A Renter's Market
Overbuilding, housing foreclosures create glut
By Jim Wasserman -- Bee Staff Writer
Published April 20, 2008
A foreclosure on his landlord booted Aaron Myers from a house he rented with friends near Sacramento's Arco Arena, it took no time at all to find another place in Citrus Heights.
His new apartment came with a quick move-in date and cost him less than $900 a month. Best of all, it wasn't a house where the same scenario could happen again. "It seems like there's a lot of openings," Myers said.
Little wonder it was so easy to move. Unlike much of California, which has generally seen a steady increase in monthly rents, the Sacramento area is an exception, with rents barely rising much over the past four years.
There are several reasons. Because the region dramatically overbuilt during the housing boom, there are plenty of apartments, about 111,000, according to some estimates, to go around. And a curious "shadow market" of new dwellings for rent, units that have come on the market principally because of foreclosure and the housing downturn, has kept monthly payments flat, they say. Such a market is also discouraging investment activity and bringing construction of market-rate apartments to a virtual standstill.
Larger apartment communities, defined as 50 units or more, in El Dorado, Placer, Sacramento and Yolo counties rent for an average of $966 this year, up just 1.5 percent over the past 12 months, according to RealFacts, a Novato apartment industry tracker. Sacramento rent gains were among the lowest in California, it reported. Here are some of the issues keeping Sacramento among the West Coast's most favorable metropolitan areas for many renters:
"We just purchased a new home," she said. "We decided to take this one off the (for sale) market because we aren't going to get what we want to. I'm thinking a lot of people are losing their homes, and they need somewhere to go."
In Rocklin, Pacific West Cos., a condominium builder based in Roseville, has added 171 units to the rental supply. Its Montessa development at Whitney Ranch was built to sell in the low- to mid-$200,000s. Now, the condos are priced as rentals at $1,000 to $1,400 a month and have attracted 0 renters in three months, said Taylor Cohee, a Pacific West sales executive. Pacific West, like Vomacka, will rent to people who have good credit histories but got in over their heads with a mortgage and lost a home to foreclosure. Renters, obviously, cheer this financial landscape. But the oversupply of rentals has damaged the region's standing among apartment investors. M/PF YieldStar, a Texas-based apartment industry consultant, ranked the Sacramento area's 2008 investment profile 42nd among the 57 national markets it analyzes. Sacramento ranked almost dead last in the critical "shadow market" category that makes investors wary of buying or building new apartment complexes.
"It's kind of a midtier performer on almost everything," said M/PF research chief Greg Willett. "But what really hurts it is what is happening with the homes for sale sector. There is too much available product out there. That is going to lead to a lot of shadow market rentals the single-family side. That will hurt apartment demand."
Only a year or two ago analysts were predicting that Sacramento's traditionally dependable job and population growth would soon trim supply and create an atmosphere to raise rents. But the housing bust has proved unexpectedly severe and led to reassessments.
"If you really put me on the spot, I would say 2009 should start to see some stabilization and rent increases as the recovery engages," said Charles DeLoney, a Sacramento-based executive with commercial property broker CB Richard Ellis.
Others don't see a change coming that soon. Robert Machado, who manages 2,000 area home rentals as president of Sacramento-based HomePointe Property Management, says he believes a recovery might not come until 2010.
"If that's the case, it means people cannot sell their properties. That means they'll rent them out. Supply will stay up, and that means rents won't go up," he said.
One reason rents have remained flat is because of the thousands of new apartments that opened in 2005 and 2006 in Sacramento, Roseville, Rocklin, Elk Grove and West Sacramento. Many still offer a month's free rent with move-in specials.
By contrast, said DeLoney, average rents rose 30 percent in the Bay Area the last three years, thanks to a robust economy and constrained housing supply. Kirk Lesh, a real estate economist at the University of California, Santa Barbara, said rents are up all over California as thousands are pushed back into the rental market. "If you are an apartment owner, this is a good time," he said. Indeed, M/PF YieldStar has ranked San Francisco, Oakland, San Jose, Portland and Seattle among its top 10 rental markets investors in 2008. Salt Lake City also makes the list.
When the Sacramento housing market recovers, it is still unlikely to make that list, industry insiders say. That's because the kind of market it is: Even best of times, the capital region is more about slow-and-steady than go-go-go. "Sacramento is a really nice Midwest town located in California," said HomePointe's Machado. "It's frustrating for investors. In the Bay Area you can maybe make money on the two- to three-year plan. Here it's 10- to 20-year plan." As the housing bust has caused investors in rental proper ties to pull back here, the number of apartment units being sold down by about half from 2005, said Dylan Herrick, a senior associate with property broker NAI BT Commercial. Dollar volume of sales is down by about the same amount. But there are some folks with capital taking a new look, especially because prices for big apartment complexes are falling just like home values. On its web site, CB Richard Ellis currently lists 17 area rental properties. Three have price reductions of $4 million, $6.6 million and, $9.7 million.
DeLoney pointed to history for what is likely to happen eventually: Housing in the Bay Area becomes so much more expensive than the Central Valley that sooner or later more people will move inland and rents will rise "Historically, the pressure in the housing sector has relieved itself in Sacramento," he said.
About the writer: The Bee's Jim Wasserman can be reached at (916) 321-1102 or firstname.lastname@example.org
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