Through Marc Frenkiel
Is it an exaggeration to say that San Francisco is the greatest center of technological invention and innovation the world has ever known?
Have a look on Milken Institute’s Top Performing Cities Report 2020. Looking back to the year 2019, the Metropolitan Statistical Area of San Francisco-Redwood City-South San Francisco took the top spot:
The growth of wage incomes in the region during the five-year base period and the recent period is exceptionally strong (second among large MSAs). In addition to the strong growth in job creation and income in the region, it also ranks the highest in five-year high-tech GDP growth among major metropolitan areas in the country. More importantly, high tech content as a part of the regional economy is increasing.
The San Francisco-Redwood City-South San Francisco, California, MSA is already home to many world famous names. These tech-driven service companies like Airbnb, Amazon, Salesforce, and Uber are not just trophies, but pillars of the regional tech cluster as well. However, tech service startups are shaping the region’s current and future growth. They are the dynamic force that elevates San Francisco-Redwood City-South San Francisco to number one this year. These startups cover areas of data analytics, finance / banking, gaming, logistics, markets, and sales.
The San Francisco Bay Area is also an emerging finance and logistics center for global trade. The region’s capacity for innovation dovetails well with increased demand for blockchain, fintech, and other data analytics technologies that are reshaping global commerce. The phenomenon is by no means unique to this period in San Francisco, but illustrates the region’s richness and its ability to attract and retain talent, despite lackluster commercial space development and low housing costs.
San Francisco Achilles Heel
And where there is money, there is expensive housing. San Francisco has always placed as the most expensive US rental market (here, here, and here). However, those who did not participate in the city’s technological boom saw their purchasing power decrease. The gap between the ‘haves’ and the ‘haves’ has widened, and soured quality of life for everyone.
So when the country was locked down due to the global pandemic and work-from-home policies were implemented at all levels, many residents fled to areas where they could get more for their money. At the end of 2020, San Francisco’s vacancy rate was around ten%, about double what it was before the pandemic.
Is this a long term trend? Recent data indicates that this is not the case.
The State of the San Francisco Rental Market
As vacant housing increases, rents generally fall and prices fall between 23% and 24%, San Francisco has seen some of the biggest cuts in the country. Associated to concessions like 2-3 months free, owners and managers do their best to get prospects to sign new leases. But is it enough to stimulate demand?
It could very well be. Like Roland Li from the San Francisco Chronicle reports:
Tenants are returning to San Francisco and demand is on the rise, said Oz Erickson, president of developer Emerald Fund. In the 418-unit apartment tower of 100 Van Ness, rents fell 30% from 2019 during the pandemic and are now about 20% lower, he said. improved to 6% vacancy, he said.
Where did they go?
While the media may have helped perpetuate the narrative of the “end” of San Francisco, the evidence – both empirical and anecdotal – suggests otherwise.
Data from the United States Postal Service analyzing change of address requests shows that most out-migration from San Francisco was to other Bay Area counties. According to Chronicle of San Francisco:
The Postal Service report does not support the conventional narrative that the majority of those who leave the city decamp for cheaper, more business-friendly states like Texas and Florida. Instead, the majority of those who fled the city during the pandemic have moved to other Bay Area counties. The top six destinations were all Bay Area counties: Alameda, San Mateo, Marin, Contra Costa, Santa Clara and Sonoma.
The fact that most of these counties are within driving distance of San Francisco suggests that those who have decamped to the suburbs wish to stay close enough to the city to (possibly) commute to work, frequent its businesses, and participate in its culture, and possibly even go back at a later date.
Among the city’s ultra-rich who have left, anecdotal evidence suggests an inevitable return. Leigh Rowan, founder of full-service travel management company Savanti Travel, said SFGate as while helping clients temporarily relocate to beach destinations like Miami; Puerto Vallarta, Punta Mita and Cabo San Lucas, Mexico; and in Costa Rica, “no one has yet said they don’t want to go back to reopening the state. “Nobody abandons the bay… Everyone is very optimistic about the return and the return of the bay.”
More data, please
Recent data from VTS Office Demand Index, which tracks office demand by tracking both in-person and virtual tours. According to the index, 94.3% of the office demand lost during the pandemic has been recovered. It is safe to say that the 7% discount year over year in office rents played a role in the recovery.
The VTS report includes a caveat:
“While the recent and sustained recovery in demand for office space in San Francisco is great news for this rental season, for homeowners in the market, the actual recovery may take even longer as market demand worsens. down sharply in the months leading up to the pandemic. Inhibited by the erosion of availability and affordability, demand slowed for much of 2019. As of January 2020, San Francisco VODI was down more than 40% from the previous year. “
So while the pandemic has certainly accelerated the downward trend in demand for office space in San Francisco, the reality is that some businesses were already exiting in 2019.
The culprit: exorbitant office rents.
That’s a silver lining for owners and operators of multiple San Francisco families: every Bay Area employee is a potential San Francisco resident.
The way to proceed
In today’s uncertain market, occupancy must be protected at all costs, and there is several ways to proceed, one of which is to double the marketing initiatives.
Investing more in pay-per-click advertising, social media and premium ads on internet ad services will generate more leads, which when paired with a IA Rental Assistant who responds instantly to all requests, can improve occupancy in a short time.
According to an internal AppFolio study, 60% of potential tenants will leave if they do not receive a response within 30 minutes. In a depressed demand market, it’s vital to maximize every lead that comes your way: providing an instant follow-up response leads to a higher probability of engagement, and in turn, a higher likelihood of converting prospects to residents. When the San Diego-based Cambridge Management Group brought AppFolio’s AI rental assistant Lisa, into their operations, the surge was immediate. As the Cambridge team shared with AppFolio in a case study:
“After evaluating the performance of the (leasing) department as a whole and analyzing our profitability, integrating Lisa was obvious. We are more profitable and have seen our team’s performance increase dramatically with no response times or missed leads. We work during regular office hours, but Lisa is still active. It enables ongoing conversations after hours with our prospects, who feel they are receiving excellent service.
With Lisa, we book more sessions and we don’t get bogged down with repetitive questions, lead follow-up and follow-up. Our team is able to focus on higher level interactions. Lisa has access to our calendars, streamlines communication with the prospect, and books the broadcast for us directly without any additional interaction from our team. ”
“Its reports give us insight into the specific platforms our prospects come from and the most successful platforms. From a marketing standpoint, this information is extremely valuable when we assess where we are spending our marketing dollars. It identifies which of our ads is driving the most traffic and allows us to make more informed decisions about where to allocate future funds. ”
As COVID vaccines become more and more accessible, San Francisco, like most American cities, is starting to return to normal. Time will tell if “normal” translates into a return to peak rent levels.