This is my first article written for the East Bay Rental Housing Association (EBRHA) and I would like to welcome our new members from Contra Costa County. This update from the Market Conditions Committee will discuss trends in the rental market and the apartment sale market.

East Bay rental market upturn may be historic turnaround

The current upturn in the rental market is shaping up to be an historic turnaround. The apartment rental market in the East Bay has traditionally gone up or down in relation to the jobs market. You know, jobs, jobs, jobs.

Up until now, rents in the Greater Oakland area went up when job growth was positive in the East Bay (Alameda and Contra Costa counties) and in San Francisco (San Francisco, Marin and San Mateo counties) and rents went down when job growth was negative in the East Bay and San Francisco.

Well, our rents are going up, unquestionably, but East Bay job growth went negative in February 2008 and has not been positive since! San Francisco job growth went negative in October 2008 and just about that time our rental market tanked. 2009 and 2010 were not great years for us in the East Bay. Then in July 2010 San Francisco job growth turned positive and in August 2010 East Bay job growth almost turned positive before double dipping. The San Francisco rental market began turning around in early 2010 and has not looked back, despite falling back into negative job growth in April and May of 2011. The East Bay rental market felt like it was poised for a surge at the end of 2010 and early 2011 but seemed to fizzle out in the spring. Finally in mid-summer 2011 things are really beginning to pop in the rental market, but why, with dismal job growth in San Francisco and the East Bay? One of the answers may be our friends in Silicon Valley.

San Jose’s Jobs Comeback

San Jose job growth (Santa Clara and San Benito counties) went positive in July 2010 and has been strong ever since. The committee has been tracking job growth in twelve cities nationally since May 2009, at which time San Jose's job growth was minus 6.5%. Only Phoenix had worse job growth. By August 2009 San Jose's job growth had deteriorated to minus 8.25%. A year later in August 2010 San Jose had jumped to #4 position. In June 2011, our most recent rankings, San Jose was #1 in the country in job growth with a 2.1% increase and is the only city to exceed 2% positive job growth of any of the twelve cities since May 2009. Maybe this has something to do with our surge?

Very probably what has happened is that Silicon Valley has fueled San Francisco’s rental market surge with its dramatic job growth comeback. Historically when San Francisco’s rental market becomes sufficiently heated up, the “push-out effect” begins as East Bay rents start looking more attractive and tenants migrate to better parts of Oakland and beyond.

Oakland and Alameda Rental Market Comments

Owners of one Piedmont Avenue area apartment building saw call volume soar in late July and a two-bedroom two-bath penthouse that had been renting at $2,495 was rented for $2,695 with an August move-in, an 8% increase and $2.07 per square feet. That new tenant had worked at Cisco Systems for ten years and recently taken a job teaching at UC Berkeley.

A one-bedroom in that same building rented at $1,495 and in June a 785 square foot one-bedroom unit went for $1,595, the highest rent ever in that property. In all, three apartments were rented in that building in late July and all three were rented before the old tenant moved out.

A lady who owns three Adams Point area buildings totaling 190 units was 100% full, with a waiting list, that same week in late July. She said that the rental market really “picked up in June” and that many applicants are from out-of-state and roughly 40% are from San Francisco looking to rent in Oakland because the rent is cheaper.

An owner of several properties in Oakland’s China Hill area said that he was raising rents “$100 across the board” on turnovers. Rents are going up in Alameda, too. According to one owner “it was hard to get $1,200 a year ago” for his two-bedrooms whereas in June this year he rented a vacancy for $1,350, a 12.5% increase over one year earlier. His one-bedrooms “were getting $875 and the last two months I got $950”, an 8.5% increase. As far as the single family rental market in Alameda he says, “I have been observing the rental market for single family homes in Alameda and rents have risen about 10% since the beginning of the year.”

Picking Up Speed

It looks like the rental market is picking up speed. But, again, why is this happening when job growth is negative in the East Bay and the San Francisco graph line looks like it cannot make up its mind whether it goes positive or negative?

It has been mentioned several times before in this column that the collapse of the single family home market has had a dramatic effect on the apartment rental market and that is true for the entire country. It is still difficult for tenants to buy houses and those that have the down payment and can qualify for a loan may be holding off to see if home prices continue to decline.

So many Americans have been burned by the housing bust that renting is the thing to do for many people, and the foreclosures are not stopping. Apartment vacancy factors are low everywhere and builders are gearing up to add more apartments to the supply. Previously approved plans are being dusted off and apartments will soon be built, although not in the Bay Area for the most part due to various barriers. There is also a trend developing where tenants are moving back to the inner Bay Area to be closer to transportation and their jobs and more and more tenants have given up cars. All these factors and many more are beginning to put pressure on the demand side of our rental economy, as was predicted. Rents are going up in San Jose, the Peninsula, San Francisco and now Oakland and the rest of the East Bay will soon follow.

Rents Could Spike Up

Having discussed the question of why East Bay rents are going up despite negative job growth, two intriguing questions are developing. One is, if rents are going up with negative job growth, what will rents do if we reach historical levels of job growth? The tantalizing answer is that rents may spike up. In the late 1990s up until the dot.com bust East Bay job growth was 3-4% annually. The rental market came back around 2005 and job growth in the East Bay peaked at about 2% until going negative in 2008. If East Bay job growth hits 1% to 2% again look for strong rent growth.

The other question is, what if East Bay job growth dips back down and stays negative, will that eventually drag down the rental market? That will probably depend on what San Francisco and San Jose do, but historically vacancies go up and rents go down when we have negative job growth in both the East Bay and San Francisco. Let’s hope we get positive job growth!