After a three-year exile to the East Coast, I came back toSan Francisco. What struck me more than the cold August fog was the vertiginous rise in rents. Small studios in crack addict-ridden parts of SOMA (South Of Market) typically go for $3,000 a month. If you are lucky enough to get it, that is. Tales of bidding wars for short-term rentals abound.
With a sense of ill-conceived pride, my San Franciscan friends confirmed that downtown San Francisco was now a more expansive place to live thanManhattan. For years,New York Citywas the only city that San Franciscans could not dismiss as a backward place for Fox TV-watching rednecks. Manhattanites could boast higher rents, more organic markets and trendier cafes.
How did San Francisco beat New York at its own game? A renting bubble is hard to understand. Housing bubbles arise when dumb bankers are willing to issue six-figure mortgages without asking questions and make home equity loans at inflated rates. In a renting bubble, however, renters still need to come up with the cash every month.
To explain the rise in rents, my friends pointed to the influx of start-ups in the Bay Area, from Zynga (ZNGA) toFacebook(FB) and LinkedIn (LNKD). I remained skeptical. Sure, start-up engineers make very good money these days, but there are not enough of them to justify a city-wide bubble of these proportions. Sure, a few made it big during the Facebook IPO, but the stock now looks more like the Titanic than likeGoogle(GOOG) and most of its float is locked in the hands of its founders and early investors.
My understanding is that these brand new condos are mostly-populated by 20-something college grads occupying entry-level positions in the traditional economy like marketing, sales or education. How can they come up with $36,000 in annual rent, not mentioning student loan payments and $10 a day for lattes and Jamba Juice?