Rents Declining

                                      

Rental Market Shifts: What’s Really Driving Peninsula Prices

October 13, 2025 – by Gary McKae

I recently reviewed rental prices across the San Francisco Peninsula after several things caught my attention:
1️⃣ A buyer exploring a multi-family investment.
2️⃣ A recent CoStar report on national rent trends.
3️⃣ My own curiosity about local rental housing.
4️⃣ Personal interest in residential purchase opportunities.

Rents and Prices: The Asset Class Connection

Over the years, I’ve watched home prices and rents move in tandem. That’s because both are driven by the same underlying factor—real estate as an asset class.
Every property has an intrinsic value tied to its highest and best use—whether that’s a ranch, a farm, an office building, or a single-family or multi-family residence.

When housing prices rise, rents naturally follow. As homeownership becomes less attainable, more people are forced into the rental market. Combine that with Gen Z’s preference for flexibility, urban convenience, and child-free lifestyles, and apartments remain the housing type of choice.

A Sudden Shift: Rent Drops in September

What truly surprised me in my latest review was the dramatic decline in rents for September.
According to CoStar, “U.S. monthly apartment rent growth declined last month in its deepest September drop in more than 15 years as excess supply affected all parts of the country.”

The national average rent fell to $1,712, a 0.3% decrease from August’s $1,717. This marks the third straight monthof flat or negative rent growth — a clear signal of softening demand despite seasonal adjustments.

Local Snapshot: Redwood City and Palo Alto

In Redwood City, I found homeowners out of sync with the current market. Asking rents were being cut by $1,000 per week, and Palo Alto, typically a strong market, also showed steady declines.
Owners using Zillow are dropping prices, lowering credit-score requirements, and allowing pets—a soon-to-be-irrelevant change as new California laws will require broader acceptance of pets in rentals.

We’re also seeing the return of landlord-paid landscaping and water, signaling a competitive shift back to pre-pandemic standards.

Impact on Multi-Family Investments

This softening rent trend will ripple through the multi-family sales market.
Offering Memorandums that rely on Pro Forma rents to justify higher cap rates are increasingly unreliable.
Instead of rent growth, Peninsula investors may be fortunate just to hold steady.

San Francisco: A Contrarian Recovery

Interestingly, San Francisco is bucking the national trend, posting 6.1% annual rent growth.
After years of decline during the pandemic’s “work-from-home exodus,” the city is rebounding as AI firms and tech employers mandate a return to the office.
This resurgence is re-energizing the local rental market—both for apartments and homes.

The Changing Face of Landlords

Single-family rentals have long been the realm of “Mom & Pop” landlords—owners who inherited homes or converted past residences into investments.
Two waves reshaped this market:

• First, institutional investors buying REOs after the foreclosure crisis.

• Second, corporate buyers and REITs seeking steady cash flow.

Now, new California landlord-tenant laws have shifted the balance of power toward tenants.
Landlords face stricter health, safety, and habitability standards—with Superior Courts often siding with tenants.
Many small landlords are selling to avoid escalating fines and compliance costs, while others are moving assets to states with lower taxes and fewer regulations.

The Migration Continues

The out-migration from California is not just about lifestyle—it’s economic.
Lower property taxes and income taxes elsewhere translate to higher net operating income and better cap rates.
For investors, this migration trend presents a strategic opportunity to diversify portfolios into growth states offering more favorable returns.

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Final Thoughts

California remains one of the most dynamic real estate markets in the world, but it’s also among the most challenging.
For landlords, tenants, and investors alike, understanding the true relationship between price, rent, and regulation has never been more important.

For more information on new landlord-tenant regulations and tenant rights, contact me for a  copy of my Renter’s Survival Guide

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

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