Why

Why Are Market Rents Taking Off?

This is a question that we are being asked almost daily. We are receiving multiple calls a day from people looking for properties who can’t find them, and if they do find one, it is exorbitantly priced. We think this is a multi-faceted problem that might not go away with Covid. Covid is a factor, but this seems to be a more complicated problem. We also believe that these multiple factors have coalesced and caused an even greater problem which is largely related to low turnover.

Covid-19

Let’s begin with the obvious factor. Covid-19 has drastically affected rents in multiple ways. First, people have put off moving as we have gone through this pandemic. People hunkered down during the Covid and decided that the hassle of moving was not worth it. Many people started working from home or were not working at all and therefore had no ability or need to move. This drastically reduced the supply of available housing.

The 2nd factor of Covid was the eviction protection provided by the state of California. The protection from eviction for nonpayment of rent was not only a protection for people suffering financial problems due to covid but also prevented the eviction of people unable to pay rent for other reasons.

Since there was a low barrier(practically non-existent) of proof that you suffered financial problems due to COVID, tenants who couldn’t pay rent due to other factors could use the law. We found that approximately 25% of non-payers were not suffering financially due to COVID. The two different categories of non-paying tenants affected prices in slightly different ways. People who can’t pay due to Covid financial issues are causing owners to lose rent.

Those owners are then pushed to raise rents on existing paying tenants and increase the rents on vacant units to make for the loss of rent due to the COVID.

People who aren’t paying due to other reasons but are still protected under the law cause the same problems as the previous group and impact the regular vacancy rate. These people in a normal market would either be evicted or move on their own.

Lifestyle

The next factor for the increase in prices is the change in our overall lifestyle. As more and more people work from home, they save money and time due to commutes. They are no longer forced to live in the area where they work, and individuals who are still working may have more disposable income due to a lack of transportation costs. Having more disposable income raises prices in an obvious way. In addition, as people spend more time at home, they are more willing to pay an increasing amount on rent due to the increased amount of time they spend at home.

The same goes for saving money and time on the commute; more money is directed to their rent. The last factor in this group could be the most impactful. As tenants move out of their work area, they are flooding lower-priced markets. This is especially important to Long Beach as we are a lower-priced rental market compared to a lot of the markets that are geographically close to our city. This is affecting the rental market in two ways.

There are a larger number of people looking for rentals in Long Beach, which is increasing the demand for rentals at a time when there is a decrease in supply. The 2nd way is that people coming from higher-priced markets are usually making more and therefore can spend more money on rentals.

Another reason for a price increase is that people aren’t moving because they can’t afford it. There seems to be a drastic decrease in intercommunity moves. Because there is a drastic rise in prices, people who would typically move to another property in the community can’t justify paying significantly higher prices for a property that isn’t a significant upgrade.

AB 1482

The last factor is AB 1482. Please look at the previous blog post for a more in-depth analysis of this law. AB 1482 has three major factors that are affecting our rents.

The first and most important is the just cause eviction portion. This portion of the law fundamentally changes your ability to control who lives in your building and your ability to remove those people who are problems. It is now significantly harder to remove people from a property who violate the lease in ways other than nonpayment of rent. Since bad tenants are harder to remove, a lot of landlords either can’t or are unwilling to try and remove the tenants who are misbehaving.

With fewer tenants being evicted or given the notice to move, this will cut the number of vacancies, decreasing the amount of rental supply. It is also conceivable that problem tenants tend to get higher rent raises. This would most likely be considered retaliation, but it could also be a possible source of higher rents. Both of these are not major drivers of higher prices but should be considered contributing factors.

The 2nd part of AB1482 is the rent control portion. For all of California, you are limited to a 5% plus cpi with a maximum allowable rent raise of no more than 10% unless you fall into the exempt category. This year in our area of Long Beach, the total possible rent raise came out to 8.6%. This isn’t prohibitive, but this law encourages more owners to give out rent raises and higher rent raises than they usually would.

The last part of AB 1482, which conceivable increases rents, is the provision requiring all landlords to accept Section 8. We can’t be certain because I have not seen an increase in landlords with Section 8 tenants. But historically, we have seen that Section 8 is willing to pay higher than the market price to place their tenants.

So often landlords would be getting a premium when renting to a Section 8 tenant. It’s hard to know if this is a significant factor in rising rents but combined with everything else in this article; it may be a factor.

Final Thoughts

We expect the market to cool off as soon as the tenant Covid protections are lifted, but we are also aware that these are not all the factors. The days might be gone when you can get a reasonably priced rental in Long Beach compared to the surrounding areas.

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