Apartment Rent Hikes Outpacing Income Growth by a Wide Margin in Sacramento

Greater Sacramento was late to recover from the Great Recession, as metro job gains did not turn positive until the second half of 2011, more than two years after the national recovery began. But the employment market has been strong ever since: Job growth has outpaced the national mark since 2012, and the unemployment rate currently falls in line with the tight sub 4 percent U.S. figure.

The metro’s growing population has similarly driven apartment demand. For years Sacramento has added new residents at a clip outpacing U.S. levels, and population gains were especially strong from 2013 to 2016. The new additions were largely a result of net migration, or residents relocating from other metropolitan locales to Sacramento. San Jose and Los Angeles in particular, and the Bay Area and southern California in general, represented many of the recent relocations.

Despite the tight job market and healthy population gains, little new apartment inventory has been added this decade. Since 2010, only 2,600 units have delivered in Sacramento, increasing stock by just 2.1 percent.

As a result of the strong demand and dearth of supply additions, apartment vacancy has decreased from 6.5 percent at the end of 2010 to the current rate of 4.0 percent. By comparison, the national vacancy rate for apartments is currently 5.3 percent.

With increasingly tight vacancies, landlords have had the leverage to increase rents. Year-over-year rent growth has averaged 6.5 percent over the past five years, and reached a peak of 10.6 percent in the second quarter of 2016.

While rent hikes have cooled following 2016’s outsized gains, increases have remained among the strongest in the nation. Annual rent growth through June 2018 was 4.4 percent; while less than half of 2016’s mark, Sacramento still ranked ninth among the nation’s largest metro areas in year-over-year apartment rent gains.

Wages, however, have not kept pace with the rising apartment rents. Since 2010, the cost of renting an apartment in greater Sacramento has increased by a cumulative 46 percent. Incomes, even with the tight unemployment rate, have only grown at a cumulative rate of 17 percent this decade. Income and rent growth were relatively correlated from 2010 through 2014, but when rent expansion picked up in 2015 following several years of positive job gains, a significant chasm was formed.

The outsized spread between rent growth and income growth suggests Sacramento’s multifamily market may be approaching a rent ceiling. However, available apartments have become increasingly rare, and the metro’s all-time low vacancy rate of 3.7 percent is within sight. While construction has finally picked up -- 3,300 units are currently underway across the metro -- many of these new communities will not deliver until 2019 and 2020, and some may not come online until 2021. As a result, near-term effects on available supply will be limited.

Furthermore, apartment rents in greater Sacramento look affordable for many Bay Area and southern California residents. The average asking rent in Sacramento is 50 percent less than the average rate in San Jose, and 28 percent less than those in Los Angeles. While gains have tempered compared to the pace of the prior few years, Sacramento apartment rents may still have more room to run.