California’s lesser-known cities are emerging as the state’s strongest multifamily rental markets, outpacing their larger counterparts in projected rent growth, according to a new report from real estate data firm Markerr.
The report analyzed the top 20 California metropolitan statistical areas (MSAs), revealing that tertiary markets, such as Merced, Stockton and Salinas, are forecasted to lead the state in rent growth over the next five years. Merced tops the list with a projected compound annual rent growth rate of 5.1%, followed by Stockton (4.5%) and Salinas (4.1%).
These smaller markets are attracting investor attention due to a combination of strong recent home price growth, yet still affordable housing, and job growth, Galen Faurot-Pigeon, research leader at Markerr, told GlobeSt.com.
Recommended For You
“The 3-year trailing job growth data further supports the report’s thesis regarding tertiary markets, with markets such as Bakersfield, Modesto, and Riverside posting job growth exceeding 7%, significantly higher than that of the state’s urban centers, setting the stage for increased rental demand,” he said.
Coastal metros such as Los Angeles, San Francisco and San Diego remain economic powerhouses. Still, they lag in projected rent growth, with all under 3%, and continue to struggle with affordability, according to Markerr data.
Los Angeles renters now spend 36% of their income on rent, well above the 30% threshold commonly recognized as the affordability limit. Interestingly, San Jose bucked the trend, ranking as one of the most affordable markets by rent-to-income ratio (22.8%) despite its high prices, thanks to household incomes averaging $168,000 in the area.
“In a state long known for sky-high housing costs, this shift toward smaller markets could mark a new era for multifamily investment in California,” Faurot-Pigeon said.
Phenomenon Likely Temporary
This phenomenon is likely temporary as tertiary markets approach saturation, according to Charles Halladay, senior managing director and multi-housing group leader at JLL.
“Sacramento serves as an instructive example—the market experienced a substantial population influx from the Bay Area during the pandemic, causing rents to surge, but both absorption and rent growth stabilized by 2022,” Halladay told GlobeSt.com.
The RealPage CAGR effective rent growth estimates and forecasts in the table, coupled with Oxford Economics' household income projections in the chart, reveal an interesting pattern, he said.
“While the Inland Empire and Central Valley experienced remarkable rent and income growth since 2020, major markets are projected to significantly outpace these areas in household income growth over the next five years,” according to Halladay.
“Additionally, the lower single-family home values in Bakersfield, Modesto, and the Inland Empire create a more accessible path to homeownership for higher earners compared to Los Angeles and the Bay Area. This homeownership transition potential could further contribute to a shorter growth cycle in these tertiary markets.”
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
