Rents gone wild: Sacramento is one of the hottest rental markets in the country

You come home from work to discover mail from the landlord. Bad news: The rent is going up. In 60 days. A lot. An extra $185. Every month.

This is what happened this summer to longtime Midtown resident Kristina. She’s called the artist lofts at Pensione K on K and 17th streets home since 2000, when she moved from the “vanilla suburbs,” as she called them, to her new urban digs. Back then, she was inspired by the loft’s quirky blank slate, its roll-up garage door, minimalist vibe and how it beckoned innovation.

Over the years, the building’s owners, San Diego-based Barone Galasso & Associates Inc., increased the rent by $50 more or less annually. But the letter stated that her rent, higher than the regional average $1,250, would be surging up to $1,435 a month.

“I feel gouged,” said Kristina, who requested to keep her last name private. “I feel that [the landlords] are jumping on the bandwagon.”

That bandwagon is the newest surge in local monthly rent costs. Midtown is the hot spot for this uptick; real-estate analysts say rents there are up 16.9 percent over the prior year, an increase more than three times the national average.

But it’s not just a central-city phenomenon. They’re up in Fair Oaks—13.4 percent over 2014. Rosemont and south Rancho Cordova jumped higher at 14.9 percent.

In November, Sacramento was the third-hottest rental-housing market in the entire country, according to real-estate analysis firm Yardi Matrix.

The River City trails only Portland and San Francisco—two cities notorious for brutal housing demand and eyebrow-raising rents.

Why is Sacramento on the rise? So many factors. Economic recovery and modest job growth. A sexy restaurant scene. The Kings arena. Ex-Bay Area types wanting more affordable living in the Valley. Millennials rejecting home ownership. Baby boomers ditching the burbs for smaller-footprint living in the urban core. And people scarred by the recession and fearful of locking into a mortgage, or who prefer the flexibility of renting.

But experts agree the foremost influencer in Sacramento is basic: too much demand, not enough supply.

Advocates for low-income renters worry this is driving old-school residents out. That people can ill-afford these new rents. Residents like Kristina.

“If I can weather this storm, I’ll stay as long as I can,” she said of her art loft. “But there can’t be another one. They can’t come to me with one more increase, not one more thing. I’d have to leave Midtown.”

The average Sacramento rent increased more than $100 a month during the past year. How did boring-old Sacto become this nationally recognized, sizzling hotbed of urban living?

Consider a damning statistic: Last year, Sacramento was the second-worst major market in the entire country when it came to the number of completed new housing units (as a percentage of total overall housing stock), according to analysis by Yardi. Which big city was in last place? Not San Francisco, not Portland.

Detroit.

Ouch.

Sacramento is home of the Kings, so we’re accustomed to cellar-dwelling. Still, this is the reddest of red flags. And there remain endless rungs to climb until Sacramento can even nip at the construction booms in cities such as Denver, Austin and Seattle (see chart on page 19).

So goes Sacramento’s unique misfortune: It’s a high-demand market, yet construction of new housing units remains pitiful.

The mayor says he’s on this, that there are thousands of new units in the pipeline. But developers still lament City Hall’s inflated fees and copious red tape. “We’ve got to figure out how to provide incentives for developers to build housing, to build rental housing,” said Jim Lofgren with the Rental Housing Association, a local group that represents property owners.

“The scarcity is what’s driving the prices up.”

But don’t underestimate the demand.

Harvard University’s Joint Center for Housing Studies released a report on December 9 that looks at demand for rental housing in the United States. “The decade-long surge in rental demand is unprecedented,” the study begins. So there’s that.

It also reports that, since 2005, the total number of families and individuals in rental housing jumped 25 percent, up to 43 million. A larger percentage of Americans rent now than during any period since the 1960s.

Harvard’s forecast in the 44-page report is grim: “[T]hese trends have led to record numbers of renters paying excessive amounts of income for housing, with little prospect for meaningful improvement.”

When Barone Galasso & Associates raised Kristina’s rent this past September, she banded together with her loftmates and visited the property manager. They asked him to relay a message to the owners: Please do not increase the rent in one big bump. Do half now, and half in six months, instead. Please.

Barone Galasso & Associates rejected the appeal. In fact, BG&A raised the rent even more.

On December 1, the landlord informed residents that it would be adding another $75 a month to their rent in the form of charging for parking spaces. Kristina says that these outdoor spots—no garage, not even a carport—had been free for the previous 15 years. When residents complained, BG&A told allegedly told them that “other loft spaces around you charge $150 a month for parking,” she said.

Her new monthly rent was now $1,510, if she wanted a parking space, up 20 percent in just half a year. That’s an extra $3,120 annually in payments.

The property manager at Pensione K did not return multiple phone calls to discuss Kristina’s claims. BG&A’s CEO did not return SN&R’s phone calls, and emails sent to info@baronegalasso.com and pensionek@baronegalasso.com bounced back.

Kristina loves her art loft. She says her landlords never performed any significant tenant improvements, not even new paint, but she made significant improvements to it herself—new fixtures and lighting and more—over the years. “So, I paid [for] it, because—oddly enough, as most of my family and friends from the Bay Area will tell me—you don’t know how good you have it [with Sacramento rents],” she said. That’s true: The median rent for an S.F. apartment is a skull-numbing $3,880 a month.

But that’s no silver lining for Kristina. “I find it, frankly, really unsettling and frightening,” she said of Sacramento’s rental-housing trajectory.

She did look at other properties before re-upping at the Pensione K art lofts, including apartments on Q Street near the Fremont Community Garden, where she was once a board member. “I was aghast that those were $2,500 a month for a one-bedroom.”

Her rent increase is legal under state law. BG&A provided a 60-day notice for their bump of more than 10 percent.

Lofgren sympathizes with renters subject to the hardship of excessive increases. “What we would all prefer is slow, steady predictable rent increases for everybody’s sake,” he said. But he also explained that the landlord-tenant relationship is fluid.

“We go through these cycles,” Lofgren explained. “We all forget about a few years ago when it was the other way around: It was a renter’s market, and owners were upside-down and were panicking.”

With all this rent drama, you’d think there’d be more numbers, more statistics on ZIP codes and rental costs and trending. But neither the city nor the county collects comprehensive data on rental pricing, so it’s difficult to pinpoint exactly how much people paid pre-recession and what they’re paying now. But there’s no denying that Sacramento was significantly more affordable for renters in recent years (see page 18 for testimonials on people’s first Midtown rent).

According to websites that collect local real-estate data (such as Zillow, Zilpy and Rent Jungle—none of which are considered nearly as reliable as Yardi), the average Sacramento rent was less than $900 for a one-bedroom as recently as the spring of 2014. At this same time last year, rent prices were ticking upward at a modest 5.5 percent, nearly on par with the national average.

Beginning in the summer of 2014, rent steadily bolted upward, all the way to the current 10.9 percent increase over the prior year, regionwide.

“And now Sacramento is beating out some major markets when it comes to rent growth,” said Yardi data analyst Dana Seeley.

Seeley says she attends real-estate conferences all over the country, and the No. 1 conversation at those gatherings is about millennials: How they are waiting to buy their first homes, and in turn pushing up rental-housing costs, because of too much student debt, or that they’re hesitant because of the recession, or that they just want to live in the urban core and not Rocklin. “There seem to be more reasons to rent in this day and age than to buy, and that [millennial] demand is driving up rent prices,” she said.

And Sacramento 2015 is a millennial city. According to the latest census data, the median age now edges into millennial territory, 34.1 years old.

Another issue driving the marketplace: There’s year-round demand for housing California. People don’t just move in the spring and summer, and this contributes to Sacramento’s climb.

“And some of [the demand] could be coming off of Silicon Valley,” Seeley said, especially for Midtown and downtown units. So, blame Google and Twitter, too.

On Craigslist this past week, there were few options for prospective tenants. SN&R found only two Midtown one-bedroom apartments for less than $1,000 a month on the site’s listings—and most options hovered well north of $1,400.

There’s this perception that the higher prices are being driven by new market-rate housing and “luxury lofts,” such as the Legado de Ravel apartments on 16th Street (one-bedrooms start at $1,675) or the 16 Powerhouse lofts on P Street (with unit prices into the mid-to-high $2,000s).

But it turns out that Sacramento is actually far below the national average when it comes to attracting well-paid renters with discretionary income, a.k.a. “choice renters,” who could easily afford a single-family home but prefer to live in urban abodes.

Sacramento actually saw a 0.3 percent dip in demand for “lifestyle,” or luxury-apartment housing such as lofts, in November, according to Yardi.

That statistic isn’t out of line with national trends. But it also speaks to developers’ reluctance to build more market-rate units in the urban core: There’s still not huge demand to rival primary markets in the Bay Area and Southern California.

And yet, the city—the region—clearly needs more housing.

John Foley, executive director of Sacramento Self-Help Housing, a group that helps find places to live for low-income renters, reminded that demand is not just in the urban core. “You see [rent increases] everywhere. You see it in South Sac, you see it in Rancho Cordova, you see it in Citrus Heights,” he said.

He explained that our “tight” market has well-off renters looking for the same housing as poorer tenants. “Folks that do have the income to pay the rent are, in a sense, being pitted against poorer folks,” Foley said. Landlords choose people with more income, of course. “And they’re pushing out the lower earners.” People end up moving out of their familiar neighborhoods to cheaper parts of town.

“And it’s not the American Dream to be downwardly mobile.”

Are these soaring rents a new normal, or is it all just a bubble?

“We thought that three years ago,” Seeley said of the bubble factor. “And it’s only inflated more.” She added that, unlike San Francisco or Denver, there are opportunities for infill and expansion in Sacramento, which means the current rental-housing surge might just be a beginning.

Her educated guess? “I would say that Sacramento’s going to keep going up, because it has the room for it.”

The region has yet to experience a truly booming job market as well, only simmering sectors. When job opportunities are more intellectually stimulating and matched by rousing cultural opportunities, housing demand tends to climb further. For instance, if Sacramento’s health-care sector continues to expand, what with the new Kaiser Permanente hospital coming to the downtown railyards, experts say that could further increase rents.

Lofgren seemed to think, however, that Sacramento wouldn’t be able to sustain this level of rent increases. “We’ll cool off, and I think that cooling-off cycle is coming,” he told SN&R. He said that once a rental-housing market is tagged as hot, it’s already on its way back down.

Or maybe not.

Consider the situation up north in Portland, arguably the most explosive rental-housing market in the country for years now. Rip City’s vacancy rate is below 3 percent—Sacramento’s is about 8 percent, according to the most recent census data—and city government there actually intervened to assuage the trend of hasty evictions and stark rent increases.

Portland passed an ordinance this fall requiring 90-day notices for any rent increase of more than 5 percent. Property owners were outraged, calling the new law a form of rent control, and a lawsuit was even filed against the city last month.

Housing developers in Sacramento would like to see the city intervene— but in a different way.

Josh Wood, the political firebrand and executive director of Region Business, a group that represents Sacramento developers, said the city needs to “get moving” and step up to the challenge of housing demand. He cited three major things the city could do to spur new development.

The first, lower city and impact fees for projects. “City fees are 30 percent too high,” he argued. And he said lowering fees, even in the short term, by as much as 50 percent, would spark new construction.

Second, come up with a way to help subsidize costs for central-city infrastructure improvements. The only ways to do this are by sales tax, bonding or an improvement district that taxes property owners—all far-off solutions.

“But we’re not going to get large downtown development unless we get an infrastructure sales tax. I’m not advocating for it. I’m just being real for what it would take.”

Finally, he’d like to see the city complete what is called a “programmatic EIR,” or an environmental-impact report for an area, such as Midtown, so that a developer can tailor a project to the report without having to go through the costly and often litigious environmental-review process.

The city did not respond to email requests to discuss these concerns by deadline.

Wood wasn’t terribly optimistic that the city can fix this “very slow” development process. “There’s not even a goal,” he said.

Jamie Lake lived at the Cherry Blossom Apartments in the Arden-Arcade area for nearly a year when she got the news: The complex had been sold, and the new owners were kicking everyone out and raising the rents.

“They just sent me a statement, that they transferred ownership, and they decided to evict all the tenants who didn’t renew their leases” at the higher rates. (Cherry Blossom Apartments did not return SN&R’s call by deadline.)

Lake says her two-bedroom, at $775 a month, was wildly more affordable than what she discovered out there as a prospective tenant. “It sucked. It was terrible. And I looked and looked for an apartment, but it was so hard,” she said. “Anything for $775 or less wasn’t in too good of an area.” She’s tried for six months, but still hasn’t found a new place.

And now she’s left Sacramento to live where it’s more affordable, in Vacaville with family. “I’m saving up my money so I can have a little bit more to start,” to pay down-payments and higher rents. Lake’s goal is to finish her paralegal studies, which she says will take another eight months of school in Sacramento.

There’s growing concern in the city and across the country that, because wages have not kept up with the cost of renting, more and more people won’t be able to ink that rent check at the first of the month.

A study released in October by Apartment List claimed that 54 percent of Sacramentans spend more than one-third of their net income on rent—and more than half of these renters are “severely burdened” and spend more than 50 percent of their income on rent.

The Harvard University study echoed these findings. It also reported that households with children or seniors are disproportionally cost burdened. Minorities are also severely burdened: 33 percent of blacks and 30 percent of Hispanics pay more than a third to half of their income on rent, compared with just 23 percent of whites.

“The difficulty they have in getting enough money together each month is an increasing difficulty,” Foley with Self-Help Housing said of the disparity between people’s income and housing costs. “The increased gap over the last several years is now a chasm.”

He explained how more and more people are calling his office with rent-increase related issues. From June 2014 to June 2015, 170 of 1,173 callers in the unincorporated county dialed SSHH for help with rent-increase issues. But in just five months, from July to November of this year, 466 of 1,159 calls were about increases in rent.

“I was surprised at the large percentage increase in rent increase related calls!” Foley wrote in an email.

During this period, both the city and county of Sacramento eliminated a requirement that all new developments include a percentage of units for low-income tenants. Instead, developers now pay into a fund that officials say will help finance new affordable housing.

But Foley and other critics are dubious. He says this fund will not bridge a gap. And he’s asking that the mayor do more. “He’s a pretty creative guy. Maybe he and others can figure out ways to raise quite a lot of money to deeply subsidize [affordable] units,” he said. “I don’t know if you tax basketball seats or [what], but you’ve got to do something.”

Until then, prospective renters such as Lake keep toiling away at low-paying gigs and watching the Sacramento rents surge higher.

“It’s really bad, because I wanted to finish school so bad,” Lake said. “How do people expect us to live when minimum wage doesn’t go up but my apartment rent does?”

This story incorrectly reported the rent increases at Pensione K’s art lofts. The increases first reported were 11 percent higher than the numbers in this version of the story. Our writer regrets that error.