Rent control is keeping rents high in San Francisco

A friend owns a three-unit building in San Francisco, occupying the top floor himself. The two tenants underneath have fled. One lost a job and the other kept the job, but decided to lose the California tax rates and mask/shutdown protocols. Both units are now vacant.

I asked how much rents have fallen and he responded with “30 percent.” Why not rent the units out at the current market rate? “If you ever rent to someone in San Francisco,” he replied, “you can never raise their rent more than about 2 percent per year after that. You’re locked it at whatever rate you start with. So I am waiting until the shutdown ends, hoping that market rents will come back closer to what they were when I bought the building.”

(Why not turn the vacant units into AirBnBs? San Francisco limits AirBnB to 90 days per year, requires them to be part of the owner’s residence, requires a variety of registrations and taxes, etc.)

If his experience is typical, there are a lot of landlords withholding supply and therefore the true market rents should actually be lower than what we’ve heard.

32 thoughts on “Rent control is keeping rents high in San Francisco

  1. The other thing I’ve heard is giving several months of free rent on the front end to keep the base rate high. Well functioning system.

  2. It would be interesting to know how this ties to into eviction laws in San Francisco. I’ve talked about the tenancy and eviction statutes in MA before. After going though six months to a year or more of struggle to evict a tenant while maintaining all the utilities and other service obligations (trash/recycling/snow removal), paying for lawyers, paying for Constables, paying for Sheriffs, and paying to store the evicted tenant’s belongings, I know of several people who simply gave up and decided never to to rent their available space again, or renovate it and seek more upscale tenants who have spotlessly clean criminal background checks and credit ratings.

    In MA you are less a “landlord” and “property owner” than you are a “provider of housing” under the law. Once you hand over the keys and sign the lease, the tenant takes “legal possession” of the dwelling with a “right to quiet enjoyment” and the only person who can return legal possession to the property owner and order an eviction is a judge.

    • P.S.: This concern becomes particularly acute for a landlord if a minor child is involved. Housing court judges can be extremely reluctant to order the eviction of a delinquent tenant when there are one or more children involved. In cases that I know of personally, the soon-to-be deadbeat tenant knows this and uses the child as a shield against eviction. Move in, pay three or four months, stop paying rent, and then ride out the rest of the year or more for free while the landlord pays and jumps through the hoops. Once you’ve been on that rollercoaster once, do you don’t want to risk it again, so you decide: “No Children!”

  3. Rent control in SF is also not means-tested. I have read about well-off people who have since moved to Marin County but kept their rent-controlled apartment as a pied-à-terre because of the nominal rent, e.g. when they go to the theater in SF.

    About half the residential units in SF are subject to rent control.

    That said, rent control and the haves-have-nots dichotomy it creates between legacy tenants (the new landed gentry) and price-gouged new entrants is a symptom more than a cause, the root cause being restrictive land-use policies rabidly defended by NIMBYs preserving the value of their holdings under guise of highfalutin’ progressive rhetoric.

    This has implications beyond the local impact. A huge proportion of tech companies’ costs are directly imputable to rent-seeking (heh) by the landlord rentier class.

    • The “root cause” is SF adjusting the rents and permitting the tenants to leave when they want. It is not clear that the city should add more and more housing and further push SF into becoming the third world city that is waiting to come out; there is something to be said for moderation.

    • @Anonymous: San Francisco and LA could do a lot more to help their homeless problems than building monuments to themselves with apartment units that cost $600,000 each and look like hollywood movie sets from the street, and primarily enrich the administrators and builders.

      We could build 100,000 housing units in LA and SanFran instead of 10,000 (almost none of which are occupied) by moving the decimal point. And people would be much better served.

      They don’t want to do anything but enrich themselves. The people on the street are already dead in their minds. Irretrievably broken human beings who can never be redeemed and whose lives only have value when it comes to figuring out who is going to get richer with government money. It’s the world’s worst shame. It’s right here in America. And the rest of the laws not only support it, they amplify it. Which makes perfect sense to them.

      They don’t want to have anything to do with the human wreckage except to enrich themselves from it. That’s what this country has become.

    • @Anonymous: And I’ve said to my friends for at 20 years now that those problems are going to continue to get worse, not better. The Biden Administration under President Harris has a great choice before them: they can decide whether they’ll have another million or so homeless, or 10 or 20 million. My guess is that they’re going to bank on the latter. Government will be their savior! In a way, they don’t have much choice. America was broken to the core when China entered the WTO in 2001 – and most of our intelligentsia, including folks like Robert Reich and Alan Krueger, and the Chamber of Commerce, supported it. Krueger at least had the conscience to kill himself because of it.

      In the meantime, this Administration has done nothing meaningful to improve the strategic situation. The technology is going to continue to take people’s jobs without replacement, and the problem is going to become increasingly intractable. At least the teacher’s unions are sure of their future.

  4. What Phillip is to divorce Toucan is to rent control! Toucan owns several dozen apartment buildings in Rent Controlled Santa Monica. Toucan now has about a 30% vacancy rate and about 25% of tenants are not paying rent due to the eviction moratorium. Our rent control is similar to San Francisco’s and we are allowed a 50% of CPI increase each year. So yes our increases do not keep up with inflation. A normal eviction costs around 100 thousand dollars and always ends up in a jury trial. Legal aid always insist on a 40k payment to avoid the jury trial, we always decline. We get sued by the city’s attorney office often and have a legal bill of approximately 300k per year. We have thought about renting our apartments for 11 months and giving the 12th month free but lawyers tell us this is not legal. So we have lowered prices about 10-15 % but cannot afford to go lower. We will sit and hope the market recovers. Toucan is considering writing his own web blog… Real World Rent Control 🙁

    • This is a case for making some friends in Russian mafia. They can solve problems like that within an hour, for a pretty reasonable fee. Thick accent and violent reputation are usually more than enough. (And, yes, hiring muscle to defend your property rights is quite moral in my book, and screw the “laws” by the plutocrats).

    • Sell the buildings and invest elsewhere if it’s so awful. Or, did you inherit them, barely pay any property tax due to prop 13, and charge a mint for rent because people are willing to pay to live in communist Santa Monica?

    • Senorpablo you are right! The properties were inherited and the taxes are very low due to prop 13, but not as low as you might think only the first million dollars in valuation keeps the original assessment. The buildings were reassessed in the late 90s. The rents are low are also very low so we could not sell them for enough to buy comparable buildings elsewhere. If we are able to evict enough low renters and re rent enough units at market we will sell for sure and probably buy a different type of real estate most likely light industrial in an “opportunity zone”. It is really that awful to be a land lord in Santa Monica!

    • I lived and worked in Santa Monica for a few years. On the bright side, the rental supply was always in high demand. In my experience, whenever a listing opened up, there were almost always 2-3 people waiting outside the very second showing appointments were being taken, filling out applications. Perhaps you need to get better at selecting from the large number of available applicants.

    • Senorpablo, it seems you are victim shaming me. We have no problem getting market based rents when a vacancy comes up. The real problem is we are not good at evicting current tenants. In Santa Monica it is virtually impossible to evict anyone. We have many people paying 500 dollars a month for a 2 bedroom apartment blocks from the beach. These people will never give up these apartments. Many have their own homes elsewhere and use them as secondary homes. In one case we have a tenant using his apartment as a storage facility for his business because his apartment is cheaper than storage!

  5. In SF, the landlord decides the initial rent, the city decides the yearly increases, and the tenant decides if/when to leave.

    So you are absolutely right that many units are kept off the market and also many tenants will never leave because their rent is WAY below market rates, and this also reduces available units (with these legacy renters).

  6. New York City, particularly Manhattan, used to have a lot of shabby places where a person could live cheap. The Bowery was a district in lower Manhattan famous for such lodgings. Now it is full of expensive boutiques offices, restaurants and offices.

  7. Glad they’re suffering for their poor business decisions. Shame they won’t consider the obvious of selling properties they aren’t using productively, but rent-seekers have never cared much about being productive members of society.

    • @Stefan, same can be said about almost anything else, don’t you agree?

      Let’s start with tuition on higher education. Tuitions *is* your killer. No collage graduate today can afford to buy a house due to the tuition debt that they are in and thus they have to rent.

      And if you think landlords are making a killing, you are far from the truth.

  8. No rent control in Florida, but increasing property taxes, HOA, assessments, property insurance, and repairs has limited the ROI on my waterfront rental unit to just 3% per year. 5% annual if I include the (unrealized) market value appreciation of the property. I could squeeze out another 0.5% if I periodically increased the rent, but I’ve had the unit fully occupied for the last five years with the same problem-free tenant. I’ve heard from him only three times in five years.

    My plan was for this spacious, beautiful, well-located waterfront unit to be my future retirement home, but the property taxes increasing at 10% per year are likely going to force me to cash out before I reach retirement.

  9. I own a 3 family investment property here in MA (near the city of Boston). The year-over-year property taxes, water and trash cost keeps on increasing, far exceeds the so called living increase of 2-3%. Compound this by upkeeping the place (and I’m my own handyman) is enough of a reason to demand that rent be increased by at least 5% year-over-year. This year, I got hit hard (had to cut rent by almost 25%) due to COVID-19 (my tenants are collage students).

    The annoying part is, I had tenants and their parents call asking not to pay rent due to COVID-19, but yet those same people were getting government money handout to pay for rent and food but I wasn’t. My bank still want me to pay the full mortgage, keep my insurance.

    And to add salt to the injury, there were some politician advocating to void rent payment, not postpone (Google it if you don’t believe me) without offering any kind of a relive to landlords. Go figure.

    • @George A: And as you undoubtedly know, if you fail to keep up your insurance, your snow removal, trash removal and recycling, outdoor lighting, water supply, septic system maintenance, and the other physical plant required to keep your tenants safe, or any of the other necessities you supply out-of-pocket as a landlord, you can be sued by your tenants, even if they’re not paying a dime of rent. It’s always assumed in this state that property owners are by definition rich people, rolling in they money they’re taking from their poor tenants and hauling it away to the bank in 50 foot trailer trucks while twisting their moustaches all the way. I’m also sure you know just quickly the power distribution companies in MA will switch off your power when you don’t pay the bills. Truck will roll up to my place within 5 days of not paying the bill and pull the meters.

      But those college kids reading their Chomsky all learn you’re some kind of monster while they study how to stick it to The Man.

  10. The evolution of urban housing markets can be explained by contrasting the careers of Fred Trump, and his son Donald. Papa Fred Trump made a fortune building and and renting affordable apartment buildings in unfashionable boroughs like Queens for the middle and working classes. I hear testimonials lauding the quality of Fred Trump as a landlord to this day.

    Donald Trump took his father’s fortune and started catering to the luxury real estate market, particularly in the most fashionable parts of Manhattan. In his later years, Trump became the most succesdful developper of luxury golf courses and country clubs in the world.

    I hesitate to speak to the ultimate causes of the shift in business focus from father to son. But the shift is obvious and emblematic as to how our society has changed.

    Somebody posted something in past comments about the over-production of elites. I think that explains a lot.

    • And Trump and his family have ridden the wave and intend to keep riding the wave. Manipulators par excellence with gold plating and green marble. I keep hoping for open manholes somewhere they can inadvertently step into. But the really sad thing is that everything gets worse from here, even if they do. You want to talk about Rock and Hardplace. That’s where we are. We don’t have any fun choices left.

    • Donald didn’t want to be his father, he wanted to be much bigger than that for a long time, and he’s a sociopathic narcissist. Steve Bannon told him how to win, and Bannon is going to go down hard.

    • The big problem for the Republican Party is that they should be hoping, at this point, that Cy Vance, Jr. puts him in prison! Because nobody wants him to control the Republican Party any longer after being held hostage all this time. And all the Deplorables are going to have to live with their fate, which is: “You’re Screwed! I’m going to go live on my private island!”

    • I remember reading in “The Art of the Deal” how young Donald would be sent along with his father’s agents to go collect rent from problem tenents. The agent instructed him on how to always stand to the side of the door when you knock to avoid the bullets that might come out when the tenent realized who was there.

      That was when Donald decided he would rather rent to higher-class tenents. I guess it worked out for him.

    • @Jimbo: “The Art of the Deal” was another one of his ghostwritten fabrications. Anyone who thinks The Donald got anywhere near anyone who might be shooting guns at him is as deluded they can get.

    • @Mememe: Agreed. I didn’t test him. But a lot of the things he’s said over the past 4 years about important issues for the country including our foreign policy with nuclear-capable rogue states, haven’t been any better than pop psychology diagnoses rendered via hearsay and conjecture, either. So he deserves it.

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