SAN FRANCISCO—As more and more ultra swank, tech-friendly high rises come online, will owners of older buildings be able to compete for high-end tenants?
This article first appeared in the June 2015 issue of SF Apartment Magazine
When the hot water heater in his Mission District Victorian apartment broke on a Thursday, four days later Zain Memon still had to choose between cold showers and a visit to his local climbing gym to get cleaned up. It wasn’t a big concern, except for guests, according to Memon, who recently moved into the four-bedroom flat with a friend.
The millennial engineer said he preferred the occasional inconveniences of an old building to the sameness of the thousands of pristine high-rise units coming online in the city. “In my building we have to deal with wiring issues, but it’s so worth it to not live in a place that’s cookie-cutter like everyone else,” he said. More important than amenities, he explained, is the proximity to a favorite climbing gym and a flexible landlord who changed the lease to allow his three-legged dog, Roux.
These priorities may not be shared, however, by a legion of young, well-paid renters drawn to the long menu of amenities offered by some of the newest, swankiest units in the city. Developers are adding tens of thousands of new units to the city’s inventory in the next few years. While the influx isn’t expected to quench the overall rental demand, the owners of some older high-priced units are reporting tenant turnover in the highest pricing levels.
Diversions and Conveniences
“The tenants looking for apartments now are younger and more focused on their careers and simplicity than living in a Victorian unit,” said Eric Andresen of West Coast Property Management, which handles almost 2,500 (mostly older) units in San Francisco. “Most of them just want the conveniences. They don’t care how big the kitchen is. That Victorian San Francisco charm is not high on their list. They want the Google bus stop down the street.”
To cater to these convenience-oriented tenants, these new developments are offering a whole line of new-generation amenities: doggy spas, indoor climbing walls, communal barbecue pits, secure valet parking and a downstairs Whole Foods that delivers from online orders.
“Nothing says ‘Welcome Home’ best like two 24/7 staffed lobbies that bring Zen tranquility together with mission control capabilities,” according to the Crescent Heights’ NEMA website, which depicts a rich menu of amenities for tenants in the buildings that rise 10 to 37 floors in San Francisco’s SOMA and mid-Market districts. Both NEMA building lobbies are equipped with smart elevators, digital device charging stations, digital touch screen messaging boards and Wi-Fi coverage. Other amenities include a 7,000-square-foot fitness center, a 1,500-square-foot “Energy Solarium” to practice yoga, three terraces and a club. A “Resident Portal” lets tenants know when groceries have arrived and laundry is done. It also lets them reserve a carshare, pay rent and request in-home service.
These types of high rises are the go-to rentals for tech millennials who crave convenience and lifestyle, said Blake Pierson, chief product officer for RentPath, which bought his company, Lovely, last year.
Tenants are definitely interested in more amenities, said Brooks Baskin of 2B Living. Baskin just helped renovate a nine-unit property on Minna Street in the Mission. The owner added a bike room, improved the outdoor communal space, and added a data room complete with multiple cable provider hook-ups.
“I think owners are starting to make a concerted effort to add amenities to buildings with 5, 10 and 15 units,” he said. “My advice to older building owners is that the market is really hot right now, but, at some point, it will turn and owners should be investing for that time now. There’s a huge demand for older units, but we have to maintain and make the insides modern and nice, and add building features when we can do it.”
Broker James Wavro of J. Wavro Associates agreed: “The first thing they should do is look at their buildings and see—how does it appeal from the curb?” Owners should be maximizing unique features rather than trying to compete directly with a high-rise full of amenities, he advised.
“In my mind, it’s not one thing over another. It’s trying to create the total package,” he said. “A lot of owners fail to truly understand what investing some money in their buildings right now does to them in the long run. Now is the time to improve the building.”
But even if owners do offer improvements, some wonder whether future rent adjustments may be in order. “We’ve already built out with nice granite counter tops, fresh paint and hardwood floors,” Andresen said of the high-end boutique older buildings he manages. “The only way we can adjust [further] is with the market rent.”
Play to Your Strengths
As much as 80% to 90% of the city’s inventory was built before 1940, said Patrick Carlisle, chief market analyst with Paragon Real Estate Group in San Francisco. “Some of the older buildings are the most beautiful buildings built anywhere,” he said. If you have the basics—high-speed internet, cellphone coverage, cable hookups, washer and dryers—other “extras” may not provide that much traction, Carlisle said.
Instead, owners of these older buildings need to showcase what the neighborhood has to offer in terms of character, including a unique coffee shop down the road. “You’re not going to build a rock climbing gym inside your five-unit building, but maybe you’re a block from Duboce Park or some vibrant restaurants,” said RentPath’s Pierson, a self-described millennial who was willing to trade the conveniences of a larger building for the “true kind of real San Francisco experience.”
Prices are driven by supply and demand within particular neighborhoods, Pierson said, and only a few new buildings are cropping up in high-demand neighborhoods. “Avalon Hayes Valley has great amenities and a great location with proximity to nice restaurants and bars as well,” Pierson said of the new development. “It will be interesting to see the impact it has.”
Another marketing strength for older buildings is the relationship with the owner. Tenants are looking for someone who is responsive and personable. “Great tenants are looking for great owners as well,” Pierson said. “The product that they’re renting is not just the unit but the relationship that they have with the manager or owner.”
Growing Out of It
The run on luxury units is not going to last indefinitely, said Carlisle, who predicted market saturation, at least in the high-end of the market, in the next two to three years. “That’s going to make it more competitive,” Carlisle said. “Rents will go down at least in that segment.”
He also predicted that the target millennial tenant would soon outgrow the prevalent communal cocoon-like amenities being offered today. “People grow up and no longer want to get drunk by the barbecue,” Carlisle said. “People grow up and want a gracious living space.”