Coastal rents...will they ever go down?

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Submitted by sdsurfer on July 14, 2016 - 2:34pm

I've been googling and searching online a bit for a source that shows rent appreciation historically based on region. Specifically, North county SD if possible.

Does anyone have one?

I know prices seem high and all, but I just believe in coastal real estate as a good investment option. My goals are always long term and based on rent going up over time in coastal areas because I know there are a lot of people that will pay extra to live by the beach and might never be able to afford to buy the same home. I always buy based on rents considering possible appreciation as the gravy that I like, but does not drive my decision-making process.

I'd appreciate the help with a source for the data, but please chime in with why you think rents will go down (and why with data is preferred) over the next 10+ years if you would like to share some insight.

I've just never been a stock guy and although I think real estate is expensive right now I'm thinking of looking for another investment in the Encinitas/Cardiff area. I'm currently in my pre-investment couple month period I always spend talking myself out of doing it. I usually fail at doing so and end up buying something. So far so good I guess, but I appreciate anything you might share.

Make it a great day!

Sdsurfer

Submitted by La Jolla Renter on July 15, 2016 - 8:19am.

I've always found rent data comes too much from apartment associations and never reflected beach pricing.

I'm curious what property type and price points are you looking for.

Submitted by sdsurfer on July 15, 2016 - 9:25am.

I think I'd have to agree with you on the lack of unbiased data. Was thinking maybe a Pigg had something or could point me in the right direction. I can get recent stats through NSDCAR, but not historical that goes back. I've love a chart that goes back 30-40 years.

I'm looking for a duplex most likely, but we'll see how it goes.

Submitted by Rich Toscano on July 15, 2016 - 4:47pm.

This is not exactly what you're looking for, but the BLS has a San Diego CPI series that includes rent, which you can break out. It's not the coast, though, but all of SD. Might give a ballpark though.

Submitted by Escoguy on July 15, 2016 - 10:05pm.

Most likely no

http://www.jchs.harvard.edu/sites/jchs.h...

from report:

Rental demand is expected to remain robust over the next decade as the youngest members of the millennial genera- tion reach their 20s and begin to form their own households. Moreover, if homeownership rates for households in their 30s and 40s continue to slide, rental demand will be stronger still. For their part, the aging baby-boom generation will boost the number of older renters, ultimately pushing up demand for accessible units.

It is unknown whether high-income households will continue to fill the growing inventory of higher-end rentals or make the transition to homeownership.

Regardless, expanding the rental supply through new market-rate construction should provide some slack to tight markets as older units slowly filter down from higher to lower rents. Once high-end demand is sated, developers in some areas may turn their attention to middle- market rentals, although high development costs mean that building new units affordable to even moderate-income house- holds is difficult without government subsidies.

Submitted by sdsurfer on July 18, 2016 - 10:28am.

Thanks Rich! Wow...lots of info on that site. I'll dig in and see what I can find. I'm kinda surprised more piggs are not interested in this topic. I appreciate you pointing me in the right direction.

Submitted by an on July 18, 2016 - 11:11am.

In my area, rent didn't drop during the last crash, so I'm not sure it would ever drop. Unless we see a major mass migration out of the region.

Submitted by sdsurfer on July 18, 2016 - 12:09pm.

Escoguy wrote:
Most likely no

http://www.jchs.harvard.edu/sites/jchs.h...

from report:

Rental demand is expected to remain robust over the next decade as the youngest members of the millennial genera- tion reach their 20s and begin to form their own households. Moreover, if homeownership rates for households in their 30s and 40s continue to slide, rental demand will be stronger still. For their part, the aging baby-boom generation will boost the number of older renters, ultimately pushing up demand for accessible units.

It is unknown whether high-income households will continue to fill the growing inventory of higher-end rentals or make the transition to homeownership.

Regardless, expanding the rental supply through new market-rate construction should provide some slack to tight markets as older units slowly filter down from higher to lower rents. Once high-end demand is sated, developers in some areas may turn their attention to middle- market rentals, although high development costs mean that building new units affordable to even moderate-income house- holds is difficult without government subsidies.

Thanks Escoguy!

I really appreciate the link/article. Some great insight in there...I really liked this part:
Although conversion of formerly owner-occupied singlefamily
homes to rentals met much of the initial surge in
demand, construction of multifamily units is now taking
on a growing share. But even with these additions to supply,
rental vacancy rates have fallen steadily since 2010,
dropping to just 7.1 percent by the end of 2015. Rents have
climbed in response, with the Consumer Price Index for
rent on primary residences up 3.6 percent in nominal terms
last year. When adjusted for inflation, it has been
three decades since either of these measures registered such
tightness in the rental market.

Submitted by sdsurfer on July 18, 2016 - 12:12pm.

AN wrote:
In my area, rent didn't drop during the last crash, so I'm not sure it would ever drop. Unless we see a major mass migration out of the region.

I agree. There was a bit of a dip with certain properties with regards to price, but the rents held strong when investors picked up those opportunities and converted them to rentals.

Submitted by Escoguy on July 18, 2016 - 2:53pm.

sdsurfer,

These last few weeks have been eye opening.

I had some tenants give notice (they are buying now). I knew I was a little below market but was able to get an average 13% increase on the units that came open.

The new tenants were overjoyed too as they are getting larger, more modern homes.

I was able to lease very quickly (within days) and had in some cases over 100 views in a few hours on zillow.

A couple of people wanted to negotiate but I was polite and told them there was no need. As an FYI, these are SFHs with values in the 650 range going for approx $3200-3300/month. (Inland North county)

I had the impression many of the alternatives were going for $3500-$4000 as one applicant (who rented for $3900 in Del Sur) told me she thought I was $200 below market. Mine are not in Del Sur.

I don't think the market will soften any time soon.

I noted that many of the applicants have very long commutes: from Palm Springs/Vegas/Riverside County/LA area. Their salaries were also stronger on balance than I initially expected. Some were relos, but some could work remotely and just wanted to be in SD county.

Not to speak of the ones who needed to move because their landlords are selling now.

Perhaps the AirBNB is pushing rents at the coast higher so some feel the need to look inland.

All in all, a very encouraging and interesting few weeks.

Submitted by sdsurfer on July 18, 2016 - 3:38pm.

It's really interesting in a way because I feel like we get solid applications for our rentals sometimes and wonder, "why dont you buy?", but I guess people have their reasons or do not like the price of what they can afford so they rent where they want to live.

I think that is a lot of it right there. The aspect that people always want what they cannot have so rather than sacrifice and go inland a bit to buy many of them stick it out and pay more to rent or find a smaller place to keep the beach lifestyle.

Submitted by The-Shoveler on July 18, 2016 - 4:13pm.

I was looking at some absolutely mind blowing population growth projections for California earlier this morning.

The current population in California is 38 million, which is project to grow to 60 million by 2050.

That is absolutely astounding if true, they need to be pounding nails as far as the eye can see for the next 35 years just to keep up if that is what the future really holds.

Submitted by Escoguy on July 18, 2016 - 4:50pm.

sdsurfer,

Yes it is notable, because some renters ARE buying, two homes open up, but are filled immediately.

Many of the other applicants also want to buy but even with a 180K-200K+ salary coming from Las Vegas/Riverside or Palm Springs, the sticker shock to buy is still there.

It probably takes a few years to become acclimated to the prices. Unfortunately for them, by that time, they will likely be higher but with their salaries, they can probably afford them if they make that choice.

Submitted by joec on July 18, 2016 - 6:18pm.

This thread is interesting...I agree that unless there is some subsidy, I doubt there will be much lower (< 600k) sfh construction anywhere in primer San Diego (coastal/north inland, not counting east or south SD).

As mentioned in the home insurance thread, I think building costs have probably also sky rocketed from just 5 years ago as my home insurance has doubled pretty much.

With so much anti-development all over SD and CA in general, I don't think supply will ever catch up to all the higher income jobs in the work centers so if I was lower income and didn't buy already, I'd seriously move.

With the crash in 08-10, rents probably stayed the same more or less because people who lost homes still had to live somewhere supporting the rental market. I know a few people who were doing the massive leverage home buying during the bubble and loss all their homes.

As mentioned, I think unless something drastic were to happen with people leaving SD or CA in general, prices won't do much, but probably steadily go up continuously as will rents.

Good for the asset holders for sure...

SF may drop a little I think since the tech IPO market seems to have slowed a bit.

Rent there is insane I hear with 2bdrms going for 5k/month+.

Submitted by outtamojo on July 18, 2016 - 9:19pm.

How soon before we see rent control measures or has the movement already started?

Submitted by Escoguy on July 19, 2016 - 9:24am.

Regarding SF rents:

Many rentals have 3-4 people in 1-2 bedrooms.
That's how they pay $4K for 1BR and $5K for 2BR.

I met a girl who worked at Nordstroms, just moved here from SF, all of her Millennial friends had multiple roommates to keep up with the rent in SF.

In that sense, I think the situation is more sustainable here. There is some inter-generational renting going on (parents plus adult child) but mostly it is larger families with 3-5 kids who need the bigger houses.

In a nutshell, the rents in SD can be supported by 1-2 professional incomes but perhaps not in SF.

Submitted by sdsurfer on July 19, 2016 - 9:35am.

Escoguy wrote:
Regarding SF rents:

Many rentals have 3-4 people in 1-2 bedrooms.
That's how they pay $4K for 1BR and $5K for 2BR.

I met a girl who worked at Nordstroms, just moved here from SF, all of her Millennial friends had multiple roommates to keep up with the rent in SF.

In that sense, I think the situation is more sustainable here. There is some inter-generational renting going on (parents plus adult child) but mostly it is larger families with 3-5 kids who need the bigger houses.

In a nutshell, the rents in SD can be supported by 1-2 professional incomes but perhaps not in SF.

I think this is a solid example that it's relative in a way. Like you mentioned above people get used to the prices in places like SF and SD over time and it becomes normal in a way.

Submitted by sdsurfer on July 19, 2016 - 9:40am.

joec wrote:
This thread is interesting...I agree that unless there is some subsidy, I doubt there will be much lower (< 600k) sfh construction anywhere in primer San Diego (coastal/north inland, not counting east or south SD).

As mentioned in the home insurance thread, I think building costs have probably also sky rocketed from just 5 years ago as my home insurance has doubled pretty much.

With so much anti-development all over SD and CA in general, I don't think supply will ever catch up to all the higher income jobs in the work centers so if I was lower income and didn't buy already, I'd seriously move.

With the crash in 08-10, rents probably stayed the same more or less because people who lost homes still had to live somewhere supporting the rental market. I know a few people who were doing the massive leverage home buying during the bubble and loss all their homes.

As mentioned, I think unless something drastic were to happen with people leaving SD or CA in general, prices won't do much, but probably steadily go up continuously as will rents.

Good for the asset holders for sure...

SF may drop a little I think since the tech IPO market seems to have slowed a bit.

Rent there is insane I hear with 2bdrms going for 5k/month+.

It's interesting what you mention about the pricepoint aspect. It does seem like most of what is being built is above 600k so the builders must feel there is plenty of pent up demand in that range. I was talking to someone recently that mentioned 47% of the cost to build a home is related to the planning/permitting process. I'd think with expenses that high to go through the process it's justified that the builder ends up building a more expensive home to hit their desired return.

Submitted by The-Shoveler on July 19, 2016 - 9:51am.

The hard reality is that the Land (bringing in utilities etc..) and entitlements are about 80% of the cost (more so the closer you get to the coast).

The hard truth (the Gov does not want cheap homes despite what the politicians say now and then).

The other hard truth there are limited resources for any given region.

Submitted by gzz on July 19, 2016 - 4:11pm.

Best thing to do is buy a new house to live in and rent out the old residence. That way you get a very low primary residence interest rate.

I think SD rentals make sense if you can get 3.25-ish purchase rates or you are investing cash that otherwise would get getting 2% or less as a safe long term rate.

A mostly-financed rental at 4% seems a bit aggressive. Probably it would work out including appreciation, but you'd likely be cash flow negative at first.

Submitted by gzz on July 19, 2016 - 4:28pm.

The strongest rental growth will be where there is limited supply and growing demand.

The supply of single family homes with nice sized back yards for kids/dogs in central San Diego is going down each year as more and more are infilled with apartments or second units.

The fastest demand growth IMO will be from retiring upper-middle class boomers. The features that may be most popular for them may be 3 or fewer bedrooms, space for gardening/dogs/grandchildren, walk-able/bikeable neighborhood, single story house and a lot without deep canyons or drops.

For older couples, single retirees, and those without the budget to have guests stay over, condos with a lot of amenities should also do well. Within Central SD and mature North County areas, this is also the fastest growing supply as new lux complexes get built and old dumpy apartment complexes get converted to lux condos.

I think working couples with kids are probably averse to having less than 2 full baths. But retired people with only the occasional guest will probably be more willing to have 1 or 1.5 baths.

I think the coastal areas with plenty of smaller SFH on their own lots, from OB to Carlsbad, is likely the sweet spot for long-term appreciation of both rents and prices. IB and OC seem a tad too remote and downscale to attract boomers with pensions and equity from bigger paid-off residences.

Submitted by sdsurfer on July 20, 2016 - 11:34am.

The-Shoveler wrote:
The hard reality is that the Land (bringing in utilities etc..) and entitlements are about 80% of the cost (more so the closer you get to the coast).

The hard truth (the Gov does not want cheap homes despite what the politicians say now and then).

The other hard truth there are limited resources for any given region.

I think these truths actually work in my favor as far as rents going up over time. Thanks for chiming in.

Submitted by sdsurfer on July 20, 2016 - 11:45am.

gzz wrote:
Best thing to do is buy a new house to live in and rent out the old residence. That way you get a very low primary residence interest rate.

I think SD rentals make sense if you can get 3.25-ish purchase rates or you are investing cash that otherwise would get getting 2% or less as a safe long term rate.

A mostly-financed rental at 4% seems a bit aggressive. Probably it would work out including appreciation, but you'd likely be cash flow negative at first.

I agree with the rates aspect, but classifying it as an investment does have some great tax advantages depending on ones financial profile (prop tax, depreciation, insurance, etc.)

I'm approaching it from the mindset that I might break even more or less (maybe a couple percent), but with an avg conservative rent increase of 3% per year in 5-10 years I'll have a nice little cash flow relative to my original downpayment plus expenses over that time.

That is kinda why I'm looking for the historical data. I'd like rent data going back through a couple downturns so I can see what the rents did during those times. I already know they were not effected much during the last one, but I'm trying to go further back.

My gut says that with everything going on my 3% is extremely conservative, but I'd like for someone to disagree with me and provide some reasons or data too.

Submitted by bearishgurl on July 20, 2016 - 2:26pm.

gzz wrote:
The strongest rental growth will be where there is limited supply and growing demand.

The supply of single family homes with nice sized back yards for kids/dogs in central San Diego is going down each year as more and more are infilled with apartments or second units.

The fastest demand growth IMO will be from retiring upper-middle class boomers. The features that may be most popular for them may be 3 or fewer bedrooms, space for gardening/dogs/grandchildren, walk-able/bikeable neighborhood, single story house and a lot without deep canyons or drops.

For older couples, single retirees, and those without the budget to have guests stay over, condos with a lot of amenities should also do well. Within Central SD and mature North County areas, this is also the fastest growing supply as new lux complexes get built and old dumpy apartment complexes get converted to lux condos.

I think working couples with kids are probably averse to having less than 2 full baths. But retired people with only the occasional guest will probably be more willing to have 1 or 1.5 baths.

I think the coastal areas with plenty of smaller SFH on their own lots, from OB to Carlsbad, is likely the sweet spot for long-term appreciation of both rents and prices. IB and OC seem a tad too remote and downscale to attract boomers with pensions and equity from bigger paid-off residences.

This is a pretty good analysis of the available residential SFR inventory going forward in well-established areas of CA coastal counties ... with a few caveats.

First of all, 1.5 baths is a design mistake of primarily builders of the '80's thru the '90's. Primarily used in small units/PUDs (townhouse-type) of 2 floors, the 1-1/2 bath design leaves no tub/shower on one floor, which is a huge inconvenience, especially if a bdrm exists on that floor. Any units being remodeled or converted (or built after about 2000) include at least a shower on the 2nd bath (in a 2-bath unit), making the unit have 1-3/4 bath ... a much more usable unit for a small family or roommates. Even a downsizing boomer doesn't want 1.5 baths! A "powder room" or 1/2 bath is fine for a home which already has two full baths.

Yes, boomers DO prefer one story homes. Many of them (perhaps more than 70% in SD County) already own a one-story SFR as a residence. But if they do happen to have stairs, they're not going to sell and re-buy a residence in CA unless they can take their old assessment with them pursuant to Props 60/90. There are limited counties participating in this "statutory scheme," besides SD County:

http://www.boe.ca.gov/proptaxes/faqs/pro...

Boomers are not going to suddenly start paying $350 to $600 month in HOA dues at the age of ~60+ for a condo in a "Luxe" complex if they haven't paid HOA dues in the past 20+ years ... or ever in their lives. H@ll, effing NO! And that's the vast majority in CA!

Even one collecting pension(s) (which are generally fixed with low or no increases every year) does not want to add to their monthly expenses when that money could be much better deployed to other uses such as home improvement, travel and assisting grandchildren with college.

It's much, much cheaper to hire a gardener (even if one has a large lot which they can't maintain by themselves anymore) than it is to be suddenly subject to HOA dues (and possible MR on a *newer* "Luxe" condo complex) PLUS any impromptu special assessments ... especially for a deferred maintenance period which commenced long before the new buyer even took ownership of their unit! Witness all those beautifully-landscaped large two story "period homes" on Coronado which are occupied by just 1-2 people. And do not believe for one minute that they will all suddenly go on the market after the last homeowner dies!

Both of the above reasons (PLUS the effect of Props 13, 58 and 193 on CA's books) represents 85-90% of the reason for the dearth of SFR listings on decent-sized lots in well-established areas of CA coastal counties in recent years. The closer to the the coast, the more pronounced the scarcity is and will be into perpetuity unless two or more of the above laws are eventually repealed. The proliferation of SFR zoning to multi-family/comm'l zoning is only occurring in 10-15% of urban micro-markets in CA coastal counties (ex: in SD, University Heights and parts of North Park). It is NOT occurring in every well-established urban neighborhood in coastal counties, nor will it . . . ever.

North Park (SD) began to be upzoned by City as early as 1988. It had a majority of residents who were renters in swaths of it, hence they had no voice when City voted to upzone those sections. This is NOT the case with the vast majority of aging urban neighborhoods in CA coastal counties!

In sum, a boomer would rather have their old house with stairs (and keep their <$1000 annual tax bill) than sell and move into a condo in the same county or move out of county (unless they can make Prop 90 work out for themselves) or out of state. To a great extent, the existence of stairs is the lesser of all evils.

Don't count on SFR inventory in well-established sections of urban coastal counties of CA getting any better for decades ... or ever. With the existing laws on CA's books, there is no reason whatsoever to believe this could or would happen.

Submitted by bearishgurl on July 20, 2016 - 3:05pm.

The dearth of availability of SFR's for sale in CA's most established (and even coveted) neighborhoods (most pronounced in CA coastal counties) is here to stay and will likely never be "fixed" in our lifetimes.

As Trump would say, "The `system' is rigged."

And there is nothing anyone can do about it :=0

Submitted by bearishgurl on July 21, 2016 - 8:54am.

The-Shoveler wrote:
I was looking at some absolutely mind blowing population growth projections for California earlier this morning.

The current population in California is 38 million, which is project to grow to 60 million by 2050.

That is absolutely astounding if true, they need to be pounding nails as far as the eye can see for the next 35 years just to keep up if that is what the future really holds.

Um, Shoveler, we've been thru this before here a few times :=0

This "prognostication" is unrealistic, pure fantasy and not doable in CA (unless the Mojave Desert gets some infrastructure and jobs and begins to be built up).

A more realistic assessment of the situation is ... "If CA DOESN'T get anymore new construction, newcomers will buy/rent what is on offer or NOT move here at all!" And, believe it or not, that is okay! We don't OWE the rest of the nation and world "affordable housing" or even any housing at all.

"Population projections" for an already built-out state are nothing but hogwash. They will be whatever the existing property owners and VOTERS want them to be. Sure, some of our rural counties "appear" to have a lot of open land. But that land is "protected." Read, legally PROTECTED for various reasons and purposes.

In some CA cities (ex: SF) the vast majority of the population is already shoulder to shoulder, live within spitting distance with one another and fight for street parking on their own streets every single day. SD has areas like this as well. Good luck with your continual population prognostications here but just realize that all they are is a fantasy ... they stem from a delusional mindset of CA having endless resources.

Nothing could be further from the truth.

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