Why are San Diego rental costs rising?
“Not again!” Those words are being spoken by apartment dwellers and renters all over San Diego county. It seems like apartment rents are going up every month. The Mission Fed Business Lending Department has a lot of experience with multifamily housing. In fact, about half of our business loan portfolio is for apartments. Let’s take a look at San Diego’s rental history, underlying rental increase causes and what we can expect in the future.
Mission Fed uses a national organization called CoStar, which provides information and analytics to the multifamily and commercial real estate industry including local San Diego County apartment rental costs. From January 2005 through May 2016, CoStar data shows apartment rents have increased every year except 2009, when apartment rents actually declined slightly. From 2005 to the middle of this year, rents have cumulatively increased 35.9% with an increase in 2015 of 8.9%. To break the rental market increase down in terms of dollars, a $900/month rent payment in 2005, would now be almost $1,225/month. It is estimated the average renter in San Diego County now spends 40% of their income on housing, and there doesn’t appear to be a stabilization of rental costs anytime soon.
The primary reason apartment rental costs continue to rise is the basic economic principle of supply and demand. There are more people looking for rental properties than there are properties available. When the recession began in 2008, home builders and multifamily developers, including both condominiums and apartments, stopped building. With economic uncertainty and higher borrowing requirements, it wasn’t prudent for them to build. However, during this time, the number of new households forming did not decline. Young adults were graduating from schools and looking for places to live. From 2008 through today, there has not been enough housing of all types to accommodate the demand. As of 2016, Moody’s Analytics, a company that provides comprehensive and timely analysis of the global economy at the national and subnational levels, estimates that the supply of housing units in San Diego County is 80,000 units short of meeting current demand. When demand exceeds supply, rental property costs will rise.
Where do we go from here? The simple answer is building more units. Currently, there are more units being built in San Diego County, but not as fast as the increase in demand. The building permit process can be arduous and timely. In addition, the new construction must make economic sense to the developer. Most new units have been high-rise buildings in downtown San Diego. With increased costs for construction, monthly rents for new units have to be higher in order for the developer/owner to get loans and a return on their investment. What about rent control ordinances? The general consensus within the housing industry is that rent control does keep rents from increasing for a short time-frame, but does nothing to increase the number of units available in the market. Since rent control usually only applies to the current resident, the benefits to rent control are limited to residents that never leave their unit. It has not proven to be a long-term solution to increasing rental costs.
Using Moody’s estimates of the housing shortage and the number of recent completions of all housing unit types, it will take decades to construct enough units to meet current demand for housing. Over the short-term, it appears the only limitation on future rent increases will be the percent of income renters can afford to devote to housing.
If you’re planning to stay in San Diego County, homeownership could be an option for you to alleviate your rising rental costs. Visit a Mission Fed branch to see if you qualify for a Mortgage Loan, or if you’re not ready to apply now, what you can do to get ready to purchase a home in the near future.
The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article by Mission Federal Credit Union is for the information and convenience of its readers and does not constitute endorsement, control or warranty by Mission Federal Credit Union.
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