Unless you’ve been hiding beneath a rock, you know that rents are way up in San Francisco, the recent national darling of post-pandemic recovery and the artificial intelligence boom. This week, the comeback trajectory reached another stratum with the news that the city’s rents for two-bedroom apartments — $5,120 on average — climbed past New York City for the highest in the country. The city is also leading the nation in rent growth.
As one housing developer told me, these rankings are often a bit skewed. Sure, San Francisco’s has eclipsed the two-bedroom average for New York City’s five boroughs, but Manhattan remains the true comparison, he said. As of late February, Manhattan’s average two-bedroom rent stood at $7,357 per month, far outpacing the Bay Area capital.
And this is perhaps why developers remain only cautiously optimistic about San Francisco’s market. During a Wednesday housing conference hosted by Bisnow in downtown San Francisco, investors and developers alike showered praise upon Mayor Daniel Lurie’s administration and its efforts to pave the way for housing and development approvals.
Despite the numbers in the headlines, however, many industry insiders pointed to rents as the millstone around the neck of housing construction. The city has a bottlenecked development pipeline of 34,000 permitted units that haven’t reached the construction phase.
“Nothing’s been built in the last six years, and nothing is going to be built in the next two years, and that could really help the rent story and you’ll see capital start to come in here,” Zach Felson, chief investment officer with Prado Group said during one of Wednesday’s panels.
During a later panel that featured local developers, news broke in the San Francisco Chronicle that Lurie and San Francisco Supervisor Bilal Mahmood planned to formally propose halving the city’s 6 percent real estate transfer tax, which is among the nation’s highest. The developers on stage stressed that something like that helps, but there is only so much the city or the state can do to spur investors to bet on San Francisco.
“I think we can all get something entitled today, but you got to solve the cost problem,” Doug McDonald, president of Summerhill Apartment Communities, said. “We’ve been banging our heads up against the wall trying to find equity partners. This time last year, I literally went like, 0 for 120 in emails trying to raise equity for something.”
McDonald said institutional investors have shown more interest lately in investing in common equity, but “big guys, with lots of money” are “literally saying they’re going to do one deal” in the entire West Coast or nationally to test the waters.
Gino Canori, president and CEO of Related California, echoed McDonald’s complaint. He said Related California, with $60 billion in assets, has never had a problem financing projects. Today, however, they can’t find a partner “on deals that are complete lay-ups.” He said investors are still coming out of the pandemic cycle, in which they lost money on their development bets.
“[Investors] don’t want to be in the equity position just yet, because the perceived risk of potentially having to build at a million dollars a door doesn’t fit into their program right now,” Canori said. “There’s still not a lot of equity out there for multifamily housing, even though the demand drivers in San Francisco are excellent and going to continue to continue to be excellent for the next four or five years.”
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