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Residential rents increase as supply drops, demand surges

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There has been a lot of media attention recently on the housing market’s recovery, and how homeowners with underwater mortgages are seeing their homes appreciate in value, as buyers and investors chase down a scant supply of for-sale homes in desirable neighborhoods.

But improvement in the residential rental market is still news that is under the radar.

Limited supply is driving up demand and rental fees for apartments, condominiums and single-family homes in San Diego County.

The Daily Transcript checked in with two veteran property management firms that manage a mix of rental properties across the county, to see how rents are trending and which neighborhoods are doing well.

Tiffany Wharton is vice president of REIT for the West Coast for Gables Residential, which develops, owns and manages apartment complexes across the United States. The San Diego office manages 7 Gables apartment communities throughout the county. Wharton is a 26-year industry veteran.

Tiffany Wharton

Bill Ausen is the broker at American Heritage Properties, which specializes in managing condos and single-family homes in San Diego County. Ausen has been with AHP for 25 years and with a staff of 25, manages 1,200 properties.

Bill Ausen

Q: During the recession, it looked like rents had leveled off and lease terms had more flexibility. Have things changed in the last year?

Wharton: There has definitely been a change and overall improvement. Over the last year, we have seen a 4 percent increase in net effective rents at our communities located in downtown, central San Diego and North County. North County has led the market with 4.6 percent net effective rent growth, followed by Central San Diego at 4.4 percent and Downtown at 1.8 percent.

Ausen: Over the past 12 months, we have seen a moderate decline in inventory, with a fairly constant demand. This combination has created an increase in rental values in most communities. Our leases have remained at one year, but we have seen more and more tenants requesting two-year leases. There are no communities that we service that experienced a decline in rental values. Some have improved more so than others, but none have declined.

Q: Do you think it's a tighter market now? Why?

Wharton: Definitely a stronger and more confident market today. Each of our markets has shown signs of improvement in occupancy and rent growth, all benefitting from limited supply to date. We have also experienced local employment growth in the professional sector, predominately engineering and other technical fields in central San Diego. We do anticipate that scheduled deliveries will impact rent growth in the near-term, across the board.

Ausen: We have been experiencing a tighter rental market. Over the past 12 months, there appears to be some growth in demand, but the supply has slightly declined over prior years, which has created this market condition. I attribute the increase in demand to an improvement in the job market and overall economy. The biotech and tech industries seem to be growing at a steady pace.

Another factor affecting the overall rental market in San Diego is the increase in rental demand created by people who did a short sale, or lost their home to foreclosure. Most of those people either can't, or don't want to, buy again in the near future. All of these former homeowners still need a place to live.

Q: Please name the top areas which make up a good portion of your properties in San Diego County. Any trends particular to these areas?

Wharton: Gables Residential owns, develops and manages communities in high-growth markets throughout the United States. In San Diego, our two top markets are downtown and central San Diego. Our other investments are located in Inland Empire, and include both luxury and mid-market assets.

Ausen: American Heritage covers a large portion of San Diego County, but our focus has been on Mira Mesa, Scripps Ranch, Rancho Penasquitos, as well as other communities along the Interstate 15 corridor. The trend in these areas has been a stronger market compared to other communities in San Diego.

Q: In approving potential tenants' applications, has anything changed before and after the recession?

Wharton: We have experienced an improvement in delinquencies across the board, but did not revise our screening criteria at any point.

Q: Is the condo rental market similar or more competitive than single family homes?

Ausen: I see condos as being very similar to single-family homes in terms of rents and demand. There has been no significant difference.

Q: For those who need single-family homes, is this a good time to rent or buy?

Ausen: Right now is an excellent time to buy, due to lower home prices and record low interest rates. However, I have seen that an increase in demand for home sales combined with low-sales inventory resulting in prices rising quickly. Renting is still a good decision for a large portion of the population that does not know how long that they will be in San Diego. Twenty years ago, people who were only in San Diego for a short-term -- fewer than say three years -- would still purchase a home and then rent it when they left. However, now there is a lack of confidence in the markets and many people do not want to be stuck with the uncertainty.

Q: Can you share your top pointers for home owners looking to invest in rentals or rent out a current condo/home? And your top pointers for tenants looking to rent single-family homes?

Ausen: For investors, I strongly recommend asking a property manager to give a rental analysis before purchasing a rental home. I have often seen investors $400 to $500 off on the rental market value that they used to make the investment decision. For investors and homeowners deciding to rent and manage their property on their own: keep it business-like, all the time. The biggest mistake I see individuals making in self-management is establishing a personal relationship with a tenant that then influences their business decisions. This often begins at initial screening when the tenant “charms” the homeowner into renting to them, and then continues with late rent, unnecessary maintenance -- and it never ends well.

For tenants, I recommend searching Craigslist, Zillow, etc., several times each day to look for new postings. Be prepared when you apply, with paycheck stubs or other proof of qualifying income, as well as telephone numbers for prior landlords. If you are able to complete an application in advance of seeing a property, then you will be ready to apply if you decide to rent it. And finally, verify that you are dealing with a real person or company. There are a lot of scams out there.

-Compiled by Padma Nagappan.

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