It’s not over yet: rents in San Francisco down 30%, in Silicon Valley down 19%, both to multi-year lows. But domestic rents are increasing

The US rental market has been plunged into turmoil. But in no major city have rents plunged so high in San Francisco.

By Wolf Richter for WOLF STREET.

San Francisco, which still has the most ridiculously expensive rents of any major city in the United States, continues to get ridiculously less expensive with woefully low occupancy rates and a massive churn from tenants looking to modernize and upgrade. save – recent rumors of rent “clawbacks” indicate otherwise.

The median asking rent for one-bedroom apartments in San Francisco in April fell to a new multi-year low of $ 2,600, down 30% from the June 2019 high, according to data provided by Zumper:

The San Francisco Bay Area, made up of five counties, is also the only housing market in the now infamous Case-Shiller Index, amid a dramatic meltdown in nationwide house prices. , for condo prices which decreased compared to a year earlier and are at March 2018 levels.

In San Jose, the largest city in the Bay Area and part of Silicon Valley, the median asking rent for 1-BR apartments fell to a multi-year low of $ 2,050, down 19% from the recent peak it was hit in July 2019, then again in March and April 2020:

These “asking rents” are compiled by Zumper from rental listings on Multiple Listing Service (MLS) and other listing services. But they do not include concessions, such as the very common “two months free”, which further lower effective rents.

The “median” asking rent means that half of the asking rents are higher and half are lower. Rental units are in apartment buildings, including new construction, but do not include single family homes for rent or condos for rent.

Rents for two-room apartments in San Francisco, after falling for months, have remained stable in recent months, with median asking rent remaining at $ 3,500, down 30% from the October 2015 high. and 27% compared to July 2019.

There is now a dynamic churn rate in San Francisco as many monthly renters shop and browse the large number of vacant units.

How bad is that? 16% of large apartment buildings in San Francisco whose mortgages have been securitized in CMBS have an occupancy rate of less than 80%, according to Trepp, which analyzes CMBS. By comparison, in many cities, such as Phoenix, there are no such buildings with an occupancy rate of less than 80%. Nothing!

So people are using the many vacancies and the offers they get from landlords, such as “two months free”, to move to bigger, nicer homes. Landlords with the right type of offers can have their homes filled. Other owners are occupying vacant homes, waiting for better times.

And some of those upgrades go from one-bedroom apartments to two-bedroom apartments. This classic flight to quality at the same or less cost changes the mix somewhat. And such shifts in the mix can skew the median rent data upwards with data providers offering a combined median rent figure for all apartment types.

Those data providers who put 1-BR and 2-BR apartments in the same bucket may show a median rent increase in their summary figure, skewed by this change in mix to larger, nicer units, without it happening. there has been an increase in the asking rents per apartment. type. And of course, it happened on the front pages of the local media.

In San Jose, the median rent for 2-BR apartments has been around $ 2,660 for several months, after dropping 13% from the start of 2019. Here, too, the dynamic churn and the flight to quality have created some stability of larger nicer units at a lower price. the price.

Affordability crisis sets inland.

There are now all kinds of reports of homeworkers who have moved from San Francisco and Silicon Valley to cheaper pasture. Many of them have found these cheaper pastures within a two to three hour drive of San Francisco, and rents in these markets have skyrocketed under the influx of people with suddenly a lot of extra cash to burn.

In Sacramento, about 100 miles east of San Francisco, the median 1 BR asking rent in April jumped 15% from June 2019 to $ 1,450:

In Fresno, about 150 miles southeast of San Jose, the median 1 BR asking rent in April is up almost 30% from the recent low in September 2019. Clearly, some of these changes have occurred. produced before the pandemic, and the pandemic accelerated them:

And the difference is reduced.

Considering falling rents in San Francisco and skyrocketing rents in Sacramento and Fresno, the difference collapsed. In San Francisco, the rent went from $ 3,720 in the summer of 2019 to $ 2,600 in April. In Sacramento, during the same period, the rent went from $ 1,260 to $ 1,450. The rent difference between the two cities collapsed 53%, from a difference of $ 2,460 in July 2019 to just $ 1,150 now.

In other words, tenants who moved in July 2019 saved $ 2,460 per month in rent. Renters who moved in April 2021 only saved $ 1,150. At some point, if the difference narrows further, the savings are not worth it and the motivation to switch to these cheaper pastures wears off.

And the rent gap between San Francisco and Fresno collapsed 49%, from $ 2,720 in July 2019 to $ 1,380 in April:

Likewise, the difference between 1-BR rents in San Jose and Sacramento collapsed by 53%; and the difference between San Jose and Fresno collapsed by 47%:

It doesn’t take much for the exodus from a large market like the Bay Area to cause a major rent turmoil in surrounding smaller markets, such as Sacramento or Fresno, and this can continue to put pressure on the market. rising rents in these inland towns. But the sharp reduction in the rent distribution makes the move less money-saving and less motivating than a year ago.

A similar scenario unfolded in the United States, with shifts from the more expensive rental markets to cheaper pastures, triggering the corresponding drops and spikes in rents. The fact that the US rental market has been plunged into turmoil is an understatement. And that’s just one example – although no major city has rents plunged from such a high pedestal as quickly as in San Francisco.

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