Tenants feel the squeeze in SLO County’s tight rental market

Rising home values may be a boon to homeowners, but for potential first-time homebuyers, they can deal a double blow. Many who are priced out of the housing market may also find higher rents and a dearth of residential rentals.

“In general, I’d say that rental prices have risen at about the same rate as home prices in each specific area,” said Tim Townley, president of the San Luis Obispo Association of Realtors and owner/broker of Comet Realty, a San Luis Obispo-based real estate firm that also handles property management.

Higher rents are the result of “a simple supply-and-demand situation,” Townley said.

Escalating home prices, low inventory and stricter lending standards create barriers to homeownership, leaving more people to compete for rentals. Low inventory drives up rent prices. Higher rents, in turn, make it even more difficult for renters to save for a down payment, creating a vicious cycle that puts homeownership increasingly out of reach.

Property managers said these shortages exist throughout San Luis Obispo County and apply to nearly all residential rentals — from studio apartments to four-bedroom, single-family homes.

Demand is high

Amy Austin, Realtor and manager with Central Coast Management Group, which manages residential rentals in San Luis Obispo, the South County and along the coast, said vacancies are so scarce that “when we hold an open house, we have 20 or 30 people lined up waiting to apply.”

Dawn Pentoney, a real estate broker and owner of Manzanita Property Management in Paso Robles, noted that in the North County “it’s not uncommon to hear that someone has been looking for a place for over a year.” She said that many who are unable to find a rental are forced into less-than-desirable living situations, such as sharing a home or apartment with friends or family.

Full-time Cuesta College student Jeff Bromby and his girlfriend, Jeana Mills, searched for a three-bedroom rental in Paso Robles for eight months before opting to rent in Templeton. They were looking to combine households and were fortunate to have housing in place while they searched.

Bromby noted that many rentals were out of their price range. When applying for affordable residences, they were often competing with 20 or more applicants. The couple put in applications for about five rentals before they were successful.

“The market just isn’t sustaining the amount of people looking to rent,” he said.

In each region of the county, rents are in line with property values, Townley said.

“The further away from SLO you get, the property values and rents drop,” he said. “Rents in SLO are up to $1,000 per bedroom, and the same type of rental in Nipomo might be closer to $700.”

Rising prices

Property managers we spoke with said that rent for a one-bedroom apartment runs $800 to $1,100 in the North County and $1,100 to $1,300 along the coast.

Five years ago, Townley said, rents were $700 to $800 per bedroom in San Luis Obispo and $550 to $650 in Nipomo. Other property management firms in the county reported similar rate increases.

Other factors are contributing to low rental inventory and high prices.

In San Luis Obispo, the rental market is particularly tight because of the housing needs of Cal Poly students, Townley said. Enrollment at Cal Poly is about 21,000 students, with 7,300 housed on campus.

The influence of Cal Poly can be felt in other regions of the county, as “people who work in SLO end up renting and buying (in) South or North County due to its more affordable nature,” he said.

Impact of tourism

Tourism may also be a factor, especially in the North County wine country and along the coast.

Paso Robles broker Pentoney said property owners stand to earn more with vacation rentals than with long-term rentals. With the growing popularity of websites such as Airbnb.com and VRBO.com, finding willing renters has become easier.

“Tourism brings in jobs but takes away affordable housing for those workers,” she said. “If you’re earning $15 an hour, you can’t afford an $1,100 two-bedroom apartment.”

Kate McMillen, property manager for Morro Bay Realty/Rentals, has seen a 33 percent increase in the number of vacation rentals in the company’s portfolio over the past few years.

She said it has become a common practice for people from out of the area to purchase a retirement home well in advance of their retirement, then use it as a vacation rental until they are ready to relocate. Vacation rentals, unlike long-term rentals, allow the owner to use their property when it is not being occupied.

Millennials slow to buy

Pentoney pointed out that millennials, or those born between the early 1980s and the late ’90s, are taking longer than previous generations to become homeowners, putting even more pressure on the residential rental market.

In addition to facing more hurdles on the way to homeownership, many young adults are waiting longer to marry and have children.

“They are more mobile. They don’t want to be tied down with homeownership,” Pentoney said.

Townley doesn’t see much relief in the near future, even with new single-family housing developments coming online, as well as new low-income housing.

“What we really need is more multiunit housing, like garden-style apartments, but those are all but impossible to build profitably,” he said, adding that there is commonly “tremendous pressure from existing homeowners not to have those (apartments) built in their neighborhood.”

Tough for developers, too

Rick Jeffrey, owner of Beach Front Construction of Santa Barbara, experienced some of these difficulties firsthand in his 10-year bid to build new apartment housing in Paso Robles.

Originally approved as senior housing, the project at 34th and Spring streets stalled during the recession. He resubmitted plans for a mixed-use project that includes 13,000 square feet of retail space and 21 studio and one-bedroom apartments. He said he hopes to begin leasing the apartments before the end of the year. The units, which range from 450 to 575 square feet, will be offered for about $1,000 per month.

Jeffrey said the project would not have been viable without financial help. He received New Markets Tax Credits from the federal government, which are aimed at revitalizing low-income communities. The project also benefited from reduced fees offered by the city of Paso Robles for building small apartment units. Fees are high, he said — around $65,000 for a two-bedroom unit.

“You’re not going to get anybody to build market-rate apartments and pay those kind of fees,” he said.

Even if new rental inventory opens up, Townley said a decrease in rent prices will be slow at best — typically no more than 1 percent per year. He believes the combination of low housing inventory, the potential for increased enrollment at Cal Poly, and the desirability of living on the Central Coast will keep rents high for the foreseeable future.

Still, he advises potential first-time homebuyers to take heart and look at the long-term picture.

“I rented for years, bought a starter condo, then progressed into the home I have now,” he said. “Some people think that everyone should have a wonderful three-bedroom home in a perfect neighborhood at a really low price, but that’s simply not how it works. Good things like a nice home take time, sacrifice and savings.”

This story was originally published October 15, 2016 at 7:46 PM with the headline "Tenants feel the squeeze in SLO County’s tight rental market."