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Rents Have Bounced Again to Prepandemic Ranges in Most Main Cities. San Francisco Isn’t One in all Them.

When Blair Vorsatz started apartment hunting in San Francisco this year after living out of state for more than a decade, the 30-year-old Bay Area native braced himself for sticker shock. His first impression of a 1,900-square-foot, two-bedroom condo at the Ritz-Carlton Residences in downtown San Francisco—listed for rent at $8,000 a month—was that it was too big and more than he wanted to spend, even though it checked off other boxes on his wish list: luxury building, great view and close to his job in the Financial District.

But when the landlord cut the monthly rent to $7,000 a few weeks later, Mr. Vorsatz reconsidered. “All of a sudden, I was like, ‘This is gorgeous,'” he said. He signed a two-year lease and moved into the apartment in May. “I got this for a steal, relative to other places around here,” he said.

Although rental markets in major US cities surged to record highs last year, San Francisco’s recovery has lagged behind. Landlords and brokers cited a confluence of factors, including exorbitant prepandemic rents and the city’s rent-control policies, coupled with a mass exodus of tech workers and others over the past two years. While many restaurants and businesses have reopened and workers are being called back, homelessness and crime are prevalent in pockets of the city.

Blair Vorsatz worked with Leslie Bauer, founder of Highrises2Homes, to find an apartment at the Ritz-Carlton Residences, San Francisco.

Angela DeCenzo for The Wall Street Journal

Of the 100 largest cities nationwide, San Francisco’s rent discounts are the steepest, according to data from home-search website Apartment List. The city’s median rents are down roughly 10% from March 2020, said senior economist Christopher Salviati. “They are trending upward, but at a fairly modest pace relative to the national average,” he said.

In June, the median one-bedroom rent was $2,331, up 7.6% year-over-year, Apartment List data show. But the rent growth was far slower than California’s state average of 13.6% and the national average of roughly 14.2%.

Blair Intent leased a two-year, $7,000-a-month condo at the Ritz-Carlton Residences.

Angela DeCenzo for The Wall Street Journal

One reason for the sluggish recovery is that the city’s rental market was the most expensive in the country prior to Covid, and it took the biggest hit when the pandemic struck. The city’s median rent plunged 26% between March and December 2020, Mr. Salviati said.

He said San Francisco’s rental market experienced a “perfect storm” when a chunk of its tech-heavy workforce left the city to work remotely. “A lot of folks were questioning why they were paying top-dollar, big-city prices,” Mr. Salviati said.

Paul Gaetani, a principal of property management company Gaetani Real Estate, said prepandemic rents were the highest he’d seen in his decades in the business. Gaetani manages 4,200 units in San Francisco, mostly five- to 15-unit buildings. “Enter Covid, when everyone either loses their job or works remotely, and people that were paying high rents, they don’t need to pay these rents anymore,” he said. “They can move and do their job elsewhere in cheaper cities.”

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A park in San Francisco. Between July 2020 and July 2021, the city’s population dropped 6.3%, according to the US Census Bureau.

Alamy Stock Photo

Between July 2020 and July 2021, San Francisco’s population dropped 6.3%, the biggest decline of any other city or town nationwide, according to data from the US Census Bureau. (New York City lost 3.5% of its residents during that time.)

Meanwhile, the city’s apartment vacancy rate shot up to 10.2% in July 2020, compared with 3.9% at the start of the year, according to the property management and analytics software RealPage, which said San Francisco had the highest vacancy rate among large US markets . By comparison, the average vacancy rate nationwide was 4.6% at the start of 2020 and never rose above 4.8%.

Mr. Gaetani said the vacancy rate in his buildings, typically 1% to 2%, ultimately soared to 25%. “There was no one to backfill those units,” he said. “All of 2021 was really, really brutal for landlords in San Francisco.” Many slashed rents.

With the pandemic waning, renters in San Francisco are still resisting paying pre-Covid prices, and landlords’ willingness to negotiate has persisted, tenants and brokers said. In May, the average new lease rent in San Francisco was $3,340 a month, compared with $3,859 a month in January 2020, according to RealPage.

A few months ago, John Micek III, 69, a semi-retired lawyer and entrepreneur, toured about 20 San Francisco apartments with his agent, Tracy Zhou of eXp Realty. One, asking $4,975 a month, was a 900-square-foot one-bedroom in a luxury building off the Embarcadero. Despite exceptional water views from the 27th-floor apartment, he didn’t sign right away.

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John Mikek III.

Cayce Clifford for The Wall Street Journal

“I didn’t need to jump unless I found the perfect place,” said Mr. Micek, who was moving because he sold his house in Silicon Valley’s Menlo Park.

A few weeks later, the landlord called to see if he was still interested. He asked the landlord to rent it furnished, pricey artwork included, and to install an electric-car charging station in the building. The landlord ultimately agreed to split the roughly $4,000 to $5,000 installation cost, he said. He is paying $6,000 a month for the furnished apartment.

Some landlords said their hands are tied by the city’s rent-control ordinance, which limits how much they can raise rents each year in multiunit buildings constructed before 1979. In 2019, California also passed a statewide rent-control law to cap rent increases in buildings that are at least 15 years old.

Renee Voss is a managing partner of Voss Management, which manages around 152 units in six San Francisco buildings. Ms. Voss said she discounted rents in about two dozen units to retain tenants in 2020. “People were telling us, ‘This is what I want to pay or I’m moving,'” she said. She still had a 30% vacancy rate in 2020.

Ms. Voss said rent control is preventing her from reinstating pre-Covid pricing. “Once you lower someone’s rent, there’s no way to say, ‘Covid’s over, we’re taking you back'” to the prior rate, she said.

Not everyone agrees that rent control is to blame for what happens in San Francisco’s real-estate market. Daniel Wayne, a tenants’ rights attorney and partner at law firm Wolford Wayne LLP, said in his opinion, a larger factor is young tech workers now being able to work remotely and pay less for more space. “The main issue is demand and value,” he said.

In San Francisco, homelessness, car break-ins and other crimes have also made headlines.

“It’s a problem, and there are various parts of San Francisco that, honestly, I didn’t want to look at,” Mr. Micek said. The first time he took his girlfriend to see the apartment he ended up renting, there was a sideshow—where drivers illegally block traffic to perform stunts with their cars—at the end of the block. He said it gave him a pause, and it convinced him not to buy in San Francisco right now. Still, he feels that the neighborhood around his building is safe. “So far, it’s been fantastic,” he said.

Whatever the cause, lower rents have been a boon for tenants.

Alex Darden, 24, an investment associate, snagged a rent-controlled studio apartment when he moved to San Francisco in October 2020. The apartment, in the Financial District, had been asking $2,700 a month before Covid. He signed a one-year lease for just over $1,700, he said. “San Francisco is very expensive, so when I was looking around and I saw some of the prices in areas I wanted to move to, I was kind of like, ‘I need to hop on it now,’” he said. In October 2021, Mr Darden’s monthly rent increased by $12.

San Francisco’s newest luxury buildings, which aren’t covered by rent-control laws and typically draw young, well-paid workers, were hit particularly hard during Covid and are still playing catch-up, real-estate agents said.

Covid caused high-rise living to become less desirable overnight, as did paying a premium to live near the Financial District, according to Denise Paulson of Compass. “Nobody wanted to ride elevators. People were washing their groceries, remember?” she said. “They didn’t want to get in an elevator with anybody—even with two masks on.”

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To drive lease activity, a number of large buildings are still offering incentives.

Fifteen Fifty, a 550-unit building that started leasing in February 2020, was recently advertising up to two months free, plus eight months of free membership at the fitness club Equinox, on select apartments. At 1177 Market at Trinity Place, tenants recently got a month free plus flexible move-in dates, and NEMA San Francisco offered up to seven weeks free. The George, a 302-unit building in the SoMa neighborhood that started leasing in March, is currently offering two months of free rent on all units plus a $2,000 rent credit on two-bedroom apartments. In late June, developer Brookfield Properties said the building was 52% leased.

Fifteen Fifty developer Related Cos. has scaled back incentives since 2020, when it offered concessions for almost every deal it closed, according to Justina Shutler, a vice president at Related. Now the developer is offering concessions on select units to get Fifteen Fifty “to the finish line,” she said. Occupancy is currently around 90%.

Fifteen Fifty—where prices start at $3,350 for a studio and there is a $19,500 penthouse—has amenities such as a dog run, rooftop pool deck, screening room and sports lounge. During lockdown, the developer offered online workout classes and free cooking classes, with meal kits delivered to people’s doors. “In a time where there weren’t services outside of your home, that was impactful,” Ms. Shutler said.

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The George started leasing in March. It recently advertised two months of free rent plus a $2,000 rent credit on select.

Brookfield Properties

The George has a library, co-working space and rooftop lounge.

Brookfield Properties

Rob Chua, a 34-year-old nonprofit and public affairs consultant, said he was drawn to amenities at the George, but the hefty discount for a one-bedroom was a “huge factor” in his decision to rent. Previously, he was living with his parents elsewhere in the Bay Area and saving money to buy a place. Instead, he moved in to the George in May. The building has various amenities, including a gym, library, co-working space and rooftop lounge. Mr. Chua’s base monthly rent is $3,600, but it works out to $2,800 after concessions. He said he’s likely to re-evaluate his situation next year. “For the time being, it’s great,” he said.

In late May and early June, brokers and landlords said they noticed an uptick in the rental market as more people returned to the office. Alphabet’s Google has a hybrid work model, with employees returning to the US office a few days a week starting in April. In June, Elon Musk said Tesla Inc. and SpaceX employees must spend at least 40 hours a week in the office.

Mr Gaetani said his portfolio is still 6% vacant, three times a typical rate, but far from the 25% vacancy rate during 2021. Rents, however, are still down by 10% to 15%.

As in other cities, San Francisco tenants have reconsidered factors like outdoor space, layout and building size, brokers said, signaling a longer-term shift in how people want to live.

“People want buildings that are smaller with outdoor space, so they’re not landlocked in their apartment in the sky,” said Patrick Barber, a landlord and a regional president of Compass in California.

Until recently, Ms. Voss had a one-bedroom apartment in Russian Hill, asking around $4,000, that had been vacant for about four months. In mid-June, she found a tenant—bringing her portfolio to 100% occupied. Although demand is higher, she said, “residents are much more picky now than they used to be. They want more for less.”

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