Has The Rental Market bottomed?

 SFGate reports that San Francisco rents may have finally hit bottom.  The rental market may be reflecting the action in the recent Game Stop trading.  Never try to catch a falling knife in stock trading, which begs the question, what does one apply to property rentals?  Apartment List shows that rents fell just .4%, while Zumper is reporting prices actually rose .8%.  After monumental declines of 25% and 27%, depending on which service you wish to follow, even a minimal loss or gain is noteworthy.

It questions the point of who will be the parties renting?  The techies have departed from the Bay Area to parts unknown, whether it be to Hawaii or parts east of the Bay Area or even out of state.  After the rise in unemployment benefits, checks from the US treasury, matched with renter relief from the State of California, the poor souls who lost their homes or apartments to soaring rents replaced by Techies coming to Facebook, Google, Yelp and the like, have the opportunity to come back home.  That could be an easy way for Governor Newsom to get relief from one thorn in his side, that being Affordable Housing.  Newsom has his share of problems that do not seem to diminish.  Oracle has departed with Charles Schwab and HP to Texas.  Oracle has put up for sale the entire Redwood Shores complex.  Yelp has now put up for lease its building at 140 New Montgomery.  I do not think that will distract you from imagining the impact on the rental market.

As for Rent Relief, California aims to pay off 80% of most unpaid rent, as long as the landlord forgives the other 20%.  The state will need more taxes to pay off this benefit.  It is not hard to imagine why the corporations are leaving.  Having a new administration telegraphing higher corporate taxes is enough without higher state taxes to boot.

While residential rents are starting to look like they are on hold, the commercial market is on the ropes!  The upscale boutique hotel Park James in Menlo Park is now in default.  Park James is not any better or worse off than most of the commercial markets in the United States.  The members of Reddit, who lit the fire under the Game Stop rocket, had promoted short covering in some of the Commercial REITS.  As an example, Tanger Factory Outlets has a short interest ratio of 52.41%.  If no one is going to shopping centers, how are the owners paying dividends and making loan payments?  Sounds like the investment professionals have a good target to profit by; or at least until the US Government and State of California try to bail them out too!

Silicon Valley’s grip on venture capital seems to be slipping.  This year, predictive analysts at the private equity research firm PitchBook, say venture capital will drop below 20% for the first time in their dataset, which stretches back to 2006.  The immediate culprit is the pandemic, says PitchBook analyst Kyle Stanford. Lockdown orders have allowed investors and tech workers to flee the Bay Area’s pricey homes in favor of other cities where they can work remotely at a lower rent and or lower purchase prices. The shift is demonstrating that startups and venture capitalists can cut deals even when they do not meet face-to-face, removing one of the rationales for piling into Silicon Valley’s overpriced real estate market in the first place.  LinkedIn data suggests smaller cities have been the biggest beneficiaries of this redistribution of the US tech scene during the pandemic. The professional networking site collected location data from the profiles of American tech workers to find out which cities got the biggest windfall of workers in 2020. The winners were midsize cities like Madison, Wisconsin, Cleveland, Ohio, and Sacramento, California.

Zillow, as per my last missive, had predicted a 10-11% increase in Silicon Valley residential real estate for 2021.  So far, all I see is those forecasts are slowly coming down to the 9-10% level.  Not to say that is bad.  As we go into 2021, the economy and the strength of Silicon Valley will come from its industry.  With its industry moving to Texas and other states of low to no income tax, it makes it hard for me to imagine an increase in prices.  In fact, as I discuss this situation with title company personnel, I receive information that business being good by home prices not improving and areas of sporadic multiple offers are only in Palo Alto and San Carlos.  The growth that Zillow is now predicting is on a national level.  Which, to me, is quite reasonable.  As people move to less costly locales, home prices increase.  To the locales they leave, home prices remain the same, at best! The cost of living in California or the Bay Area is now stable but only due to low interest rates, should interest rates increase by 1% and home buying power reduced by 12%.  So far, the 10-year government rate hovers around 1.1%.  Now we get to the real long-term issue: higher interest rates.  As the State and Federal Governments raise taxes and raise debt, the result is to create demand for money and with that, higher interest rates.

Does that mean a CRASH?  Interest rates do not historically move like Game Stop!  It is a slow, gradual increase and decrease with a trend up, like boiling a frog alive.  It takes time for the water to heat to a boil and the frog becomes "frog's legs".  Many Silicon Valley residents are calling for a housing bubble and crash.  Not possible now.  If that is the thought then forget about having a job.  What is more probable is that housing prices remain static.  No increases or decreases.  Just flat for years. Then the owners of residential real estate could prosper from mortgage amortization!  As mortgage payments are made, the balance on the mortgage decreases and so the equity increases.  No concerns of “should we sell?” More so, buy, as the investment you have in your property increases through the gradual payment of mortgages and the gradual increase in equity value.