Blog Post
Guy
Sacramento is creating an inevitable apartment Housing Bubble
Sacramento's Residential Housing Needs Assessment (RHNA) will generate an apartment Housing Bubble. Based on the most recent Census data, we derive that California has 6,509, 220 rental units. And, the rental vacancy rate is 3.8% in 2022.
RHNA targets to add 2,500,571 rental units by 2031. Given that the population of California is forecasted to remain flat out to 2060 (source: Department of Finance), the RHNA target if fulfilled would contribute to increasing the rental vacancy rate from 3.8% to 30.5% by 2031!
Below see the basic calculations deriving the 30.5% rental vacancy rate.
As shown above, if you add 2.5 million rental units on top of an existing stock of 6.5 million with a flat population, your rental vacancy rate goes through the roof.
The Bubble could even get worse. That is because of the multiplier effect of Builder's Remedy whereby developers have to allocate only 20% to affordable housing vs. 41.1% for the overall RHNA target (1,028,395/2,500,571 = 41.1%).
Thus, the greater percent of units developed through Builder's Remedy the greater the number of market-rate housing units built, and the higher the vacancy rate.
As shown above, if Builder's Remedy account for 30% of overall rental units built, the resulting vacancy rate would rise from 30.5% to 33.8%.
Let's quickly review how the RHNA target works out over time between 2022 and 2031. I am assuming that the RHNA target linearly rises over time by adding 277,841 rental units per year over 9 years.
Let's now just focus on the RHNA resulting rise in rental vacancy rate over time.
The above graph depicts an impossible situation. The real estate development industry is not going to develop 2.5 million in a State with no population growth resulting in a rental vacancy rate of 30%. The needed credit financing will evaporate long before 2031. The same is true for the private equity industry. They are not going to invest or lend in projects that are sure to lose a ton of money.
So, what will happen? A lot of lawsuits.