“California landlords complain of less demand for rentals.”

I’ll bet that got your attention.  Sorry folks.  That headline is probably older than you are.  But it can happen again.  In fact, it almost certainly will.

One of the many advantages of cleaning out your files every thirty years or so is that you unearth gems like an article written in 1991 by then-real-estate-columnist-now-Internet-mogul Brad Inman.  The country was in recession, and instead of creating new households, people were doubling up–sound familiar?  “Housing is the largest expenditure, and people are figuring out a way to control or finesse that cost”–sound familiar?

A decline in the 25-34 age group–the relatively small Gen X–and huge growth in the 35-54 age group–“entitled boomers”–was also depressing rental demand back then.  Entering their peak earning years, boomers were far more likely to buy than rent.  Although home prices were declining in 1991, and didn’t start to recover from the 1989 crash until 1994.

I was there, folks.  It was the best of times, and it was the worst of times.  Homeowners who couldn’t sell turned their homes into rentals, great if you were in property management as I was then, but a soft economy and an over-supply of rentals meant that rents were flat or even declining.  Example:  in the early ’90s the 468-unit apartment complex I worked at in Cupertino, next door to an upstart company called Apple, didn’t bother to renovate the older units it had next to 280, because no one would rent them.  Yes, they offered the Cupertino schools parents kill for these days.  Yes, they were walking distance to Apple HQ.  And no one wanted them.

Spring of 1994 was the turning point.  All of a sudden apartments that got a “meh” response just months before were renting as fast as I could get them ready.  Silicon Valley had turned the corner.  I knew this, well before it showed up in the California Employment Development Department’s surveys, because it was the start-ups, flying well below the radar, that were hiring, not the big employers the EDD surveyed.

My point here, if any, is that 1) what we’ve seen happen to the rental market over the past four years won’t go on forever, and 2) I must be really old.  In fact, a survey by the County of San Mateo shows that rents rose a paltry 2 to 4 percent last year, and I’ll bet that’s due mostly if not entirely to new luxury apartments–is there any other kind of new apartments?–coming on line.  I leased three rentals last year, all of them leased the year before, and my experience suggests that rents for anything without “lavish use of granite” are essentially flat.

Of course, that’s small consolation when San Mateo County rents have gone up almost 40 percent in four years.  It would take a disaster–anyone up for a trade war?–to get rents back down to where they were before the boom.

But it’s something to bear in mind, in this era of “build big” and talk of rent control, just as the rental market begins to shift.  We need more affordable housing, but the nature of real estate cycles and the length of time it takes to build here means more housing may finally reach the market just as demand softens and even declines.

The trajectory of rents and housing demand isn’t a straight line up, not even in Silicon Valley.  Rents declined after the dot-com era went bust, and didn’t recover their 2000 levels until 2012.  Landlords don’t always hold the upper hand.

copyright © John Fyten 2017



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