BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

San Francisco Tops Forbes' 2015 List Of Worst Cities For Renters

This article is more than 8 years old.

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.

Manhattan, the poster child for outrageous housing costs, lands in fourth place on our list. Rent eats up an excruciating 53% of Manhattanites' household incomes (average $74,915). Rents there are the highest in America's biggest cities, at an average of $3,290 per month. The tight 2.3% vacancy rate ratchets up the pain even more. The one piece of bright news is that rents have gone up only 3.4% year-over-year. The bad news is that’s because rents are already just about as high as the market can bear, says Gary Malin, president of Citi Habitats, one of New York City’s largest residential rental brokerages, adding that without salary growth rents can’t push a lot higher.

Notably, back in 2012 when we last took a list at rents, the difference between the monthly costs of buying versus renting in the Big Apple had shrunk to a mere $217 more to buy—this in a city where it has historically been much cheaper to rent. Didn’t buy in the downturn? You should have: it’s now $4,627 cheaper to rent than buy ($3,290 rent v. $7,917 mortgage for the average apartment) in Gotham.

“Vacancy rates are low, and owners feel pretty strong about the position they’re in,” Malin says. “There’s a lot of frustrated buyers that stay in the rental market longer than they want to, whether it’s because the overall pricing is beyond their comfort zone, or  because prices of properties have gone so high that they don’t have the down payments to get the mortgages they need.”

Overall, rising rents aren’t great news for the many Americans who have become renters since the economic downturn. The number of rental households has increased by 4 million since 2010, while the homeowner count has decreased by 1 million, according to the National Association of Realtors. Nationally, NAR projects a 3.9% increase in rents over the course of 2015. Vacancy rates are expected to remain low at least through 2017, continuing to push rents up at a rate that outpaces inflation, NAR forecasts. That rate, of course, is much lower than the expectations for places like Silicon Valley.

Other cities where rising rents are making life more difficult for renters include Los Angeles (No. 5, average rent $1,785), Northern New Jersey (No. 7, avg. rent $1,890), and Boston (No. 9, avg. rent $1,756). In each of these places, the vacancy rate is below 5%, giving landlords the upper hand, and residents spend between 28% and 39% of their household income on rental costs. Conditions don’t look likely to ease any time soon. “I think there’s so much pent-up demand, both the for-sale housing market and rental market is going to do very well,” says Nadji. “We’re creating around 3 million jobs a year. It’s still plenty to support new household formation and demand for housing.”

On the other hand, renters willing to live outside of the top-tier job centers (but still near plenty of employment) can find rental housing deals in Indianapolis (No. 1), Kansas City (No. 2), or Las Vegas (No. 3). Sin City renters have the power to be selective and still pay less, thanks to a 6.6% vacancy rate and $767 average monthly apartment rent. On average, Vegas renters pay just 18% of their household incomes (average =$52,269) on rent. Bonus: it’s $369 cheaper to rent each month in Las Vegas than own.

“It really has to do with the fact that in those cities, vacancies have not approached what I’ll call full occupancy,” says Nadji.

Of course, the trade off for living in cities with lower rental prices is often lower salaries.

Full List: The Best and Worst Cities for Renters