Another Surge in Rent Growth – No End in Sight

It’s the middle of summer and we’ve somehow managed to cultivate another massive surge in rent growth for the quarter. Landlords are grabbing all they can, lining their coffers in preparation for leaner times that never come. We’ve all learned from past experience the tides are bound to change, they always do, but the question is, when? This gravy train keeps rolling along. No large bubbles drifting along the horizon yet, but there are plenty of exasperated renters.

Here in the second quarter of 2015 the national average rent has grown nearly 8% from last June and increased $38.00/mo. to $1,225.00/mo. over the past quarter. Of the 38 MSAs published by real Answers, all 38 showed an increase in monthly rent. One third posted quarterly gains of 4% or greater.

The top growth markets in the current quarter are not a surprise to us; they reflect the same trend as past quarters, the most aggressive rent growth concentrated in the Western Region; it’s hub, California.

Tech heavy market leader, San Jose is number one for the second consecutive quarter. Its rents grew by $127/mo. from $2,457/mo. to $2,584/mo. The San Francisco-Oakland-Fremont MSA is a close second at $96/mo. from $2,371/mo. to $2,467/mo. Next up is Santa Rosa at $77/mo., from $1,613/mo. to $1,690/mo. In the number four spot this quarter is Portland, up $76/mo., from $1,148/mo. to $1,224/mo. Rounding out the top five is Denver, up $73/mo., from $1,242/mo. to $1,315/mo. Other notable markets this quarter are San Diego, Sacramento, Riverside-San Bernardino and Vallejo, California.

It’s easy to get caught up with the headline grabbing markets of California; to become so jaded that we barely notice what’s happening with other markets, where growth is also uncommonly high. Markets like Phoenix and Las Vegas typically lose tenants to cooler climates in the summer but not so this year. Quarterly revenues are up by 2-3%.

The national occupancy rate in the second quarter of 2015 has perfect symmetry at 95. A 5% vacancy rate is thought to represent the ideal market condition. There are units still available to rent and plenty of wiggle room for landlords to push rents still higher.

Rents have been steadily climbing since the later part of 2010, when the rental market began to work its way out of a two year drought brought on by the 2007 national recession. Rents first started to rise as home owners began to default on “over leveraged” property. Then a renters by choice market developed, comprised mostly of young people and empty nesters desiring an urban lifestyle. Now, four years later, rents are still climbing. The economy is growing and creating new employment opportunities and housing is in short supply. Builders and developers are still winding up their pitching arm to bring new supply to market for both rental and for sale housing.

So, when will the rental market move out of this current growth cycle?

First we need a bubble before we can have a market correction. Watch San Francisco and San Jose. These two areas precipitated the current national growth cycle. Our most recent survey shows growth is still being realized in the city of San Francisco where rents are up by $66/mo. in this quarter alone. The tides will change when San Francisco rents stop growing. Echo markets such as Santa Rosa, Oakland and Los Angeles will continue to grow while secondary markets (Vallejo, Sacramento, Riverside, Portland, Phoenix, Albuquerque, Salt Lake and Las Vegas become oversupplied. Collapsing secondary markets ripple outwards and inwards back towards the core, mix together with one part unforeseen reversal of fortune and we enter into the fourth phase of the cycle where we started this conversation, recession.

West Coast Commercial Real Estate News