Vacancies Rise, Rents Drop, but No Plunge

Friday, June 12, 2009 | When she was apartment-hunting earlier this year, Josephine Frodente spotted a listing for a two-bedroom unit with a 180-degree ocean view in Clairemont. The landlord wanted $1,900 a month.

When Frodente checked Craigslist and still saw it listed a month later, she decided to try to haggle.

“We said, ‘We really like it, and we’re great tenants, if he would just consider lowering the payment,” she said. “And he said, ‘OK.’”

Frodente and her husband moved in and are now renting the unit for $1,800 a month.

For much of the past decade, San Diego was a seller’s market in anything real-estate related, including rental units. But stories like Frodente’s — and new data out today — are evidence of a significant shift in the local rental market. The number of properties sitting vacant is rising, and, as landlords compete to fill those units, rents are falling for the first time in two decades.

A couple of years ago, Frodente’s landlord might have had a half-dozen potential tenants willing to pay full price, and could have laughed at her offer. Now that landlord, faced with the prospect of losing an entire month’s rent if he is not willing to lower it, becomes more flexible.

To be sure, the rental market has not experienced the same kind of freefall as the for-sale housing market. But that doesn’t mean rental properties are impervious to the significant economic pressures facing San Diego County. The share of apartments and rental homes sitting vacant is 5.4 percent, a 1.8 percent jump from the fall and a 0.6 percent increase from last spring, according to the San Diego County Apartment Association’s spring survey of landlords and apartment managers, released today.

And the survey showed an average rent across all property types in the county of $1,192. The new average is a few dollars more than it was in the association’s fall survey, but a 0.7 percent drop from last spring. The survey encompasses 33,367 units — about 10 percent of the county’s rental stock — and includes a range from single-unit landlords to major apartment complexes with hundreds of units.

Another recent report also showed local rents slipping. A March survey of apartment complexes with at least 25 units — a more specific sample than today’s survey — conducted by MarketPointe Realty Advisors found that average weighted rents across San Diego County logged their first decline in rents in the survey’s 21-year history between last fall and this spring.

The vacancy rate is nearly identical between the two surveys. This spring was the first time the vacancy rate has risen above 5 percent since the mid-1990s, MarketPointe reported.

Rental market experts attribute much of the vacancy increase to multiple people splitting a place to live. A single person who previously rented a one-bedroom apartment might downsize to a studio, or move in with a roommate to a place with two bedrooms. In the new survey, one-bedroom apartments across the county had a 5.7 percent vacancy rate, the highest of all bedroom counts. Units with three or more bedrooms were in highest demand, with 3.8 percent of such units vacant.

“The biggest reality is that people today are saying, ‘I need a break with my costs,’” said Russ Valone, MarketPointe CEO. “There are a lot of people doubling up.”

The thought that homeowners who have lost their homes to foreclosure are entering the rental market in force isn’t yet a significant trend, said Bob Pinnegar, executive director of the apartment association, though he said he’s unsure what will come next.

“We are seeing the foreclosure issues out there and everybody’s been waiting for this wave of people who are losing their homes to start renting apartments,” he said. “But we haven’t seen waves. We’ve seen trickles.”

That bolsters the doubling-up explanation for a rising vacancy rate at the same time that foreclosed households are displaced. Others laid off from jobs or losing their homes may move in with their parents or leave San Diego entirely.

Pinnegar expects these vacancy increases and rent declines to last at least another year to 18 months. Some growing concerns for landlords include more job losses in the local economy, and potential increases in utility costs if water rates increase.

“We’re just sort of bouncing along,” he said. “I’m hearing everything from people saying we’re going to be better in a year to saying this is going to be for a decade.”

Despite setting new local records, San Diego’s vacancy rate compares favorably to other cities, said both Pinnegar and Valone. Pinnegar said the problem is much greater in some other regions, even though balloons and banners advertising first months free and other incentives have become more common sights in San Diego County.

“In Phoenix they’re giving away everything and they’re still looking at a vacancy (rate) of 15 percent,” Pinnegar said.

More data exist for tracking rent rates and vacancies in apartment complexes and units run by professional property management companies than for the single-property landlords who use Craigslist or classified ads to find tenants. Those kinds of property owners — what Pinnegar called the “shadow market” — are more likely to agree to lower prices, he said. Yet because of the popularity and widespread accessibility of online sites, the shadow market has in recent years begun to influence the county’s apartment market more dramatically.

Yet, while overall rents in the county have slipped, Pinnegar said he’s heard from several landlords who say they’re managing to raise rents slightly.

“This is a market that all things are happening at the same time,” he said. “Depending upon where people are located and what grade properties they own, some people are experiencing business as usual and some people are struggling to fill vacancies.”

Mike Watson owns a triplex that he rents out in Golden Hill. In the three years he’s owned the units, he’s never had a hard time filling them when they come vacant, he said — until this year.

One unit filled quickly. The other took three months, “which is an eternity in landlord time,” he said.

Watson had been renting the 500 square-foot, one-bedroom apartments for $950 and $995 last year. He dropped the price of both this year to $895 — a fair price for the neighborhood, he said, where last year’s prices may have been too high.

Watson said he grew more willing to negotiate the prices lower on his vacant unit with every month that passed. But his desperation didn’t mean he’d negotiate with just anyone. Don’t even bother with the barter if you bring lousy references, bad credit and a cat and a dog to the table, Watson said.

“If any of us have learned anything this year, it’s that you can negotiate on anything, and it’s a great time for tenants to negotiate,” he said. “But you have to have a strong position to negotiate.”

Frodente, the renter in Clairemont, knew she and her husband were in that strong position when they approached the landlord, especially since she’d tracked the listing and knew the unit had been vacant for a month already.

The Frodentes hope to buy a house someday. But considering a mortgage payment on the $380,000 purchase price of a unit for sale three doors down from them, Frodente said she’s content paying $1,800, five percent less than her landlord’s original asking price.

“It’s great,” she said. “We still couldn’t buy in this complex; it’d be easily another $1,000 (a month) just to say we own.”

Some tenants are pushing for even greater discounts. When Jerry Mancuso’s landlords of six years decided to tear down and rebuild their house, Mancuso and his girlfriend began a search for a new place to rent. One open house caught their interest: a two-bedroom home in Del Mar with hardwood floors, a new kitchen, a pool and spa, close to the ocean.

Only problem was the rent: the landlords, who had given up on selling now because of the slumping market, were hoping to pull in $2,600 a month for a couple of years before trying to sell it again.

The couple had been paying $1,900, and they were willing to bump up a few hundred dollars but couldn’t swing that much. They offered to pay $2,200 a month and left the open house, just as several other people were pulling in to check out the property. A month went by, and Mancuso thought for sure the property had rented.

“We figured we insulted him by telling him $400 less a month,” said Mancuso, an editor at NBC 7/39, voiceofsandiego.org‘s media partner. “He called us a month later and asked, ‘Are you still interested?’”

They moved in three weeks later, committing to paying $2,200 a month, and to taking care of the landscaping themselves instead of a gardener. Mancuso’s discount — 15 percent — is far greater than the average decline in rents across San Diego County. But his story demonstrates the give-and-take of leasing a house while its owners wait to sell in a better market.

Watson, the Golden Hill landlord, isn’t complaining about dropping his prices. He said despite his reductions, he’s still earning more money each month than he’s spending on the mortgage payment. He chalked it up to a reality check.

“The guy at the watch store was selling Rolexes and taking vacations to Hawaii before, and now he’s back to selling Timexes, but he’s still putting food on the table and everybody can tell time just as well as they could before,” Watson said. “We’ve all set our standards back to something that’s a little more reasonable.”

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.