Landlords fight rising vacancy rates

Landlords are increasingly turning to rent concessions — such as free or discounted rent, a reduced security deposit or “free” amenities like parking — to attract tenants in 2023.

Here in California, the share of residential rentals offering concessions as of April 2023 is:

• 16% in Riverside, up from 10% a year earlier;
• 29% in Los Angeles, up from 22% a year earlier;
• 29% in Sacramento, up from 21% a year earlier;
• 42% in San Francisco, up from 33% a year earlier; and
• 46% in Santa Clara, up from 34% a year earlier, according to Zillow.

The only major metro in California with a lower share of rental concessions is San Diego, with 21% of rentals currently offering concessions, down from 23% a year earlier.

The slight rise in rental concessions is reflective of a bump in the rental vacancy rate, with California’s rentals experiencing a 4.1% vacancy rate in Q1 2023, up from 3.8% a year earlier, according to the U.S. Census Bureau.

Still, while the supply-and-demand imbalance is heading in the right direction — toward stabilization — the rental market is a long way from normal.

For example, the historical average rental vacancy rate is a higher 5.5%. Today’s rate of 4.1% is only slightly higher than the decades’ low of 3.6% experienced in 2016.

When vacancy rates are low, rents tend to rise faster than the pace of tenant incomes, resulting in the state’s infamously high housing costs.

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A return to normal isn’t enough for California’s rental market

Following the eviction moratoriums and extended noticing requirements of 2020-2022, pandemic complications in the rental market have finally wrapped up. With the end of tenant protections, the rental vacancy rate has bounced slightly in 2023.

But the overall vacancy trend remains low, as tenant demand continues to exceed the number of units available. This dynamic will continue until residential construction rises to meet the ever-growing need for housing — which it has yet to achieve in any of the years following the 2008 Recession.

Multi-family construction has lagged single family residential (SFR) starts since 2018. This is a symptom of the influence of vocal not-in-my-backyard (NIMBY) advocates on California’s already restrictive zoning policies.

However, state legislators in recent years have made it a priority to bring down housing costs by increasing California’s rental inventory.

While builders were gradually beginning to cash in on legislative incentives to build more multi-family housing, leaping mortgage interest rates and spiraling sales volume and prices have pummeled builder sentiment. Thus, residential construction starts will not reach their full potential until after the conclusion of the 2023 recession, with the recovery expected to pick up steam around 2027.

Taking the long view, lenders will also have a hand in the next construction boom. In 2023, credit remains tight as lenders attempt to shield their businesses from the losses accumulating in today’s slowing real estate market. But once lenders loosen their grip on mortgage money, allowing cheap money to flow freely, watch for the overbuilding of the mid-2000s to return — likely toward the end of this decade.

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