San Francisco and Silicon Valley aren’t just churning out jobs and billionaires these days—America’s tech center is also producing what is arguably the nation’s worst housing shortage. The average monthly apartment rent in greater San Francisco is $2,802, second highest among the nation’s 50 biggest metropolitan areas. But what really makes the Bay Area a tough market for renters is the competition.
As of the fourth quarter of 2014, the vacancy rate in San Francisco stood at just 3.6%. Oakland was even worse with a vacancy rate of 2.9%, though average rents are cheaper at $1,815. San Jose had a $2,291 average rent and a 3.5% vacancy rate. The tightness of the rental market means that landlords can keep raising prices, which is why rental costs in each metro area have skyrocketed over the last year: San Francisco by 12.8%, Oakland by 10.5%, and San Jose by 11.3%.
“What makes a market unfavorable for a renter is not just the amount of rent and its relationship to income levels, but the vacancy and availability of units,” says Hessam Nadji, chief strategy officer and director of specialty groups at Calabasas, Calif.-based real estate investment firm Marcus Millichap. “Property owners get a pricing power that is exceptional when vacancy falls below 5%. That’s when rent increases accelerate.”
San Francisco has a history of being unfavorable toward new development, but that’s changed somewhat in recent years. Since 2012, San Francisco has added some 6,100 new units, Oakland 4,400, and San Jose nearly 8,900, according to Marcus Millichap. This year, the three cities combined are forecast to complete another 10,000 units. Unfortunately, that’s just a drop in the bucket compared to the area’s large population (the Bay Area had a total population of some 7 million people at the 2010 Census). So it’s not that surprising that despite the new construction, rents have still been rising dramatically.
Thanks to those atrocious and depressing housing numbers, the Bay Area and Silicon Valley sweep Forbes’ 2015 list of Worst Cities for Renters, with San Francisco No. 1, Oakland No. 2, and San Jose No. 3.
Behind The Numbers
To find the places where renters fare the best and worst, we started with the 50 largest U.S. Metropolitan Statistical Areas (MSAs) and Metropolitan Divisions (MDs). These are cities and their surrounding suburbs, as defined by the U.S. Office of Management and Budget. In large metro areas with sub-markets that vary significantly, we looked at their smaller components. The greater Miami metro was broken into its divisions of Miami, Fort Lauderdale, and West Palm Beach, while the greater Bay Area metro was broken into the East Bay (Oakland-Fremont-Hayward) and San Francisco (San Francisco-San Mateo-Redwood City). Finally, for two geographic designations we sliced the data into even smaller chunks. We broke Manhattan out alone — the island truly stands apart from the rest of the New York City metro area with its affluent population and high population density. We also broke out Northern New Jersey, which covers Bergen, Essex, Hudson, Morris, Passaic, and Union counties.
Using data from Marcus Millichap (compiled by Nadji and John Chang, first vice president of research), we ranked the metro areas on four criteria: 1) average rent during the last quarter of 2014; 2) vacancy rates, since more empty units means greater choice and, typically, better prices; 3) average share of household income spent on rent; and 4) the year-over-year change in rents. We tipped the scales a bit more heavily on the factor that renters most often consider each month: the dollar amount they spend on rent. Our gallery of Best and Worst Cities for Renters also includes a break-down of the affordability gap, or how much the average mortgage costs compared to the average rent, though that wasn’t a factor for the ranking.