Bay Area Rental Market: A Slowing Trend
Would you believe that rental prices have flattened and are lowering in some areas? If you ask ten people almost all of them will say, “The rental market is hot,” but if you are looking for a rental or have one to lease, you may have a different perspective.
This is not something I expected to see this year – with the strong bay area job market and confidence flying high with all-time peaks in the stock market. I expected the rental market to continue a strong run at least through 2016.
I have a unique vantage point to the rental market since I help many clients purchase investment properties in our area and assist in renting them. Because of this, I’m privy to a large data set in terms of pricing, demand and trends across multiple communities and price ranges. This is data most real estate professionals do no track or have visibility, so it gives an edge to my clients.
So What Gives?
Some may say it is just the time of year: school is back in session, so everyone planning to move has done it. But schools are not the only driving factor of rentals and quite frankly I see plenty of homes being considered by childless families. I have witnessed a slowing trend all year; the first sign was in late April. Historically this is when the rental market is picking up: you prepare the property to move-in ready condition, list it for rent (at a fair market price) and then have ten applications within 48 hours. This is how it is in the valley, right? To my surprise people only trickled in to see this particular property and just didn’t have the urgency to make a move. At first, maybe this property was an anomaly – the current tenant pool didn’t want a newer property that was walkable to Caltrain and Downtown Mountain View. But then I began seeing it on subsequent properties for lease: condos, single family homes, apartments – across price ranges from $1,200 – $12,000/month. I quickly communicated this observation to my clients in order to make the appropriate adjustments.
To Landlords and Those Interested in Investment Properties:
I am not advocating being in a crumbling rental market, but I am telling a cautionary tale to Landlords who may be over-exuberant on their projected lease rates or those of my clients considering buying an investment property. When the rental market is plateauing you do not want to continue the annual rental increase, unless you are significantly under-market. If your tenants begin shopping around they may recognize comparable values and may either look to move or ask for a number of improvements. If you are keeping up with your market and have a reasonable rate, all should stay calm.
For those interested in an investment property, keep this in mind: Rental rates have been on a hot streak just like home prices, but when rental values swing, it can significantly impact your monthly cash flow. Rental rates increased through 2015, but the data I am seeing this year won’t be aggregated until next year. Therefore, we should be conservative on the rental analysis and even anticipate a drop when considering an investment purchase. If my observations are across the board (and I think it is), next year figures will show this change to the market.
So where’s the data?
I have given you an anecdotal story of the rental market, but where is my data to support it? Our rental market is quite different from other parts of the country whereas we do not have a good repository of historical data. In other areas the rental properties are managed similar to resales and the real estate professionals assist landlords in placing tenants, so the inventory data is tracked more accurately.
Finding rentals in the valley usually include: a sign in front of the home, Craigslist, Zillow, property management company, a friend, etc. – there are a number of sources to find a property, but once they are leased there is no source to maintain the lease terms for reference. You might think that Zillow has this information because they give you an estimated value on rent for any given property, but this data is not accurate. I know this because they do not have a good source of information – junk in, junk out. I think the data integrity on Zillow is lacking since there is no check and balance. For example, the real estate Multiple Listing Service (MLS) requires each member to participate in sharing accurate transaction data within a certain amount of time (72 hours) or fines will be incurred. The data can be verified through county records as well as the members themselves. Nothing similar exists on Zillow. Since the MLS is not a main source for finding rental properties, there is no single source to aggregate the information. Fortunately, I keep a close eye on the rental market as I think it is a key indicator to the overall health of our economy. I am always happy to have a discussion with you of what I’m seeing day to day.
Why is the rental market slowing?
I think there are a number of contributing factors impacting the market with varying degrees of significance:
Homeowners have listed their homes for sale and have not obtained an acceptable price to sell (comparing values to 2015, which seems to be the peak). A Seller wants to sell equal or greater to their neighbor that sold last May, but when they list their home and the offers do not come in as anticipated, they decide to pull the home from selling and decide to rent it out (I am interested to see how long they keep the home in the rental pool, i.e. 6 months, 1, 2, 3 years or indefinitely). This increases the inventory to the rental pool.
Migration in Silicon Valley
We are seeing a shift in migration – for the first time since 2011, we had a net loss of new residents (we lost more residents than we gained). I recognized this trend earlier this year as I noticed a shift to our aggressive rental market and as I asked around other industry leaders I heard the same thing. The Silicon Valley Competitiveness and Innovation Project is a great resource to this information, though it is delayed. The day-to-day data I collect offers my clients the timeliest information, so we can make adjustments and calculated decisions. Fewer people moving in means less demand and as we see increased inventory (new homes in the rental pool) the vacancy rate will increase.
Moving is never fun and there is a cost associated with it. Individuals are focused on day-to-day life and with a perception that the rental market is crazy hot, they are less likely to move. A good amount of activity is individuals leap-frogging around properties, but when prices reach a certain point, people just hold their current rental home and deal with any inconveniences it may have (size, condition, location, etc.). Once the rental prices come down these people will be more likely to move into a better situation. I am also seeing more housemate situations to ease the burden of high prices. This phenomenon decreases the number of home units being rented.
There has always been a demand for short-term rentals: new to the area, in the process of buying/selling a house, remodeling your existing home. These tenants are usually very motivated and want to get in as soon as possible, but I haven’t seen many of these prospective tenants this year. Did they disappear? I think they moved into short-term Airbnb rentals or equivalent. I noticed this when a number of my clients that were new to the area told me they were temporarily renting an Airbnb home while we shopped for a property to purchase. I did not hear this in 2015, hence why I think it is a new thing (and a good idea at that). It is not clear the amount of impact, but I expect to hear more people following suit with this creative solution.
It is important to watch what happens to the rental market because it is an indicator to home sales. When rent values reach a state of critical mass, prospective tenants consider buying rather than renting. In the current climate with ridiculously low interest rates and a calming market, you may have a recipe for more tenants moving into home-ownership (or at least keeping their options more flexible) within the next twelve to twenty-four months. You want to be cautiously optimistic in your real estate plans – figure out what is best for your financial plan and be prepared to execute. Whether you are thinking about something now or down the road, I want you to be prepared as possible.