Suburban neighborhoods have seen a greater increase in the number of residential renters than urban centers from 2011 to 2015, according to an analysis of 20 U.S. metro areas.

This trend persisted in California, though renter growth in urban neighborhoods trailed closely behind in most metros:

 

CA metro

Suburban renter growth Urban renter growth

Riverside

23% 13%

San Francisco

10%

6%

San Diego

9%

8%

Los Angeles 7%

5%

 

The data suggests renters are deserting the city for the suburbs, preferring quiet outlying neighborhoods to busy urban cores. But is the trend indicative of a change in renter preference, or the result of market factors?

Evaluating renter demand, rent prices and home construction in the suburbs and cities reveals more at play in the growing number of suburban renters.

Demand for rentals

It’s no secret renting is quickly becoming a more dominant housing type in California.

The state’s homeownership rate, already historically below the national average, has steadily dropped in recent years. As of Q4 2016, the homeownership rate is at 54.6%, down from its peak of 60.7% in 2006.

As homeownership continues to be a struggle for buyers, more residents are compelled to enter the rental market. In fact, from 2011 to 2015, renter household formations increased 6.5%, compared to a mere 1% rise in owner household formations.

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Renting and owning across counties

So, we know demand for rental units is on the upswing, spurring a notable increase in the overall number of renters — both urban and suburban. The question now is: where are these renters moving to and why?

Location, location, location

Though California has long held a suburb-oriented housing market, recent demand for urban housing has climbed as residents are lured by a higher volume of jobs, amenities and entertainment venues.

Generation Y (Gen Y), in particular — those making up the majority of first-time homebuyers — are known to prefer city living over a suburban lifestyle, driving up all housing demand in city centers.

However, when urban rental demand soars, rental prices in urban neighborhoods also increase.  One quick search for vacant apartments shows an upward trend in rental prices the closer a property is to the city center — contributing to a severe rental squeeze throughout the state, with some rental markets requiring a renter to spend an average of 48% of their income on rent alone.

As urban demand and rental rates explode, many of California’s aspiring city dwellers cannot afford the cost of urban living and are left to settle in the suburbs.

Further increasing the number of suburban renters is the slowdown in suburban home construction. Developers, taking notice of the growing demand for urban housing, have set their sights on the city.

Thus, while urban home construction has increased (yet continues to be outpaced by demand), home construction in suburban neighborhoods has stagnated.

Those homebuyers who seek ownership in the suburbs are now met with a highly competitive market and increased home prices, often causing them to extend their status as renters.

Not only are these market factors driving up the number of suburban renters, but they have also resulted in the suburbs experiencing the fastest-growing rental rates over the past year alone.

With urban living often out of reach, California renters will continue to overflow into suburban rental markets. Expect the number of suburban renters to increase, followed by growth in suburban multi-family construction that will help level inflated rental prices.

Suburban rental growth will also slow when urban zoning restrictions are amended, allowing for more multifamily construction in cities to accommodate more renters. Only then will inventory begin to meet high renter demand and rent prices stabilize in both urban and suburban neighborhoods.

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