Maybe this will surprise you and maybe it won’t:
From 2008 to 2016, only 200 new homes were built in the city of Merced.
That’s quite a lull. Fortunately, the city and local government have been making up for lost time. They’re on a course correction and investing a lot of resources into development. There’s a lot more construction happening now, and most of it is in the housing sector. Merced is trying to meet the housing needs of a growing population. Rents have gone up quite a bit over the last few years, and one of the things contributing to that price hike is a lack of inventory.
Merced set a record for itself in 2020, adding around 2 million square feet of new construction projects.
Local development can significantly alter the dynamics of rental markets. This is especially true in California, which is known for its pricier housing markets and its more competitive vibe. Merced has always been more affordable than most of its California cousins, but there are notable changes in Merced. Real estate investors should keep a keen eye on how local development impacts Merced's rental market because it feels like this may only be the beginning of something bigger.
The Growth and Evolution of Merced
Merced is known for its abundant outdoor recreation and its commitment to research and higher education, among other things. It’s often referred to as the "Gateway to Yosemite," because it’s close to the national park. This area is more than its trees and parks and trails, however. It’s actually undergone rapid transformation in recent years, and it’s
attracting a lot of new residents who might not have considered it previously.
Thanks to substantial investments in infrastructure, education, and business, Merced’s real estate landscape is increasingly becoming a hotspot for investors.
Building Up Merced
The city has spent the last four or five years preparing for a construction boom, and that boom has arrived. We’ve been watching, and much of Merced’s recent investments have increased the supply of affordable and attractive housing. In 2021 and 2022, the city approved new policies that had a huge impact on development and housing. For example, it established a residential density for areas zoned as commercial. It also created a streamlined permitting system and implemented an affordable-by-design policy, which encourages smaller, market-rate houses through fee discounts and other incentives.
All of this has had an impact on the housing supply. It’s given more people an opportunity to
rent homes in Merced.
Local development projects have not strictly been housing-related. Some of the other projects that have had an impact include:
- University of California, Merced Expansion
One of the most significant drivers of local development in Merced is the University of California, Merced. The university's 2020 Project has expanded the campus significantly, adding new buildings, research facilities, and student housing. This expansion promises to attract more students, faculty, and staff—leading to increased demand for rental properties.
California's high-speed rail project, which aims to connect major cities across the state, includes a stop in Merced. Once operational, this rail system will make commuting more accessible, drawing new residents and businesses to the area. Investors should anticipate a boost in rental demand as the project progresses. Merced is one of four stops along the planned bullet train route, and the California High Speed Rail Authority hopes to have the Merced-Bakersfield high-speed train line operational by 2030.
- Downtown Revitalization Projects
Merced’s downtown area is also witnessing an evolution, which is having an economic impact and drawing more people to the area. The city has invested in renovating historic buildings, improving public spaces, and attracting new businesses. These efforts not only enhance the quality of life for residents but also increase the appeal of downtown living, driving up rental demand.
Local Development’s Impact on Merced's Rental Market
What does this mean for you and your rental property? What does it mean for investors who are now thinking about buying property here? This is what we have noticed:
- Increased Demand for Quality Housing
Tenants no longer have to settle for whatever’s available on the rental market. Local development projects are drawing more people to Merced, both temporarily and permanently. Students and university staff often seek off-campus housing, while new businesses bring employees who need rental accommodations. This influx leads to higher occupancy rates and, ultimately, higher rental prices.
With increased demand for rental properties,
property values in Merced are on the rise. For real estate investors, this presents an opportunity for capital appreciation. Investment in properties can deliver investors
substantial returns as the area's desirability continues to grow.
- Diversification of Rental Properties
The development projects have led to a diversification of available rental properties. Investors can find opportunities in
single-family homes,
multi-family units, and newly developed apartment complexes. This variety allows investors to create stronger and less risky portfolios to meet different market demands.
Challenges to Consider
If only it was all good news. There’s always a risk, and sometimes there are unintended consequences. Here’s what we see as being some of the complexities that need to be navigated:
While local development brings opportunities, it also introduces market volatility. Investors have to be prepared for fluctuations in rental demand and property values as projects progress and market conditions change.
Understanding the local regulatory environment is crucial. Merced may introduce new zoning laws, building codes, or
rental regulations in response to development projects. Staying informed about these changes can help investors make strategic decisions. You’ll especially want to watch these if you’re interested in short-term rentals or vacation properties.