December 4, 2022

The for-rent housing market looks to be heading into a slowdown as rents dropped in August, according to at least a few trackers of the apartment industry.
CoStar Group Inc., through its Apartments.com platform, found rents declined 0.1% between July and August. The U.S. median rental price declined from $1,781 in July to $1,771 last month, according to Realtor.com. RealPage Inc., though, found same-property asking rents for new leases climbed 0.4% between July and August 2022.
On an annual basis, asking rents increased 10.5% through August, the latest deceleration in rent growth after the market hit its peak of 15.7% annual growth in February, RealPage found.
“We’re seeing a complete reversal of market conditions in just 12 months, going from demand significantly outstripping available units to now new deliveries outpacing lackluster demand,” said Jay Lybik, national director of multifamily analytics at CoStar, in a statement accompanying the data release.
The apartment sector has proven resilient through most of the pandemic, although growth was flat or even slumped through much of 2020, especially in coastal gateway cities. But last year saw a remarkable rebound, with the national apartment market posting anywhere from a 10% to 13.5% increase nationally in 2021, depending on the data source. Many markets far exceeded that rate of growth.
This year, rental-rate growth has remained strong, although the rate of growth started to slow this spring and summer. Inflation, higher interest rates and a record amount of new apartment construction are hampering the ability for investors to push rents, and to buy or sell properties, at the numbers achieved in the past 18 months.
Chicago-based Origin Investments LLC owns or operates nearly 10,000 apartments nationally. David Scherer, co-founder and co-CEO of Origin, said his company uses machine-learning models to help forecast metrics like rental rate and valuation estimates for a site or property the company owns or is evaluating.
In most of the markets Origin operates in — primarily Sun Belt cities like Nashville, Tennessee, and Atlanta — Scherer said the model is anticipating slower rent growth through the fourth quarter before slightly negative growth in 2023. That’s predicted to become strong rent growth in 2024.
“As rent growth either goes flat or negative in the short run — is that such a big deal after it went 30% (in some markets) over the past two years? We have to keep it in context,” Scherer said.
In the past 18 months, he said, it wasn’t usual for deals to have 40% profit margins. Today’s good deals are penciling closer to 30% to 35%.
Scherer said he sees the potential for distress in the broader multifamily market, on properties purchased last year or in early 2022. That’s because valuations and capitalization rates on properties that traded, especially last year, aren’t sustainable, Scherer continued.
“I do think there’s a lot of capital that overpaid for assets that are going to be hurting,” he said, adding issues could arise when those groups look to refinance in the next year or two. “It could be solved by recapitalization and kicking the can down the road … but if we’re in negative rent growth and in a recession, there’s a probability it could end badly. It would feel more like 2008-2011.”
Doug Ressler, manager of business intelligence at Santa Barbara, California-based commercial real estate data company Yardi Matrix, said he remains confident in multifamily as a property type, even with last month’s decline in rents.
The continued housing shortage, and fewer people able to purchase a home now because of higher mortgage rates, will keep the sector relatively strong, he added.
“One of the things you have to be conscious of is new supply and how (that) comes in, but the next two to three years, we’re very bullish in terms of renter demand,” Ressler said.
It’s possible apartment developers and investors will shift their strategies, though, especially to focus on secondary and tertiary markets.
In particular, areas seeing big jobs projects — think multibillion-dollar electric-vehicle plants — will likely prompt apartment developers to move into, or expand, within those markets. There’s also an observable migration to suburban and exurban areas of the country.
“There are a tremendous amount of jobs that aren’t necessarily in the primary gateway cities that are in secondary cities,” such as in Kentucky, Georgia, Oklahoma and Kansas, he continued. “People are going to migrate to the jobs.”
Analysts at Newport Beach, California-based commercial real estate research firm Green Street LLC also say markets with continued job growth will translate to need for housing. In particular, corporate relocations to states like Texas, Tennessee and Florida were cited in a residential market analysis by Green Street this month.
But not all Sun Belt markets will see the same outcomes, Green Street analysts say. They said while places like Phoenix; Charlotte, North Carolina; and Washington, D.C., will likely continue to benefit from incremental job growth, on a relative basis, those markets are losing steam to other cities and states.
Phoenix was cited as a potential worrisome market by RealPage in its August rental report, as asking rents there dropped 0.4% in August — that market’s first month-over-month decline since May 2020.
In fact, Sun Belt markets have seen the biggest and most sizable retreat in rental-rate growth, after leading the pack during the pandemic. Markets like Orlando, Florida; Austin, Texas; Fort Lauderdale, Florida; and Charlotte posted negative month-over-month rent growth in August, CoStar found.
Cities that continue to see job and wage growth may allow apartment owners to still push rents. Income migration from pricey Northeastern and West Coast cities to Sun Belt markets like Austin and south Florida means those renters are generally more tolerant of higher rents, given their new rent is still a discount on a relative basis.
Rent-to-income ratio starts to become problematic at around 30%, according to Green Street, and most multifamily REITs have disclosed low 20% ratios in recent months.
Green Street’s analysis found apartment REITs are reporting applications from prospective tenants coming from out of market into the Sun Belt are about 15%, or 5 percentage points higher than pre-pandemic. That suggests migration to more affordable cities is continuing to take place, even as the the Covid-19 virus’ direct impact on real estate fades.
But for many U.S. renters, the cost to rent remains a challenge, especially with continued high inflation. Realtor.com found Americans spent 26.4% of their monthly budgets on rent on average, nationally in August. That’s close to, but still less than, the 30% generally accepted benchmark for how much a household’s income should go towards housing.
Rent accounted for the highest share of household incomes in places like Miami (46.5%), Los Angeles (40.7%) and San Diego (37.1%) last month.
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