating staff to cheaper cities outside of California like Pittsburgh and Cleveland. PG&E Corp. said this month it plans to move to Oakland, ending more than 100 years in San Francisco.

Other Bay Area businesses are allowing their employees to work from home indefinitely, making some San Franciscans question whether it still makes sense to pay exorbitant rents when they no longer have to live in the same city as their office.

“This is a very unusual market,” said local real-estate agent Joanne Fazzino. “Landlords can’t expect the same kind of rents they were expecting.”

San Francisco isn’t the only high-rent city brought back to earth. In Manhattan, the rental apartment vacancy rate is now at its highest point in at least 14 years, according to a report by real estate appraiser Jonathan Miller and brokerage Douglas Elliman. And RealPage found that for all of New York City, renters are signing leases at more than 8% off asking price on

average. Meanwhile, home sales are booming in the city’s suburbs.

Other cities that experienced high rent growth, like Nashville, Tenn.; Orlando, Fla.; Atlanta and Charlotte, N.C., have seen rental vacancy rates grow to 5% or more, according to data from RealPage.

In places where rents aren’t falling, price growth is easing. The pace of rent growth has slowed in 27 major markets over the past year, including Seattle and Austin, Texas, with rents actually falling in 11 of those 27 markets in just the past month, according to real-estate firm Zillow.

But Northern California is among the hardest hit. Rents for one-bedroom apartments are falling in San Francisco, San Jose and Fresno, and are close to flat in Oakland and Sacramento, according to Zumper. Rent cuts on new leases are 8% or more on average in both San Francisco and San Jose, RealPage said.

Still, a few hundred dollars shaved off the rent doesn’t bring prices down to what most people would think of as affordable. The Bay Area has a higher rate of rent-burdened households than do most parts of the country, defined as households spending more than 30% of their gross income on rent.

San Francisco’s City Hall is helping out. Last week, it decided to make permanent a temporary eviction moratorium, which was put in place to protect tenants from being evicted for failure to pay rent during the pandemic. The many renters protected from eviction could actually be preventing the city’s vacancy rate from being even higher.

Some market analysts think tenants shouldn’t expect rents to fall much further. Prices of homes for sale are also not coming down, and that ultimately pushes more people in renting, propping up demand for apartments.

For now, however, it is a renter’s market for a change. Sandeep Giri and his wife, Sunita, began searching for a new San Francisco home in April. For the first several weeks, they offered less than the asking rent. Rental managers wouldn’t even respond. But in June, the couple found a

three-bedroom, single-family home with an asking price of $5,800. The Giris’ lower offer of $5,400 was accepted without question.

“We were really pleasantly surprised,” he said.

The hunt played out very differently when Mr. Giri rented his first apartment during the late 1990s dot-com boom. “We had to literally stand in a long line of applicants, with a résumé and our credit score all printed out in our hands and people would like, outbid you, right in front of you,” he said.

Questions:

1. The article mentioned that the vacancy rate for apartments in San Francisco rose from 3.9 percent in February to 6.2 percent in May. Briefly explain how the rental market changed as the vacancy rate rose. How was the equilibrium price and quantity of apartments affected by this change?

2. The market for apartments in San Francisco is subject to rent control, which limits the amount of rent tenants can be charged and how much the cost of capital improvements can be passed on by landlords to their tenants. What impact does the imposition of rent control have on the quantity demanded of apartments? What impact does rent control have on the quantity supplied of apartments?

3. From the article: “For now…it is a renter’s market for a change.” Briefly explain what is meant by a “renter’s market.”

4. In the article, Sandeep Giri described the first time he and his wife searched for an apartment in San Francisco during the late 1990s: “We had to literally stand in a long line of applicants, with a résumé and our credit score all printed out in our hands and people would …outbid you….” What does this statement imply about the relationship between the quantity supplied and the quantity demanded of apartments in San Francisco in the late 1990s? Briefly explain your answer.

Answer 1

1. Effects and causes of Increase in Vacancy Rate

Vacancy Rate that measures the percentage of vacant housing units available for rent, experienced a sharp rise from 3.9% to 6.2% in May in San Francisco. An increased vacancy rate, implies an increase in the supply of rental units available i.e a rightwards shift in the supply curve of rental housing units at any given prices. With an increased supply, the equilibrium rental rates experienced a downward pressure falling by 9.2% on an average during the month of May 2020. The median rental rate went to down to approximately $3050 per month as compared to $3360 per month last year. Some of the reasons for the above changes (as per the article) are mentioned below:

- In regards to the efforts and measures to contain the pandemic such as the lock down and stay-at home orders, many people decided to not to renew their leases.

- Due to a fall in economy’s production capacity, several large, high-paying companies, including Yelp Inc., and Lyft Inc., began laying off workers in the city due to which many employees had leave their rented apartments and move back to their home-towns

- Even companies like San Francisco-based startup Stitch Fix Inc., has been planning to save costs by hiring or relocating staff to cheaper cities outside of California like Pittsburgh and Cleveland, which is another source of increase in the quantity supplied of rental apartments in the city.

2. Effects of Rent Control

Rent control can be seen as price-ceiling in the market of rental apartments. In almost every city like in San-Francisco, some of the population is on the edge of the demand curve as they do not earn enough income to pay the actual market rent. In order to protect the interest of such individuals, the government uses rent control policy wherein they decide to impose a rent ceiling below the equilibrium price. The effects of such a policy are:

- Demand side Effects: Lower prices make renting houses more affordable for everyone. There is an increase the quantity demanded for rented apartments.

- Supply side Effects: Lower prices makes construction of new apartments less profitable. The land-owners are less willing to rent up their properties at lower prices, that leads to a fall in the quantity supplied for apartments.

- Overall effect: Since, quantity demanded for apartments exceeds the quantity supplied; it leads to a shortage in the market of apartments.

3. Given the example of Mr. Giri and his wife who’s rent offer of lower than the asking rent was accepted without any questions, it could be stated that “For now it’s a Renter’s Market for a change”. It means there is a shift of power from the landowners to the tenants:

- Due to a rise in unemployment rate caused by the onset of pandemic, many tenants are not able to pay rents. Right now they don’t have any other options instead of paying lower rents or stop paying rents at all. Also, there are not even any legal rules that define eviction of tenants by the landlords who are refusing to pay rents. In some cities, the jurisdiction has given extensions of as long as 120 days to make rent payments.

- Addition to this there is a rise of vacancy rates due to the various reasons listed above that has led to an excess supply of rental apartments and bidding the rental prices down.

Considering the above factors, the landlords are either accepting the lower negotiated rents from the existing/new tenants (as something is better than nothing) or are waiting for some formal rules to be laid down by the court of law for the official rent payments, before they make their new properties available on rent. Till the time we can say, the market of apartments on the tenants side (renter’s side).

4. The dot-com boom of the 1990s drove San Francisco real-estate prices and fueled rent increases, while zoning limitations and high construction costs have kept new apartment supply in check. In more recent years, a growing number of tech employees have flocked to San Francisco, with more opting to take buses to nearby Silicon Valley corporate campuses from the city rather than living in the suburbs.

The above situation in 1990’s can be described as complete reversal of the current scenario in San-Francisco. Due to the dot-com boom, there was a high demand of rental apartment in the city that drove up the rental prices. Apartments were being rented to people by checking their income and credit history, as affording a rented property that time was not an easy task for every one so the rental manager’s did not wanted to risk on any defaults. In a way, this made the supply of apartments restricted during 1990’s. Hence we could say, the demand of apartment outweighed the supply leading to an excess demand in, that increased the equilibrium prices in the housing market.