Renters regain some power as rent growth stalls

Rent increases are starting to ease or even slide in some markets in California, as an abundance of apartment communities become available and more pandemic price-gouged residents are passing on renewing leases.

Consumers are embracing their newfound power after enduring hefty rent increases during the past three years. Some are asking for cheaper rent from landlords while others are looking for lower-priced housing options and passing on renewing leases.

It’s a dramatic turnaround, especially in several cities where rents soared in the early days of the pandemic. 

For example, new apartment rents in Anaheim, Fresno, Riverside and San Diego are up 20% or more since March 2020, according to a new Apartment List report. But those double-digit gains are easing into little, if any, rent increases during the past year (see chart, below).

RENTERS HAVE ‘A LOT MORE OPTIONS

As buyers gain some control in the home-buying market, renters are flexing their muscles and taking advantage of the lower rates.“Renters facing lease renewals suddenly have a lot more options,” says RealPage economist Jay Parsons, who adds that more landlords may drop rents in order to stop residents from moving.

Indeed, about half (53%) of renters renewed leases nationwide in January, the lowest level for that month since 2018, according to RealPage. In California, about 60% of renters renewed leases in Orange County, while the figure plummets to 42% in San Francisco. 

The hold-on-a-minute approach by many renters on renewing leases at record-setting rental rates comes as the economy and the housing market struggle. 

Many Bay Area companies, from Alphabet (aka Google) to Facebook parent Meta Platforms, are laying off employees, causing some renters to look for lower-priced housing or relocate for new positions. And many Californians are concerned about an economy that teeters closer to recession and possibly more layoffs. And, of course, some simply cannot afford to rent.

Keep in mind …

Most rental reports are based on new rental contracts. Current tenants may have lower rates, especially those with longer-term leases.

Also, the California Protection Act of 2019 limits annual rent increases to no more than 10% for tenants who have lived in their apartments for more than a year.

BUY OR RENT? CHOICE BECOMES EASIER WITH FALLING RENTS AND RISING MORTGAGE RATES

Renters in almost half of California’s 58 counties spend more than 30% of their income on housing, the widely accepted threshold of being cost-burdened, according to the U.S. Census Bureau. 

But even with the hefty cost, renting remains a better financial choice than purchasing in much of California, according to the latest ATTOM data report. And the decision is getting easier with the lower rents in recent months.

Nationwide, rents inched up to $1,942 in January, a 2.4% increase compared to a year ago – the smallest gain in 20 months, according to Redfin. Half of California’s six largest markets beat the national average, but Los Angeles, Sacramento and San Francisco barely budged from a year ago. San Diego had the largest annual gain at 4.7%, followed by Riverside at 3.5%. (All of those annual gains are lower than the inflation rate.) 

Rent for a two-bedroom apartment in San Francisco has remained steady the past year — but has plummeted 13% since March 2020. Shutterstock

“We’re watching closely to see whether rents start falling year over year,” says Redfin chief economist Daryl Fairweather. “That would be a welcome relief for renters because it hasn’t happened since the onset of the pandemic. If rents do start falling on a year-over-year basis, it will mean that renters have more room to negotiate. It may also prompt more landlords to sell their properties because they’re no longer getting a good return on their investment.”

That could boost the critical shortage of homes on the market and help the pocketbook of renters, many of who are hoping to save enough money to purchase. In turn, declining rents would impact the inflation rate, possibly prompting The Federal Reserve to hold off on another round of interest-rate hikes that have put a deep freeze on the housing market.

Feature photo of apartments in Menlo Park/Shutterstock

Rents of select cities in California in January compared to a year ago

CityJanuary 2023 Rent% Gain/Drop from A Year Ago
San Francisco$3,641+1.2%
San Jose$3,525+3.9%
Los Angeles$3,402+0.8%
San Diego$3,290+4.7%
Riverside $2,747+3.5%
Sacramento$2,746+0.5%

Source: Redfin