Sacramento isn’t a name anyone expects to hear when discussing top real estate markets on a national scale. But its recent apartment rent growth performance has heads turning.
Beginning in 2015, rents began to surge across the metro, a phenomenon observed across much of the western US. Other metros such as Portland, Seattle, the entire Bay Area, and Denver all experienced year-over-year rent gains that exceeded 8% in 2015, but of these metros, nearly all suffered dramatic drop-offs in 2016. San Francisco and San Jose even experienced year-over-year losses. This is displayed in Figure 1, where each blue diamond represents one of the top 54 US metros.
Indeed, Sacramento sustained this outsized growth for all of 2016. To put things into perspective, after 16Q4 the metro posted year-over-year growth above 9% for the sevent straight quarter. These gains have been especially inflated in prime suburban submarkets like Roseville/Rocklin and Elk Grove.
The explanation for this growth lies in one primary driver: a severe lack of housing stock. Figure 2 shows that since 2011, household growth in Sacramento has far outpaced single-family housing starts and apartment deliveries. During that time period, only about 1,400 new market-rate apartment units emerged throughout the entire Sacramento metro, placing it in the bottom two for apartment deliveries among the top 54 US metros. Construction costs are extremely high—similar to those in the Bay Area—deterring developers from breaking ground on new projects, since rents and NOIs don’t come close to those in the major metros to the west.
So how much longer will this growth last? A look at income growth may give some indication. In Figure 3, we can see that since 2005, rent growth and income growth generally trended in the same direction. But when rents took off in 2015, income growth stayed relatively stagnant at about 3%. This created a wide spread between the two variables that we’ve never observed previously in Sacramento.
As it stands right now, the average apartment unit in Sacramento commands about $1,200/month, while median household income is just $52,000—and only about half of that for current renting households. Average rents already account for more than 30% of income. Recently, rent growth has leveled off, and even hinted at the commencement of its initial descent. While developers continue to get their shovels in the ground at an increasing—albeit crawling—pace, most are still deterred by the high construction costs, lengthy approval processes, and fear that new product won’t achieve rents to make it worthwhile. As a result, landlords of existing product should continue to reap the benefits of tight vacancies and remarkably strong growth.