San Jose Reigns Supreme for Rent Growth

The San Jose and San Francisco apartment markets have been trading back and forth the #1 spot nationally for annual rent growth during the past few quarters. As of early 2012 San Jose moved back on top.

Effective rents for new leases in South Bay apartments surged 12.7 percent during the year-ending 1st quarter. Pricing jumped 2.2 percent specifically during the initial three months of the year, recovering the ground that was lost during a brief performance lull in 4th quarter 2011.

In the best neighborhood-level performance for annual rent growth, pricing shot up about 18 percent in Mountain View/Palo Alto/Los Altos. Only East and Central San Jose, where rents climbed roughly 7 to 8 percent, failed to realize double-digit growth rates during the past year. But it’s doubtful that property owners and operators in those two spots are complaining about rent growth that’s nearly twice the national average.

Occupancy in metro San Jose has been at approximately 97 percent since the middle of 2010. The 1st quarter rate was 97.2 percent, with just the South Sunnyvale/Cupertino submarket posting vacancy that reaches even the 4 percent mark.

Starved for some additional product, San Jose is about to get it. Ongoing building has jumped to roughly 5,500 units, with much of the construction occurring in the North San Jose/Milpitas area. Those additions will grow the metro’s inventory at a fairly aggressive pace of almost 4 percent over the near term.

It will be interesting to see what happens with South Bay rents as this new supply begins to deliver in early 2013. With the market so tight and employment growth registering at what’s actually a pretty healthy pace above 3 percent, there’s no reason to think the additions won’t be readily absorbable. However, property managers here tend to exhibit extreme reactions to relatively slight shifts in market conditions. Thus, it’s not out of the question that a sizable block of product moving through initial lease-up will be enough to cool down rent growth quite a bit.

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