What’s happening to Bay Area rents, and why?

Depending on who you read, Bay Area rents are either rising, flat, or declining.  And it’s probably all true.

SocketSite, which tracks San Francisco real estate trends, recently headlined “Rents in San Francisco and Oakland Slip Versus 2017”.  The site claims that City rents are 1.3 percent lower year over year, and down 9 percent from their peak in Q4 2015.

On the other hand, the San Jose Mercury-News quotes apartment rental site Zumper as saying that Bay Area rents are soaring, up 15.6 percent for Mountain View apartments.  But the Merc article apparently focuses on “newly-available apartments”, which means new luxury apartments since they’re virtually the only new rentals coming on line in the Bay Area.

On yet the other hand, Zumper’s press release shows San Francisco rents going both up and down, depending on number of bedrooms.  San Jose one bedrooms were 9 percent pricier last October than in October 2016, according to Zumper.

And way back in August 2016, the San Francisco Chronicle ran a story asserting that rents had plateaued, after years of “stratospheric increases”.  “The average rent for all apartment sizes in San Francisco, San Mateo and Marin counties,” said the Chron, “was…down 0.7 percent” in July 2016 compared to July 2015, the “first such decline since April 2010”.

Flat or declining rents, just as rent control becomes a hot political issue.

What’s really happening in the rental marketplace?

I rent two or three places a year, so I’m occasionally in the rental market but not immersed in the rental market.  But I did lots of leasing during my first nine years in real estate, from 1989 to 1998, and I like to think that my antennae are still finely tuned to rental trends.

So let me give you some context.  In January 1994 I suddenly started getting lots of calls for rentals, not only for ones I had, but ones I might have coming up.  I was incredulous.  Overnight I was seeing real demand, overwhelming demand, an abrupt switch from the previous four years, when the end of the Cold War devastated the defense industry, at that time a major factor in Silicon Valley’s economy, and the local housing market with it.  Valley landlords were cutting rents and begging for tenants, even leaving units with marginal appeal vacant.

Now tenants were begging for apartments.  What was happening?  The first stirrings of the dot-com era, as start-ups, flying below the radar of the California Employment Development Department’s employment surveys, began hiring.  It’d be another year before anyone not in the trenches knew that Silicon Valley was coming back, and rents with it.  And, a few years later, home prices as well.

Rental demand is a major, and leading, indicator.

Several boom-and-bust cycles later, people still come to the Bay Area.  But it’s not the torrent it was a few years ago, and it’s offset by people leaving the Bay Area for other, more affordable places, mostly in California.

Who’s coming here?  People with high-paying jobs, for the most part.  People who not only can afford the bells and whistles new apartments offer but who, in fact, demand those bells and whistles.  Hence the strong demand for new apartments, especially in tech centers like Mountain View where money is thick on the ground.

Who’s leaving?  Often it’s people with jobs that pay well but not well enough to get ahead or even survive in the Bay Area, particularly Silicon Valley, where the high cost of living isn’t limited to housing.  They’re the kind of renters I dealt with for years, people who’d take a rental even if it didn’t have the latest and greatest finishes and amenities.  Price-sensitive people who’d sign a lease if the rent was right.

People who apparently are leaving Silicon Valley for Sacramento and San Diego.

I haven’t done a scientific study of this–it’s based partly on what I’ve read and mostly on my impressions of renters over the past few years–but what I think I’m seeing is a great hollowing out of demand for run-of-the-mill rentals, caused by a great hollowing out of the people most willing to rent them, the Valley’s middle and working classes.

Today, more than ever and faster than ever, the rental market is changing, and owners of older units need to keep pace, doing upgrades that go beyond the usual new paint, new carpet and new color in the marketing corridor.  Because today, more than ever, Mom-and-Pop landlords are competing with deep-pocketed big investors for the best renters.

Will Mom and Pop get squeezed out?  It’d be a natural for Silicon Valley, where big fish swallow little fish.  Call it the Amazon-ization of the Valley’s rental industry.

© John Fyten 2018


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