The big deal about rising rents in real estate

Values have been rising and so have rents. Across the country we’ve been hearing of rent increases in many cities (including Sacramento). Why does this matter? If you work in real estate, how do you plan to communicate this trend to clients? Let’s talk through some key points. I’d love to hear your take in the comments.

rising rents in sacramento - by greater sacramento area appraisal blog

Things to keep in mind about rising rents:

  1. Low Inventory: Rents are rising in large part due to low inventory. There has been population growth over the past decade, but very few new housing units have been built since the housing “bubble” burst. This essentially means we have a shortage of housing units. Keep in mind this isn’t an easy issue to solve since building a large number of units won’t happen overnight.
  2. Squeezed Savings for Tenants: Wage growth has been more or less stagnant in the Sacramento area at least, which means rent increases are coming directly out of a tenant’s savings account. Remember, if a tenant is saving up to buy a house, it’s going to now take longer to make that happen.
  3. Investors Holding: There are investors enjoying higher rents, and many will hold on to their properties for now instead of selling. Unless an investor is looking to diversify outside of real estate, an investor’s money is probably parked well right where it is. After all, why would an investor trade in great rentals only to buy something else at a much higher price today (and get the same rent)?
  4. Investors Selling: Not everyone is going to hold on to their properties though. There are many investors who purchased at lower prices from 2009 to 2012 especially, and it’s now time for them to cash out. Quite a few investors are actually selling directly to their tenants off MLS (agents, be there to write up the contract and help guide the process).
  5. Old Numbers: When rents rise quickly, sometimes the rents we see published online from a few quarters ago are simply old. Just like with rising values in the resale market, we have to ask whether the rental market has changed since the most recent data was published. Ultimately it’s important to look to a number of sources to get fresh numbers. Here are some suggestions: Craigslist, Hot Pads, Zilpy, Rent-O-Meter, & Zillow.
  6. Not Every Neighborhood: Like any trend, it’s easy to hear “rents are rising” and think that applies everywhere. Let’s remember some rental markets are hotter than others though. Apartment rents are said to have increased 10% last year in Sacramento and are projected to increase by another 10% this year. A similar dynamic is happening with single family units too, though NOT in every neighborhood.

I hope that was helpful.

Rental Event: By the way, I am helping put together a “Show Me The Money” event at SAR about the rental market. On May 18th from 12-1:30pm a property manager will talk through rental trends and give tips to agents for turning tenants into buyers. This is hosted by the Housing Opportunity Committee (which I chair this year).

Questions: What is point #7? Did I miss anything? What source do you use for rental data?

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Comments

  1. says

    Thank you for the article Ryan. It sounds like rents in Sacramento are increasing similar to the Portland, OR area. In our area, builders have focused on high-end rental units in recent years and that has made a shortage of lower priced rental units. Also, in Portland, we just have a shortage of land available to build multi-family. In the short term, this is forcing lower income people to the suburbs and the only way to fix the problem long-term is to change zoning and open up more high density land.

    • says

      Very interesting Gary. It sounds like there are many layers to the issue (isn’t that almost always the case?). This is a big issue to watch in terms of our appraisals too. If market rent is increasing, it could certainly impact value. There are some higher-end rentals in some markets in Sacramento too. Our Midtown/Downtown area has really been emerging over the past decade or so to become a very hip place (sort of like Portland I imagine, but less breweries…..so far). Rents are definitely increasing quickly in this area.

  2. unnamed investor says

    I think the most ignored part of the discussion for Sac rentals is the lack of replacement begin built, even in the face of rising rents. Look at page 4 of the most recent Yardi report, it’s even more pronounced in the March issue, but Sacramento replaces stock at the lower rate for top markets and that is skewed towards higher end rentals. I bet you can’t find a new project with sub $1500 average per door rents.

    So take my favorite asset, the duplex. Rents are $1000-$1300 and no one is building new ones. In the mean time building costs are going up, so problem only gets worse (and is exasperated by CA high permit costs and long development timelines). Essentially this means that the mid to lower end housing has a depleting supply.

    I could go on, but rents will go higher, absent an economic hiccup, because there is a severe supply issue due to Low nominal rents and higher building costs. You see other top markets building at 4x high rates.

    This report in theory is only apartments, but that drives all pricing in the rental market

    • says

      Nail on head. Thank you for your insight. This is exactly why we need to watch rents closely. The inventory problem really isn’t easy to solve. The market is very much ripe for new construction, but there haven’t been any really major subdivisions built in recent years. All the development seems like it is mostly infill or smaller subdivisions.

  3. says

    Great post-Ryan! We are seeing rising rents in North Texas as well. We have low supply,high demand, rising rents, and stagnant to decreasing wage growth. There is new construction to help with the demand, however, most of the new construction seems to be at the higher end. We are not seeing many of the smaller, “starter homes” being built which is also keeping rent demand high. Those that may want to buy are priced out of the market. It is certainly something we are keeping an eye on and not sure what will give.

  4. says

    Solid breakdown, Ryan. I want to add a few data points. Yes, inventory is low, but the real problem is that new construction is late to the game (typical of Sacramento) and it’s not nearly enough activity to catch up with demand. Sacramento’s supply of new units as a share of overall stock was 0.7 percent, ranking last among the top 30 markets. Yes, we have some amazing projects in the pipeline: about 500 housing units will be delivered in the downtown grid next year, and 3,000-5,000 are projected by 2018-2020. But that’s only a few drops in the bucket.

    Point #7. Vacancy at all-time lows. The residential vacancy rate in Sacramento has dropped to a staggering 2.6 percent, which is down from the market’s 2002–12 historical average of 6.2 percent. Apartment building owners and managers tell me that they get 12, 15, 20 applications on a vacant 1 or 2 bedroom apartment, if it’s in good shape with modern upgrades. Apartments with original finishes tend to have more modest rents and take longer to fill.

    Point #8. Exchange Buyers. There are a significant number of investors selling their assets and deferring the capital gains taxes through a 1031 Exchange into another property. Flush with cash and on a very short time frame, some exchange buyers are willing to pay top dollar, just to park their money somewhere. Others are “value add” investors looking for dilapidated properties to fix up and maximize on the healthy rent growth.

    • says

      This is great. Thanks for the stellar stats Patrick. I really appreciate the time you took here to add some value. I know when seeing graphs of building permits in the Sacramento area, the current market pales in comparison to say 2003 to 2005. It’ll be nice to see those units coming in a few years, though it would be even better if we had them now. I appreciate your Point #7 too and I think you are dead-on with that. I’m grateful for your mention of Point #8 too. I definitely did not include that in my comments above, and for that I say point taken. I’m not aware of any way to track 1031 exchange data in our market. If you or someone else knows, I’m open ears. That would be an interesting stat to run. In terms of cash stats, the number of actual cash purchases in the residential sector on MLS is at a fairly normal level right now. About 36% of all sales were cash three years ago, and that number has been hovering closer to 16-17% lately. Granted, some investors can use financing instead of all cash, so pure cash isn’t always the number one indicator to watch (but it does say something).

      Thanks again.

  5. Jane Layton, Realtor says

    Thanks, Ryan. I’ve been thinking about the rental market lately as some current renters have reported to me a tactic landlords are employing to keep them in long-term leases. In single-family homes & apartments alike, landlords dramatically increase the rent if the tenant declines signing another one-year lease ($1,850 to $2,800 for example or double the rent in one case. Wow!). And to Landlords enjoying these high rents I would say, Please use some of the windfall to keep your asset well maintained – that’s part of a great exit strategy because when those Tenants become Buyers, they prefer homes in good condition.

    • says

      Thanks so much Jane. I always appreciate your take. I completely agree with you about maintenance. That is a dramatic increase (and a safe way to either get a new contract signed or force someone to move). The difficulty becomes a tenant finding a replacement rental in today’s market, so landlords really do have the position of power right now. Just yesterday a colleague posted on Facebook asking if anyone had an upcoming rental up to $2500 somewhere along Highway 50 for someone moving to the area in the next six months. While that is not an odd request per se, it does illustrate what is happening in the market. Inventory is simply squeezed, so people have to reach out and try to find something in any way they can.

      • Honey Brazeal says

        Okay, so let me get this straight, although I enjoy seeing all the “smart” people say their piece…..Now, where do the single mom’s and the lower income people live? Under the bridge? Greedy investors are, like one of the comments, pushing people who just don’t have that two income household or have that cushy senate job out! Really? It is way more complicated than that. There are plenty of rentals available, just not affordable. You should not have to eat beans and rice due to the increase in food prices, to pay rent. Only about 30% of your gross income should be used, technically. Show me options. The prices are high because they can be. People who can afford it, can. They can “qualify” Oh and not to mention, don’t have a blemish on your credit, it can even be as old as 5 years. I mean, really? What about your average person, like me? Single mom, decent job but still can’t afford to move into a decent apt building that actually cares about how they keep their units. Why does it seem that the working poor are being pushed to the ghettos of the Sacramento area? I have seen my own apartment complex rise from the 715.00 I started paying in July 2014 to a recent jump to 965.00. I mean really? Its filthy and low class, drug dealers and nothing has been done but my rent has been raised two times in two years. My apt is falling apart and the Natoma group wants to plant some plants and raise the rent. The perfect example of what is happening. They CAN raise the rent as they feel necessary and no one will do anything about it. So why shouldn’t they?

        • says

          Thank you for sharing your story. It’s a common one and you highlighted the real struggle. Increasing rents absolutely impacts real people. I’m sorry to hear about your situation. That is a huge increase in rent. Where does the money come from? That’s not an easy question to answer for many in today’s market.

  6. Jess Morris says

    Thanks Ryan for your post, it’s very insightful! It’s great that you mentioned the importance on research real estate sites to determine comparables and your realistic market price. However, I would like to include one more thing. If you decide to increase your rent, you should do it carefully. The topic https://rentberry.com/blog/tenant-turnover has pretty good pieces of advice how to manage it.

    • says

      Thanks Jess. I appreciate the comment and link. Landlords always need to consider the reality of higher rents vs. vacancy. You are right about that. I just inspected a house yesterday where the tenant has been paying the same rent for 4 years and is likely $225 to $250 below market rent. In this case rents probably could have increased and the tenants would have remained, but I don’t think the property manager or landlord was paying much attention for whatever reason (bonus for the tenants).

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