Look Before You Lease

Written by PAM MCELROY

It seems like we could all use a little help navigating the current rental market. With people moving to and from the city, rolling layoffs, and certain neighborhoods still recovering from the pandemic, it’s no wonder! In times like these, it can be hard to know how to invest in your buildings, fill vacancies, and . . . really, just keep up!

We asked a few of SFAA’s top property managers to share their expertise and advice. The following is what they had to say, in their own words.

Corey Eckert Vice President, Leasing & Marketing Structure Properties, Inc.

While we have experienced an increase in demand, we are still somewhat in a renter’s market. Top priorities for tenants include neighborhoods within close walking distance to main shopping corridors and/or parks; in-unit laundry; space to comfortably work from home; and natural light.

We’ve seen a slowdown in renters moving out for better deals as many have already secured low-rent, rent-controlled units during the pandemic. The great news is that we are seeing an increase in renters who are new to the city with employment offer letters.

The market is very much following the massive amount of tech layoffs we’ve experienced in the Bay Area recently. In November and December, we saw demand significantly decrease, even beyond the ordinary seasonal slowdown. Things are getting much better as we head into February and layoffs have slowed down.

My expectation is that rents will continue to climb, slowly but steadily, through end of summer and into the fall.

My advice? Now more than ever, it’s important to ensure you have your best foot forward in terms of unit condition. Very clean, updated units show much better. Get professional photography, create floor plans, and include a virtual tour to help your listings stand out.

Corey Eckert can be reached at ceckert@structureproperties.com.

Renee Engelen President & Licensed Broker

HRH Real Estate Services Corporation

It wasn’t that long ago when landlords had to do little more than post an ad on Craigslist or hang a sign on their building to rent a vacant unit in San Francisco. People would line up, applications pre-filled, complete with references and personal biographies, all vying to be the first choice. Renters would pay for an apartment a month before their actual move-in date, just to secure a lease.

Wise landlords used this period of high occupancy to build reserves to improve their buildings. They kept their common areas fresh, grounds groomed, and conducted minor unit improvements during occupancies.

In the wake of many large employers diversifying work forces to other states, the unexpected exodus from San Francisco when COVID hit, and the resulting trend in remote work, we have seen record vacancies that have been challenging to fill. Simply lowering rents has done little to motivate prospective renters with so many apartment choices available.

Our anticipated “slow season” (November through January) was the most stagnant many of us have ever seen. The wise landlord, who regularly invested in their building, found themselves ahead of the competitors because they were not faced with sudden and expensive repairs, cash crunches to facilitate improvements, labor shortages, and delays in re-marketing their housing supply.

Adding to the dilemma, those times created a great deal of uncertainty and insecurity for landlords. Those that carry large mortgages were hemorrhaging money in buildings that were sometimes less than 50% occupied. If they weren’t strapped for cash, they were fearful to spend.

Looking at the units I manage and lease, it’s clear that properties that are well-maintained and check the top boxes for prospective renters result in more logged leasing inquiries and applications. Further, they continued to move at or near high-season rates, albeit at marginally slower turns.

For example, a well-appointed two-bedroom apartment in a standard walk-up can fetch $6,000 per month. In contrast, a unit that hasn’t been maintained or lacks desired features rent below $4,000, some as low as $2,500.

Renters’ tastes have become increasingly more refined. They have not seen job cuts to an extreme that their spending has slowed, and they are still searching for two-bedroom units within a $5,500-$6,000 budget.

Expectations have increased as quickly as rising inventory. The most sought-after apartment features include: desirable location; in-unit laundry; extra space for a home office; upgraded kitchens and bathrooms; hardwood flooring; designated parking; outdoor space and views; reputable management services; additional storage; forced-air heat; and good natural and artificial lighting.

Of course, there are many factors to consider before moving forward with any major renovation plans. What cycle are you in in your investment? Are you building for the long-term in growth and future retirement? Are you retired and on a fixed-income? Is your plan to sell or leave to heirs? Would you need to finance your renovations?

And, finally, what will your return be? If you (1) take the top-tier rental value that a fully-renovated unit could fetch in your building (factoring in your building’s quality, location, and your unit’s size), and then (2) subtract current market rent for that unit, then (3) take the total estimated cost of repairs and divide it by the number you arrived at in Step 2 above, you’ll find your recovery time. If the number you end up with exceeds 48 months, your recovery period may be too high.

Example

Estimated new rent - Current rent

$5,000 - $3,500 = $1500 per month value increase.

Cost of Renovations/Increased Value = Recovery Period

$50,000 / $1,500 = 33 months recovery

While a person cannot create all of the above features, like views or the building location, many of the other items can be achieved via simple and inexpensive fixes and creative marketing.

Renee Engelen can be reached at renee@hrhrealestate.com

Natalie M. Drees President Lingsch Realty

Our tenants are moving out due to job relocations or because they are taking advantage of lower housing prices to plunge into homeownership. In addition, many tenants we rented to during the pandemic are now moving back in with roommates to save money or are moving in with their significant others and are looking for a larger space.

Our rent prices are back at pre-COVID levels. Tenants continue to look for deals, but they want updated units including dishwashers and in-unit laundry. We find tenants are taking much longer that usual to decide about an apartment. They view an apartment and then come back to us weeks, even months, later, saying they want to rent it. We suspect that on the heels of the depressed pandemic-era rent prices, tenants are slow to realize the market has recovered. Look Before You Lease… continued on page 58