Rents remain steady in the Bay Area — but perhaps not for long

Rents have stayed steady for most of the year in the Bay Area — but the trend might not continue for long.

As mortgage rates inch closer to 8% — their highest level in 23 years — more would-be homeowners are waiting on the sidelines, continuing to rent, which is driving demand for apartments.

“A lot more people are going to choose to rent instead of buy because of mortgage rates, and that will push rents up,” said Daryl Fairweather, chief economist for Redfin, an online real estate brokerage that tracks home sales and rental prices.

Rents have fallen 1% year-over-year across the Bay Area, according to data from real estate information company CoStar. That’s a savings of $25 a month for a $2,500–per-month rental.

Across the country, real estate pricing stayed mostly flat, growing by a meager 0.7% since last October. The average asking rent for an apartment in the third quarter was $3,011 for San Francisco and San Mateo counties, $2,925 for Santa Clara and $2,389 for Alameda and Contra Costa counties.

For the last three months, Alex White, 30, and Elizabeth Montes, 27, have been looking for a place in Oakland to buy together, but high interest rates have caused them to slow their search.

“It’s hard to justify right now,” said Montes, standing outside of an open house last Sunday in Oakland. While she and White have been saving the last few years for a down payment, interest rates have made it hard to nail down a budget.

“The target just keeps moving,” she said.

Rents are mostly back to where they were pre-pandemic, but home prices are far more elevated. The median Bay Area home price increased from $1 million in March 2020 to $1.3 million as of September, according to data from the California Association of Realtors, an increase of about 30%. Higher interest rates also mean buyers’ budgets are shrinking — for every 1% increase in rates, buyers tend to lose 10% of their purchasing power.

In part, rents haven’t budged because the Bay is still feeling the impact of pandemic migration. The nine-county Bay Area lost a net 292,050 people between February 2020 and April 2023, the Mercury News previously reported.

“We are seeing people come back, but not in tidal waves,” said Drew Hudacek, chief investment officer at Sares Regis Group, a real estate development company that manages 14,000 units across Northern California.

Adding to the tepid demand, the Bay Area is seeing several new projects coming onto the market — CoStar estimates that about 3,843 new units have been delivered across the Bay Area since the beginning of the year. Those new units mean more choice for renters, cushioning them from greater rent increases, Hudacek said.

Some regions of the Bay have been quicker to absorb those new units than others. In Santa Clara County, the vacancy rate is 5.2%, versus around 7% for the East Bay and San Francisco.

Ryan Wagner, a senior managing director of capital markets at JLL, which specializes in multifamily units, said that may be a result of shifts in lifestyle during the pandemic.

“Many of the people who moved to the suburbs may be reticent to move back to the urban core,” Wagner said. Meanwhile, in urban centers like Oakland, new apartment developments are enticing renters with “some of the highest concessions in the Bay,” he said — including up to three free months of rent and $2,000 move-in bonuses.

Still, the Bay Area faces a constant shortage of housing units, keeping rents from dropping significantly. The region needs to approve 397,000 new units by 2031 to meet the state’s housing mandate.

“In places with a lot of new construction, rents could fall — but that’s not the story here,” Fairweather, the Redfin economist, said.

Silicon Valley is expected to see more rent growth over the next five years than any other metropolitan area in the country, he said. Leases signed by AI companies around the Bay Area are one sign that, despite the advent of remote work, the tech center’s center of gravity hasn’t shifted.

“There’s no question: there have been tech layoffs, but it seems like tech has somewhat righted the ship,” Wagner said. “These companies will drive steady job growth and wage growth, and therefore rent growth.”