Don’t believe all the national headlines about “the national real estate market.” Real estate markets are highly localized and are dependent on the supply and demand characteristics of each specific market.
So while the national markets do exhibit certain overall trends, what is happening in Seattle or San Francisco, or Cleveland for that matter, has no real bearing on the market dynamics in San Diego.
Here is what is happening in San Diego: We are in a housing crisis. Countywide vacancy is hovering around 3%, while rents have been increasing by 5% to 10% per year. Supply is severely constrained, while demand is extremely high. If you are a renter, this is a very difficult time to find housing at all, let alone housing that is reasonably priced. If you are a rental property owner, this is a very good time, as you should have seen big increases in your Net Operating Income over the last several years. Let’s look at the housing crisis trends:
Vacancy Rate and the Supply Side of Rental Units
Think about what a 3% vacancy rate means: The average county-wide vacancy is 3%, meaning that for every single rental unit in San Diego, there is less than 11 days of vacancy per year. (3% x 365 = 11). When one factors in long-term tenants who do not move out in a given year, that 3% vacancy translates to only a few days of vacancy per year.
Many people who self-manage their rental properties will have a tenant move out on the 31st of one month, and will not have a new tenant start a new lease for 30 days or more. That’s an 8.3% vacancy!
Professional property management companies like MV Properties add tremendous value by keeping the vacancy period to a bare minimum. We start showing the rental property to new prospective tenants before the current tenants move out and have all repairs, cleaning, and maintenance lined up for the day the tenant moves out. Our goal is to have a new lease start within 3 days of the move-out.
Why is the vacancy rate so low? The reason is that San Diego’s land use and development policies make it very difficult to build new housing units. We are in a perpetual state of under-supply. In 2015, San Diego added less than 10,000 new housing units. The demand, discussed below, exceeds 25,000 new units – just to keep pace with current job growth! That type of perpetual imbalance creates tremendous upwards pressure on rental rates, and home prices.
The Demand Side of the Equation
Housing demand is driven by one primary factor: New Job Growth. The rule of thumb is that demand for one new housing unit is created for every 1.5 new jobs created.
San Diego has been averaging approximately 40,000 new jobs per year, and the unemployment rate is now 4.5%, below the levels in 2004 to 2007 before the recession! In fact, our job growth is double the average growth we saw from 2000 to 2005. During that time, San Diego averaged 20,000 new jobs per year and we are at 40,000 today!
So new job growth of 40,000 equates to demand of over 25,000 new housing units – and San Diego is building less than 10,000 new homes per year. That demand will be split between for-sale homes and rental homes. In a high-cost area like San Diego, over 75% will go towards rental demand, which equates to demand for 19,000 new rental units per year.
What Does the Housing Crises Mean for You?
Economics 101 tells us that severely constrained supply and historically high demand result in one thing: Rental rates and home prices will continue to go up.
Renters are advised to spend no more than 30% of their income on housing, but in San Diego the average renter typically spends 40%, and often 50% or more. There is no question: it is a tough time to be a renter and the affordability crises is likely going to get worse.
However, if you own a rental property, you may be poised to take advantage of increasing rental rates and reduce your vacancy period to improve profitability.
If you are a property owner with rental properties, you have to ask yourself the following:
- How much has my rental income gone up over the last several years?
- When a unit turns over, what is my average vacancy period? Is it 3 days or less?
MV Properties specializes in keeping our clients’ Net Operating Income and Cash Flow as high as possible. We will be happy to analyze the performance of your rental property(s) – contact us today!
Stay Up to Date on the Most Recent Trends
As any successful investor can tell you, only those with truly up-to-date knowledge of the market can fully leverage their investments for maximum gain. It’s important as a property owner to entrust the care of your asset to the experts who can keep you up to date on all the latest market trends, surprising and otherwise. The experts at MV Properties have intimate knowledge of all specific rental property markets in San Diego County. Call us for a free consultation to improve the your cash flow on your property today by phone at 888-686-1525 or by email at [email protected].