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Perkins on Real Estate

Rents in the Silicon Valley rise, in some places by double digits

By Broderick Perkins

Housing consumers can't seem to get a break in Silicon Valley.

Just as the for-sale sector of the housing market looked like prices would take a tumble, a chunk of Silicon Valley's rental market is revealing double-digit rent inflation--a level of rent hikes not seen since the first quarter of 2001.

The average rent rose 10.4 percent from $1,314 a month in the third quarter 2005 to $1,450 this year, according to Novato-based RealFacts.

Granted, RealFacts' database includes rents only from apartment developments with 50 or more units, but the double-digit rent hike is the first since the first quarter of 2001 and just which rents are increasing most is telling.

Within the 50-plus apartment sector, RealFacts tracks everything from studios to three-bedroom townhomes, and among the hottest Silicon Valley apartment properties were those considered starter rentals, typically snatched up by first-time renters and newcomers.

Studios ($1,007 a month), junior one-bedroom units ($1,105 a month) and larger one-bedroom apartments ($1,296 a month) all netted average rent increases of more than 11 percent in the past year. As a group, the three types of units comprise more than 50 percent of RealFacts' Silicon Valley database.

Renting for an average $1,828 a month, only two-bedroom, two-bath townhomes came in with a larger increase, 12.1 percent over the past year.

Eric Wieger, executive director of the Tri-County Division of the California Apartment Association (covering San Mateo, Santa Clara and Santa Cruz counties) says job growth is putting the pressure on rents as new workers flock to the area for jobs.

"The economy is improving. People are coming into the valley for jobs, and when they get here they need a place to live, and it's too expensive to buy a home. Renting becomes the preferred alternative very quickly," he said.

Even with the median single-family detached home price $51,000 less than it was three months ago, home prices remain out of reach for many. The median price of homes in closed sales in September was only 5 percent ahead of last year, but up from $733,000 last year to $769,000 in September.

Wieger said the market is also suffering reduced inventory because few apartments were constructed during a housing boom that generated demand for owner-occupied housing.

"There is not a lot of stuff in the pipeline right now," he said.

There's still some silver lining in another rental sector. Wieger, who is working on a count of the segment of the rental market RealFacts doesn't count, said those offer relatively cheaper rents.

"There's a lot of the market they don't cover. There are smaller communities where people rent out duplexes and fourplexes, and they are not captured in that data. I don't believe smaller people are pushing 10 percent," Wieger said.

RealFacts says rent growth for communities in its database is now de rigueur and expected to continue well into 2007 with a trickle-down effect on smaller communities.

"Rent growth rates might even accelerate as the 'follow the leader' effect kicks in, and more conservative owners start to raise their rents as they see the success of the market leaders," said Chris Bates, RealFacts' sales and marketing director.

He said concessions common just a year ago to lure potential homebuyers to the apartment market have all but disappeared.

"Both the landlord and the tenant are looking for six months to a year leases. Renters are thinking maybe prices will come down a bit, and landlords are not looking for month-to-month leases," said Sylvia Hill, broker/owner of HMS Development, a San Jose-based property management company that specializes in single-family home rentals and commercial property.

By city, San Jose saw rents rise only 8.4 percent to $1,377 compared to the greatest jump, 17.5 percent in Mountain View, where rents averaged $1,549 a month. The smallest increase was in Milpitas, where rents rose only 4.1 percent, but with one of the county's highest occupancy rates (97.7 percent), that market commands rents that average $1,405 a month.

Elsewhere in the county, the highest rents were in Palo Alto, up 6.8 percent to $1,810 a month; Cupertino, up 11.2 percent to $1,771 a month; and Los Gatos, up 14.3 percent to $1,557. All three towns had statistical samples.

In other towns tracked, Sunnyvale's average was up 11.4 percent to $1,399; Santa Clara, up 13.4 percent to $1,546; Campbell, up 10 percent to $1,262; and Gilroy, up 14.7 percent to $1,557.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.