The rental market is slowing. What is in store for Landlords?
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Bay Area Rental Market Slows. What is in store for landlords?

With residential rents going through the roof over the past few years, my colleagues and I, in conjunction with California Apartment Association (CAA©) and The National Association of Residential Property Managers (N.A.R.P.M.©) went to bat for landlords recently to fight a rent control ordinance. The proposal was designed to ease the escalating rents but probably did little to impact the market in the short term. The real problem comes down to the basic laws of supply and demand. I think we can all agree that demand remains high in San Jose and surrounding communities. Supply however, continues to be an ongoing problem for our marketplace. This is a dilemma that has garnered some attention according to the data in the second quarter housing statistics just released by the city of San Jose. I am sure you have seen them. High rise luxury apartments, new condo developments, and a healthy dose of low income housing developments, are sprouting up around here like weeds after a spring rain. This is actually very good news. More housing is the best remedy for our supply problem. While all of the debating about rent control was going on, the market was making its own statement as we’ll discover when we review the report.

After careful examination of the second quarter data, my suspicions were confirmed. The market is slowing. It started at the end of the 1st quarter or maybe earlier. We have become accustomed to seeing an average 10% increase in rents (YoY) year over year for at least the past four years. The report reads the following: "the average rent growth slows, up just 1% from Q12016 and 4% YoY".

Average length of vacancy is going up as you might expect. I am having more difficult conversations with my clients. Is this a sign of things to come? The year 2016 has not gone all that swimmingly for jobs in the Bay Area as Nick Kolakowski writes "'Tech layoffs in the San Francisco Bay Area“ more than doubled' in the first four months of 2016, according to the San Jose Mercury News.

The newspaper tallied 3,135 layoffs at Yahoo, Autodesk and other firms in Santa Clara, Alameda, San Francisco, and San Mateo counties. Compare that to the 1,515 area tech professionals laid off during the same period in 2015, or the 1,330 in 2014."

That number doesn’t include simple attrition or layoffs from startups with less than 75 employees, which aren’t required to file a notice under the Worker Adjustment and Retraining Notification Act, according to Business Insider." You can read the entire article by clicking this link. 

The report also does not call out Cisco which laid off over 5,500 workers in the past two month according to CBS bay area news on August 17, 2016.

There are some other interesting facts about the real estate market that could be dousing the flames of our once out of control rental market. Real Estate listings and sales rose by 40% during the second quarter. More supply did not appear to keep the price from soaring to a ridiculous 920,000.00 for a median price three bedroom home in San Jose. Interest rates remained low during this period, which, no doubt, made it easier for buyers to qualify. Listings and sales have slowed dramatically in recent weeks and I anticipate the news on that front to be similar to our rental market for the remainder of the year. It is difficult to predict if the market will recover quickly after the holidays considering things generally slow down after September anyway. The good news is the market needed an adjustment. Clearing away the dross will help us see a more vivid picture going into 2017 which will help us better evaluate rent pricing for the spring. Some of the statistics are still promising even in light of the fact that the vacancy rate is going in the wrong direction.
The Bay Area is still one of the most desirable and expensive places to live in the entire world. As markets change we simply must adjust. We are still optimistic and believe that our clients properties will still rent and stay rented.

I will provide a link to our owner resources page so that you can view the report for yourself. Draw your own conclusions or give us a call or email. We will do our best to help answer your questions.

Robert Collins, RMP, Broker
President/Cal West HMS

In Q2 2016, 368 residential permits were issued - 81 affordable, 233 multi-family market and 54 single-family/other permits
Average Rent Growth Slows, Up 1% from Q1 2016 and 4% YoY
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