California Rental Markets Reign Supreme

Rents continue to rise in every market across the US.  The fall survey recently completed by real Answers concludes that the rental market hasn’t lost any momentum in the third quarter of 2014. The California markets outperform all others including the West, Midwest, Southwest and Southeast.   It consistently produces the highest face rents and year over year growth.

The highest rents achieved today are in the San Jose MSA where the average rent is $2,369/mo.  A close second is the San Francisco MSA at $2,285/mo.  Holding the number three spot with an average rent that is already $500.00 less than San Jose is the Los Angeles MSA (which also includes Orange County) at $1,857. Other strong markets in California such as San Diego, Santa Rosa and Oxnard are about $200-300 less than Los Angeles ranging from $1,579/mo. to $1,683/mo.  Outside of California the highest rents are about $1,000/mo. below San Jose, like Miami, Florida at $1,399/mo.  The best bargain markets in the real Answers database are Greensboro-High Point, NC at $572/mo. ($1,797/mo. lower than San Jose); Tucson, AZ at $666/mo.; Tulsa, OK at $670/mo.; Oklahoma City, OK at $712/mo., Indianapolis, IN $747/mo. and Las Vegas, NV at $791/mo.  Great bargains are easier to find further away from an ocean or mountain.

The California MSAs also outperform all others in terms of rent growth.  Only one other market (Denver) makes its way into the top five.  Santa Rosa shows annual growth at 11.7% from $1,414/mo. to $1,579/mo. followed by San Francisco at 11.5% from $2,050/mo. to $2,285/mo.  Denver comes in at number three at 11.2% from $1,092/mo. to $1,214/mo. San Jose’s rents grew by 10.5% from $2,143/mo. to $2,369/mo.  Vallejo-Fairfield rounds out the annual growth top five at 8.7% from $1,185/mo. to $1,288/mo.

With rents reaching record highs in California along with a few others outside California, referred to by investors as “sexy markets”  that include Seattle and Denver, it’s easy to become callus in our job doing research and overlook everything else.   In most of the country, rents are under $1,000/mo. on average and annual rent growth is between 4-6%.   But the truth is that every market is benefiting from the economic recovery and the progress over the past several years is truly remarkable.   Let’s take a moment here to recognize some of the unsung heroes.  How about a shout out to Atlanta with yr. over yr. rent growth at 7.7%, from $937/mo to $1,009/mo.; and Houston at 5.8% from $880/mo. to $931/mo.  All is well in Miami, up 5.2% from $1,330/mo. to $1,399/mo.  Boise, ID has finally awakened from a long slumber up 4.6% from $784/mo. to $820/mo. And the Phoenix has once again risen from her ashes at 4.9% annual growth from $777/mo. to $815/mo.

While rates keep climbing, renters are worried.  Each year, more of their paycheck is going towards rent.  The rule of thumb is no more than thirty percent of income should be spent on housing but residents of San Francisco would argue it’s often the reverse.  Renters can easily pay upwards of 70% of their income on housing–even with a roommate.  They are hoping this runaway train will stop.

We say it’s not over yet.   Rents won’t begin to ease until occupancy rates start to decline.  In the third quarter, real Answers showed the current rent increases came with no impact to occupancy rates.  Occupancy rates barely budged in supply rich markets like Seattle, currently at 94.30%, down less than one percentage from 95.2% and that is only because so many new complexes are in lease up.  Same store occupancy remains unchanged.

As long as the economy is expanding and until we can fix the short fall in the supply chain, rents will keep growing.  Future rent growth will be strongest in the markets that have yet to enjoy the full benefits of the “echo effect” from the primary driver markets like San Francisco.  Echo markets of the San Francisco MSA are the San Francisco East Bay, Solano County, Napa, Sonoma, Sacramento and the Central Valley.

The markets to watch are in Southern California.  It’s a huge market, three times that of the San Francisco Bay.  The Los Angeles MSA always lags behind San Francisco by five to seven years, sometimes even longer.  If we believe that history repeats itself then Los Angeles  will grow to surpass San Francisco just about the time when the Bay Area rents come off their peak— like it did in 2004 when the average rents were higher in the Los Angeles  MSA all the way through 2010.

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