Silicon Valley’s apartment market has taken a sudden turn in renters’ favor after months of spiraling rent increases.
Vacancies are up, asking rents are being lowered as much as 5 percent and move-in discounts are back for the first time in 18 months. In San Jose’s Japantown, one landlord is offering $500 bonuses to tenants who help find new renters and is luring passersby with the once-ubiquitous street-corner sign waver.
The change seems to be at the top end of the Bay Area apartment market. Hit with a rising number of vacancies, large apartment complexes from San Jose to San Francisco to Walnut Creek have begun making changes.
“The general consensus is that business is pretty slow,” said Killian Byrne, vice president at Vasona Management in Los Gatos.
Vacancies often rise, and rent increases taper off during the holidays. But this year, Byrne said, interest from prospective renters slackened and has not picked up.
“This is a trend that we haven’t seen in four or five years,” said Byrne, whose firm manages 3,800 units in the Bay Area.
After rising 30 to 40 percent in the first three quarters of 2000, rents in the core Bay Area counties remain among the highest in the nation. For example, landlords were asking an average $1,732 for a one-bedroom apartment in Santa Clara County during the fall.
But those in the rental industry said a definite softening began in November and continues despite record-low unemployment — 1.3 percent in Santa Clara County.
The managers of two large Bay Area apartment portfolios said their vacancy rates had risen to 4 percent and 4.5 percent. That is well above the September countywide rates, which were between 1.1 and 2 percent in Santa Clara, San Mateo, Alameda and San Francisco counties. The last time vacancies were at 4 percent was in 1998 during the Asian financial crisis.
Newspaper classified ads show a clear trend of rising vacancies, as does a check of listing services such as Bay Rentals.
“We’ve got 3,000 rentals listed right now from Hollister to San Francisco, including the Monterey Peninsula, Marin County and East Bay,” said Bay Rentals chief executive Ron Stern. “We had 1,700 through November.”
The depth of the rental trend is hard to measure, because statistics for the fourth quarter are not yet available. And those statistics measure only apartment complexes of 50 units or more — about 20 percent of the Santa Clara County apartment market.
But the situation is a stark turnaround from the spring and summer, when apartment-seekers stood in line for applications and rented apartments, sight unseen, over the phone.
Bassem Gerges began looking for an apartment in August, when apartments were being snapped up within days, but postponed his search. When he started looking again in November, he noticed a big difference. Listings were on the market much longer, and prices were going down.
He finally rented a two-bedroom apartment in Sunnyvale in December and paid $100 less than the asking price of $1,900 a month.
Vasona Management reduced asking rents by $50 to $100 a month on a fifth of its properties during the fourth quarter of 2000. It also lowered rent increases for tenants whose leases are coming due.
During the first six months of the year, those tenants received rent increases of 15 percent to 20 percent. Now, the increases are 9 to 10 percent.
The 56-unit Bay Tree Apartments in Los Gatos is advertising $500 move-in specials to attract people to the creekside complex, which asks $2,800 a month for a two-bedroom and $2,300 for a one-bedroom place. Those prices have been reduced by $100.
Anecdotal information suggests that vacancies are still tight for moderately priced apartments.
John Watson, a software engineer at XO Communications who moved to California Dec. 9 from Saginaw, Mich., tried in vain to find a one-bedroom apartment for $1,200 to $1,300.
“The higher the price you went, the more vacancies there were,” he said. “I didn’t have a problem finding apartments at $1,600. But when I was looking for $1,300 to $1,500, it was slim pickings.”
He settled on a studio in San Jose for $1,300 — twice what he was paying for a three-bedroom house on an acre in Michigan.
Experts say there are several reasons for the drop in demand for more expensive apartments. Rents have risen so high it makes more sense to buy a home, especially with falling interest rates.
“Thirty percent of our move-outs were buying homes or condominiums” between August and November, said John Pringle of Ventana Property Services in Menlo Park, which manages 7,500 apartments.
But Pringle said more recently it appeared that Internet-related layoffs also are playing a part. He said a handful of luxury apartment complexes in Santa Clara and San Mateo counties had recently cut asking rents 3 to 5 percent.
“No one’s hitting the panic button,” Pringle said. “But it’s clearly a better market for renters than it was.”
Some suspect the apartment slowdown is merely part of the season.
“Nobody really wants to move during Christmas, during the New Year,” said Tess Nonato, manager of the Villa Serra 336-unit complex on Homestead Road in Cupertino, which is 4 percent vacant. “Companies are not hiring. It’s picking up. We rented a lot of apartments last week.”
A 4 percent vacancy rate is still low compared with other parts of the state and country. But that rate is high for Silicon Valley and usually means rents will stop rising.
“It’s enough to keep the rate of growth flat,” said Kathy Thibodeaux, who heads the Tri-County Apartment Association, which represents landlords in Santa Clara, Alameda and Santa Cruz counties. “We had that for the first half of the ’90s.”
One analyst predicts rents will grow modestly, about 9 percent this year in Santa Clara and San Mateo counties. But that’s assuming the vacancy rate is at 2.5 percent. If the rate climbs higher than that, said Rehmat Kharal of Marcus & Millichap’s Palo Alto office, rent increase rates could easily remain flat.
