Vacancy Trends in 2020
For multifamily owners in restrictive, rent-controlled markets like Oakland, vacancies are commonly viewed as opportunities to bring depressed, underpriced units up to market rent. It’s the chance to capture higher rental rates; maximize annual cash flow and profitability; and increase overall value of an asset.
This was exceptionally true between 2011 and 2017, when Oakland’s unprecedented demand created a market imbalance favoring landlords. Units were absorbed in record breaking time; rents rose dramatically; and vacancy rates dropped – especially the well-maintained properties in safer, desirable submarkets like Grand Lake, Rockridge and Piedmont Ave.
But in the last 24 to 36 months, Oakland’s rental market has seen a surplus of inventory which has created new challenges for local multifamily owners. As neighborhoods continue to gentrify, and new, multifamily construction projects deliver thousands of units to market, we highlight five vacancy trends to expect in 2020.
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SUPPLY > DEMAND
While Oakland commands some of the highest rental rates in the nation, and long-term forecasts remain optimistic with steady population and broad-based job growth, (see San Francisco Chronicle’s Why Oakland Is Booming), competition will remain fierce in the interim, requiring landlords to get creative when it comes to impending vacancies.
According to Co-Star, supply currently outpaces demand in East Bay markets, particularly in Oakland. Historically, less-desirable submarkets like West Oakland, Mosswood and Temescal have gentrified and grown in popularity with revitalized business growth, rehabilitated properties and more convenience to public transit – all at lower, comparative price points. Owners in these submarkets have capitalized by addressing deferred maintenance; updating landscaping for added curb appeal; and modernizing both interior and exterior design to attract the Millennial and Generation X demographics who crave convenience and neighborhood flare.
Additional pressure is coming from the influx of luxury apartments. There are currently ten notable luxury living developments with hundreds of units each – and all are aggressively luring new and existing Oakland residents to their properties. These communities include: MacArthur Commons; The Broadway; The Baxter; Idora; The Hanover; The Grand; Mason at the HIVE; 17th and Broadway; The ZO; and 777 Broadway.
Each of these new developments offer modern, sleek design and state-of-the-art cabinetry, countertops, appliances and fixtures. More importantly, they offer residents a slew of amenities – rooftop decks with fire pits and BBQs; fireplaces for social gatherings; game rooms; pet services; bike storage and repair; package delivery systems; and convenience to ground floor retail and public transit.
With several other notable projects underway and/or nearing completion, expect to see luxury living capture the highest echelon of Oakland renters.
CONCESSIONS MAKE A COMEBACK
While the luxury product-type is vastly different and incomparable to older multifamily buildings in Oakland, it is imperative to note: in today’s stringent rent-controlled market, most landlords are vying for the same, highly sought-after renter pool. To maximize results, rent concessions have made their way back into the fold, with offers including anywhere from 4 to 8 weeks free rent, in addition to “Look and See” signing bonuses ranging from $500-$1000.
In an effort to keep price points as high as possible, rent concessions will be commonly adopted by both luxury living and mom-and-pop landlords to fill vacancies.
EXTENDED LEASE-UP TIMES
In our fiercely competitive rental market, multifamily landlords should also expect longer lease-up times. In previous years when demand outpaced supply, renters were pressured to secure desirable units as quickly as possible. Today, these same tenants are faced with an abundance of choice when it comes to securing their next lease.
Popular rental websites like Craigslist, HotPads, Zillow and more are flooded with listings, trying to capture attention with catchy taglines. And with various neighborhoods, product types, concessions, offers and amenities to consider, renters are carefully weighing all options and taking their time before proceeding with tours and application submittals.
All of these factors are contributing to extended vacancy periods, which inevitably create a more frustrating, time-consuming and costly process for multifamily landlords.
FLEXIBLE TERMS
Rather than the standard one year term, some landlords are starting to loosen timelines to accommodate the varying needs of renters. By creatively offering an alternative to the traditional one year commitment, these multifamily owners are opting to secure leases quicker, even if it means repeating the turnover process sooner than later.
Continue to see this trend more prevalent in the winter months, when leases expire in the desirable spring and summer seasons in an attempt to capture higher rates once more.
REDUCED RENTAL RATES
Rent reductions are never the optimal outcome of any vacancy, but some landlords will be forced to lower rates to speed up the process, minimize loss and secure a strong tenancy. For instance, a two-bedroom, one bathroom unit that once commanded $3000/month might now go for $2700/month, while a one-bedroom condo which was collecting $2850/month is now renting at $2500/month.
While developers hold the burden of maintaining the market’s highest rental rates for their institutional partners, smaller multifamily owners will have the flexibility and competitive prowl to strategically use price as a means of achieving the most optimal outcomes.
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FINAL THOUGHTS
Short-term, today’s supply-heavy market has made vacancies less opportunistic than years past. With thousands of options available to renters – in various submarkets, at varied price points, with an array of offerings and incentives – it has become more challenging for established landlords to secure the coveted, creditworthy crowd.
Long-term, demand will catch up with supply once again, especially when companies like Square, Blue Shield, Kaiser Permanente and others settle into the East Bay permanently, and construction slows thanks to the City’s imposed impact fees.
In the meantime, use any of the above strategies to fill units as quickly and efficiently as possible, with the primary goal of locking in the strongest quality renters ASAP.