Tuesday, May 12, 2015

Rents set to skyrocket this summer in the Sacramento region.

Do you rent an apartment or home in Sacramento? Well get ready, because what you pay every month is about to rise like the thermostat this summer. The capital city of California is set for a massive, across-the-board rent increase in the last two quarters of 2015 and beyond. This isn’t just a matter of speculation, nor is it a function of individual landlords acting out of greed or whim – there are a handful factors in play that will absolutely force our rents to the highest points they’ve ever been.

The good news is that real estate prices are still reasonable, interest rates good, and new bank programs are making it easier to buy a home once again. So if you’ve been renting, it may be time to finally take the first step toward owning your own home. If not, you’ll likely be paying way more in rent.

The data on rising rents:

The average U.S. rent has climbed an astounding 14% since 2010, according to Reis Inc., a property-tracking firm.

To put it in perspective, that increase is four percentage points higher than the rise in inflation and twice the increase in U.S. home prices. In the past, renters counted on spending about 25% or less of their income on rent, but now that number is usually 30% or more.

Rents are rising fast across the country in 2014 and now 2015 in metropolitan areas like Denver (+10.2% in one year), Portland (+7.2%), and Austin (+7%). But rents are increasing the most in California cities like San Francisco, who’s already-pricey cost for rental property rose by 14.9% over this last year, Oakland, where rent went up by 12.1%, and now, Sacramento.

In 2015, rents are expected to rise somewhere between 3.4% and 5.7% nationally, most of those increases coming during the summer or fall. New renters will pay the most, while rent renewals will get a slight break with a smaller increase.

Sacramento rents will rise even faster than the national average.

Sacramento rents are expected to increase at a much higher rate than the U.S. average, piggybacking on the 2014 increase of 5.4%, which ranked it #10 on the list of all cities in America.  It’s not out of the realm of possibility to see average rents to increase by 5% -10% or more through the summer and fall of 2015 and the winter and spring of 2016.

There is a big price break between apartments and single-family residences, but the numbers play out across the board. The average rent for an apartment is right around $1,087.

And when you factor in single-family homes, the average rent for a Sacramentian is $1,397 as of the first quarter of 2015. If you include the entire Sacramento metropolitan area, including communities like Rocklin, Roseville, Elk Grove, Folsom, etc., then the average rent is $1,653.

So if with a 5%-10% increase by this time next year, those rents will jump to $1,141-$1,195, respectively, for apartments.

For single-family homes, that same rental appreciation will yield $1,466 - $1,536 average rents in Sacramento proper.

In the greater Sacramento metropolitan area, single-family homes will rent for an average of $1,735 - $1,818.

That’s great news for landlords (who will collect more rental income), homeowners (who don’t have to pay rent and will benefit from appreciation), and new home buyers (who will get in the market at the perfect time.) But for those who rent an apartment or home, the financial burden of having a place to hang their hat will become more significant than ever.

What’s causing upward pressure on rents?

Homeownership is at the lowest level since the early 1990s.
Since the Great recession and financial crash, home ownership rates have settled at 19-year lows of only 64.4%.  People are reluctant to buy again and get burned, have trouble saving down payments, and Millennials are opting to rent at record numbers. Less homeowners mean more people are renting, increasing competition and demand.

Less people have roommates or are living at home.
During the recession, hard times caused a lot of people to move back home to live with their parents, combine households, or take on roommates to help pay the rent. As of 2012, 42% of U.S. adults were living with roommates or family, up from 27.4% in 2006. As the economy has rebounded, those numbers are normalized, which means more people who want to rent their own place.

Positive employment numbers.
Recent job numbers have been strong, with about 2.8 million more Americans now working compared to only a year ago. More employment means higher incomes and more renters.

Sacramento’s paltry new construction numbers.
In other areas of the country, new housing starts have regenerated to pre-Recession numbers. But in Sacramento, new construction has been near nonexistent. In fact, almost no new apartment projects have been built in Sacramento since the last big wave of construction in the early and mid 2000s. Back then, developers built around 2,000-4,0000 new apartment units in Sacramento every year. But at the low point, in 2010, only 123 new units were built. There are currently about 1,500 units being built but that still doesn’t make up for years of almost no new housing, and many developers are opting for high-end condos now instead of standard apartments. As there are more and more people living in the area, demand has exploded but supply is stagnant.

 Vacancy rates have fallen.
Vacancy rates in the greater Sacramento region have reached record lows of 3.8%, all the way from a high point of 6.7% in 2012. 3.8% is the lowest vacancy rate in 25 years of tracking the statistic, and gives huge leverage to landlords and apartment owners to raise rent and take the best possible tenants.

Bigger water and energy bills.
Many landlords and apartment owners are paying higher property tax rates as their appreciation increases, and have higher energy and water bills, which are expected to possibly double over the next year or two. Rents will increase in anticipation of those rising costs.

Institutional investors are squeezing their rental portfolios.
This is one of the biggest factors why rents are set to explode in the Sacramento region. For years, the area was considered a bargain for big money investors from other parts of California, who scooped up apartment buildings, commercial centers, and blocks of foreclosed single-family homes. Now, they are shifting strategies from acquisition to milking those investments for performance, i.e. raising rents to make a large profit. That will have a profound effect on the rent levels in the area in the summer and fall of 2015.