Multifamily Sales In San Francisco Still Way Down Despite Recent Pickup

The coronavirus pandemic and economic downturn brought San Francisco's multifamily investment market to a near standstill that it is now just starting to crawl out of. 

After an April and May in which only seven five-plus-unit apartment buildings sold in S.F., the city has since seen about 40 such properties sold, according to Compass Commercial Senior Vice President Jeremy Lee. 

Even so, that is still a large drop from the more than 60 sales during that time in 2019. The drop isn’t from a lack of supply; there are about 80 listings, roughly three times the normal amount, on the market, according to Lee.

The ongoing slowdown is typical of economic downturns in most markets, but it also comes as rental rates in S.F. are hit especially hard. As the city's unemployment rate has quadrupled and companies like Facebook and Twitter have extended remote work policies into 2021 or beyond, apartment vacancies and dropping rents have cooled some multifamily investors' interest in S.F., at least for now.

"Buyers and lenders are not comfortable with vacant units anymore," Colliers International Vice President Payam Nejad wrote Bisnow in an email. "They are asking for the apartments to be rented to confirm the new market rents and income."

The market reversal hit after several years of steadily rising rents, which were fueled by the continued growth of high-paying jobs and lagging housing production. Now, average S.F. metro area rents are down from about $3,100 per unit per month to about $2,800, a drop of 10%, according to CoStar Senior Market Analyst Marco Cugia. 

In some submarkets, the drop has been even greater. Rents in the expansive South of Market neighborhood have fallen over 20% year-over-year, largely because of the area's relatively high Class-A supply growth last decade, Cugia said. 

While deals are finally happening again, Lee said it will take some time before the number of listings on the market falls to normal levels.

"There’s just been such an accumulation of [listings] that it’s just going to take time to absorb them into the market," he said. "If a building is well-located, well-priced — and well-priced in the city is still a four-cap — then it’s going to move, and it’s going to move relatively quickly."

He said the plethora of listings includes some holdovers from rosier times.

"There are some listings that have been priced with very aggressive pro forma rents for vacant units that have been listed before the coronavirus started," Lee said.

Just before the pandemic, a number of buildings around the city had closed at cap rates under four, including a 42-unit property at 1935 Franklin St. in Pacific Heights (2.68%), a 39-unit building at 150 Franklin St. near Hayes Valley (3.01%) and a 40-unit building at 704 Bush St. downtown (3.47%), according to Colliers International's Northern California market report. 

In San Francisco, like with most of California, demand is at least somewhat affected by the possibility of Proposition 21, which would expand cities' ability to enforce rent control and looms for CRE on the November ballot. Lee said its passing would have "a chilling effect on the market because it will affect market rents." Nejad said it is already affecting pricing. 

"Cap rates are up 75 basis points now due to the perceived risk in the market and the potential for new laws that would adversely affect our market, such as Proposition 21," he said. "On the other hand, buyers are taking advantage of the positive leverage environment due to the low interest rates."

Other items affecting the multifamily market if passed in November include Proposition I, a local ballot measure that would double the city's transfer tax for deals of $10M and higher.

Regardless of election outcomes, investors will still be watching to see whether apartment demand in S.F. reverses the course it has taken this year.

"I just think that so much of this depends on the recovery and the public-health outlook getting better and getting demand back into the city," Cugia said.

"From everything we’ve been hearing from property managers and in the data in terms of vacancy rates and rental rates, it’s just a market that’s struggling to generate enough demand."