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Friday, June 2, 2006 | Want to know whether your rent’s going to go down? Look to the sky.
One of the best indicators that landlords are having trouble renting out their units: those brightly colored “Now Renting” balloons that occasionally rise above apartment complexes. And the more trouble landlords have renting, the further they will drop their rents.
The National Association of Realtors doesn’t think San Diegans will be much in the way of those colorful balloons in the next few months. Its economists forecast that rents in San Diego will rise by 6 percent to 7 percent from 2005 to 2006. But some local analysts say that’s an overly optimistic prediction.
Lawrence Yun, an association economist, said a number of factors led to the forecasted increase, including the region’s steady job growth and healthy economy – the main indicator economists use in forecasting rental rates. With a healthy economy and plenty of jobs, less people will leave the city, which means demand for rental properties remains high.
Yun said the recent run-up in home values has priced many buyers, especially first-time home buyers, out of the market. Those people will instead choose to rent, at least until prices come down. This is an especially strong factor at the moment, Yun said, because many potential buyers are wary of purchasing at the peak of the housing market and are therefore holding off and renting.
Another considerable factor is that many apartment buildings in San Diego have been converted to condos. That means the number of apartments available for renters has been greatly reduced, driving rents up.
“Everything is lining up in a path for much higher rents this year,” Yun said.
Such a jump would reverse recent trends. The rate at which rents have been increasing annually has dropped every year since 2001. Indeed, from 2004 to 2005 rents rose just 3.7 percent – or about half what association economists think they will rise next year.
Robert S. Griswold, an expert on San Diego real estate and president of a local property management company, called the NAR forecasts and other recent rent forecasts by large brokerage firms “grossly inaccurate.”
“Those numbers are wishful thinking, for the purpose of what they’re doing, which is selling people apartment buildings for a profit,” he said.
The housing boom is actually largely going to work against at least part of the rental market, Griswold said.
Griswold’s in the “bubble” camp of real estate analysts who believes that the high home prices in San Diego are unsustainable. He said the market in San Diego has been largely driven up by investors who gobbled up local property. Now that the market has cooled, those investors find themselves holding property that is going to devalue as the market collapses in on itself, he said.
If that happens, increased competition among landlord-investors will force prices to drop, he said. While property values were escalating, getting a good instant return on those properties through rent was not a primary concern, Griswold said. But if many investors see the value of their properties dropping, they will have to remain competitive, which could mean lowering rents, he said.
Individual investors are distinct from large property management companies, who can afford to ride out a softening market, Griswold said. But individual landlords own a sizeable chunk of any rental market, and the slowdown in the sales market could actually lead to rents dropping across the board.
“Now, all of a sudden, the ‘for sale’ signs are up. People are losing money, they’re not able to get the rents – and those people do not have the staying power of that other group who own big apartment buildings, who have owned them for years,” Griswold said
Bob Pinnegar, executive director of the San Diego County Apartment Association, said he could see rents increasing in near the city’s urban cores, if renters are spurred by gas prices to live closer to job centers.
While San Diego’s job market remains strong, Pinnegar said the corporate relocation companies he works with are reporting that fewer families are coming to town. Instead, the people moving to San Diego tend to be young singles who move here, work for a while, then move on, he said. That increases demand for smaller units, especially studios, Pinnegar said.
“What I foresee is that you’re going to see a spotty market. You’re going to have areas in the inner core that will be very popular, but then you’re also going to have other areas that are not going to see the rent growth,” Pinnegar said.
Gary London, president of the London Group Realty Advisors in San Diego, agreed that certain areas of San Diego will see rent increases while others will not. London’s reasoning was different, however.
He said renters with the highest incomes will hold off from buying homes, pushing up the demand for the nicest apartments. That demand will trickle down somewhat to lesser units, but it will mainly push up rents in the neighborhoods where the nicest apartments are located.
“If you go to El Cajon or the southeast, you won’t see as much increase as you would if you go to Mission Valley, UTC, downtown or Carmel Valley,” London said.
At least one property manager in town said he’s already had landlords increase their rents. Andrew Schlesier, vice president of Utopia Management in San Diego, said 7-percent rent increases are in line with what his landlords have been mandating.
One of Schlesier’s clients, the landlord of a 40-tenant building, recently increased rents. The effect on demand was negligible, Schlesier said.
“A lot of those people had been in lower rates, and there are still available units out there, so we had a lot of turnover. But we haven’t had any problems refilling them,” he said.