Let’s make a deal: SF’s small landlords confront lost rent and vacancies

“I just made the decision to swallow my expectations and my pride."

It was the summer of 2020 and Mark Henderson, the owner of three six-unit, rent-controlled San Francisco apartment buildings, was scared. Every day it seemed that another tenant was breaking their lease and fleeing the city.

At one point, half his units were empty. Residents who remained were either demanding rent concessions or already paying far below market rates on leases signed up to 20 years ago. At the same time, costs were rising for almost every aspect of his business, from insurance to maintenance. His mortgage payments were getting harder and harder to meet.

“Everything was an unbridled chaos of free fall,” he said. “All the profits of the building were in peril.”

Henderson resisted cutting rents to keep tenants, as under San Francisco’s strict rent control laws, he wouldn’t be able to raise them for as long as the tenant stayed. But Henderson’s leasing agency persuaded him it was time for drastic action.

It “very emphatically” advised him to negotiate lower rates with the market-rate tenants who did want to stay, he said.

Finally, he caved and started negotiating, typically ending up at a number 15 to 20 percent below his previous rents. His numerous vacant units, meanwhile, were renting out at 25 to 30 percent below their pre-pandemic prices.

“I just made the decision to swallow my expectations and my pride and start making deals,” he said. “I quickly realized I wanted to do anything to avoid a vacancy.”

From one angle, Henderson is better off than many small landlords who are stuck with tenants who aren’t paying rent but can’t be evicted.

From another perspective, he might be better off if his units were occupied by non-paying tenants rather than vacant. Then he could qualify for some of the $5.2 billion in rent relief that has been trickling out of state and local coffers since June.

Worst off are the landlords who are dealing with high vacancies and lower market-rate rents, plus tenants who haven’t paid a penny in over a year but are protected by an extended eviction moratorium, now set to end on Sept. 30 in California. (The CDC’s new moratorium for counties with “substantial and high levels of community transmission levels” runs through Oct. 3)

The San Francisco sheriff carried out only five evictions in the latter half of 2020, according to a report from policy site CalMatters.

The nonpayment issues began right away, when many tenants in the hospitality and restaurant industries were laid off in March and April of 2020 and stopped paying their rents just as landlords’ property taxes came due, said Charley Goss of the San Francisco Apartment Association. Over a year later, some residents could owe upwards of $60,000 in back rent, he said.

“We heard a lot of really tough stories from a lot of properties,” Goss said, including some members who couldn’t even evict violent tenants who were threatening other residents for months while the court system was completely shut down.

A June update from the city’s Budget and Legislative Analyst’s Office shows an estimated range of $147.4 million to $355.1 million of unpaid rent owed citywide.

State and local rent relief programs have now begun repaying these debts for those who make less than 80 percent of the area median income, but they require the landlord and tenant to participate together, and that’s often difficult if there are “personal dynamics at play” or simply language or technical barriers, Goss said. The apartment association offers translation and technical assistance to try to get everyone working together.

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“We try to explain that whatever has transpired in the past is one thing, but the debt isn’t good for the landlord or the tenant and there’s federal aid so it’s in everyone’s best interests to access it,” he said.

But even though they’re beginning to collect rents, the high number of vacancies and the considerably lower market rates that owners are getting for their once-prized inventory continue to be bigger issues, Goss said.

“The majority of tenants in San Francisco have been able to pay their rent and have made good faith efforts to do so,” he said. “But the dynamics of what we saw was that anybody paying at the top of the market either had the ability to negotiate a rent reduction or move.”

A city burning

High-value tenancies, Goss argued, have an outsized impact in San Francisco, where owners rely on market-rate tenants to subsidize the very-long-term rent-controlled residents in their buildings.

“People were struggling to make ends meet,” he said. “They wanted to keep their tenants housed in a pandemic, but it was tough. You really rely on the market-rate tenants to sustain the building. It’s what makes rent control work. But when you take out everyone paying market rate, or close to it, you have a building that, long-term, isn’t sustainable.”

The worst period was probably last fall, Goss said, when there were no vaccines yet and the city’s famous skyline was backlit in orange from the raging wildfires all around.

“Basically the world around us in San Francisco was on fire, literally, and the amenities we had were closed,” he said. “What we saw over the next two months was that the bottom just fell out.”

That was true for the residential and the commercial leasing markets, as businesses like nail and hair salons, entertainment venues and spas couldn’t operate for over a year. Even those that could open but relied on a bustling local streetscape to do so were under severe financial strain.

“If nobody’s going to rent a two-bedroom in the Mission during the pandemic, there’s nobody who’s going to rent a bar in the Mission during a pandemic,” said J.J. Panzer, president of the Real Management Company, which manages about 650 units in San Francisco and the East Bay, of which around 40 are commercial units.

Panzer said most of his clients were willing to work out short-term deals with their commercial tenants, who don’t have rent control protections, rather than add to the city’s growing number of vacant storefronts. This often involved “sharing the pain” and charging only 50 percent while stores were closed, as long as they went back to paying full rent when they reopened, he said.

Many were allowed to reopen in June, after 80 percent of the city’s 12-and-over population had received at least one vaccination.

Panzer said that he had 100 vacant units in his management portfolio at the lowest point of the pandemic last winter. That number had dropped to 50 by July, including 20 that are being renovated to attract new tenants. He said more affluent neighborhoods like Noe Valley are among the first to refill as the idea of returning to offices becomes more likely.

Henderson, too, is finally attracting new tenants thanks in part to some renovations he did while the apartments were vacant. With so many of his potential tenants now looking via virtual tours and photographs, he was advised that outdated units would be swiped left.

He is also “cautiously optimistic” that, as the city reopens, the inherent desirability of living in SF is still a good long-term bet.

“Everything is better than last year,” he said. “People live in the city because of restaurants, bars and cool places. Staying at your mom’s ADU out in the suburbs is pretty boring after a while.”

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