Rental growth seems to be slowing, which is good news for renters, but a potential concern for apartment investors.
According to the Realtor.com rental report for October, multifamily rent growth slowed across the country to 4.7% year-over-year. This is the slowest rate of growth in over a year, as the median rent landed at $1,734. A 2022 survey shows that apartment owners plan to continue increasing rents at their properties, although it won't be by as much as it has been in recent months.
Danielle Hale, a Realtor.com economist, claims that rising inflation and the potential of a recession remains a major concern for consumers, and these issues only increase the priority level of affordable housing for these families. Realtor.com data suggests that rents are beginning to fall from the 10%+ increases we’ve been experiencing throughout the pandemic.
While there are signs that rents won’t be as high as they have been lately, they are expected to fall to normal, seasonal levels. So while apartment investors may not experience historical rental rate rate heights forever, rental rates will fall back to healthy, historically standard levels.
Rental Rates are Stabilizing
In October 2022, the median rental rate in the most prominent 50 U.S. metros was $1,734. This is a $25 decline from September, and $47 decline from the highest rate back in July.
This October 2022 metric showed the third month in a row of single-digit rental growth, and the ninth month in a row of rents slowing down.
But before you get all doom and gloom minded, this isn’t necessarily foreshadowing anything. COVID, supply chain issues, delays in construction, and other factors contributed to this inflated, artificially high spike in rental rates. So, it shouldn’t be a surprise to anyone that these rates would come down eventually.
Rents have been growing at a rate almost 1.5 times faster than it did in March 2020, right before the pandemic outbreak.
It’s also important to understand rental trends from a historical perspective. Typically rental demand declines during the second half of the fall season and the beginning of winter. This is simply because less people want to move during these times (probably due to the cold weather!). So these recent rental trends don’t mean it’s the apocalypse for apartment investors. It simply means things are returning to normal, “regressing towards the mean” so to speak. It might look negative because we haven’t seen these trends for the last two years. Even though rental rates are relaxing, plenty of renters are seeing higher prices than they did only a few years ago.
Now let’s break down what this means for residents living in apartment buildings. The people who live in our buildings are responsible for the cash flow the property produces. So, savvy investors understand the importance of analyzing how these changing economic conditions impact their residents.
According to the Avail 2022 Fall Landlord and Renter Survey:
63.2% of renters currently residing in a rental unit for 1-2 years have experienced rental rate increases. This metric has increased by 11% since July 2022.
Survey participants recorded a median monthly rent increase of $138 for lease renewals (a $22 decline from July) and $300 for new leases (which didn’t change since July).
Even though increases are lower, 69.5% of residents who had rental rate increases are debating whether or not to relocate to a more affordable option, which shows a 3.3% increase from July. This suggests that affordability continues to be a growing concern for residents.
The median renter who is thinking about relocating is hoping to find a rental unit that is 12.5% cheaper than their current one, which is about $200 per month. This shows a 10.3% increase from July.
For renters looking for cheaper rental units, they’ve got their work cut out for them. Most apartment owners intend to continue pushing rental rates higher.
Over 70% of landlords intent to increase rents for at least one unit in the next year (but this is 1.7% lower than it was in July).
The percentage of landlords intending to push rents higher fell by over 10% between April and October 2022.
Many renters are seeing smaller rent increases. But the increases they’ve already seen has made it harder for renters to save money. Landlords are increasing rents in response to inflation and the increased cost of maintenance and construction. This means many landlords can’t afford to negotiate with new residents on rental rates.
Increasing cost of living makes it harder for renters to save for a home
The average renter claimed to only be able to save about $100 a month.
This means:
The percentage of renters thinking about buying a home has fallen from 34.6% in July to 32.3%
Although there are many reasons why renters can’t buy a home, the most common reasons are not having enough money for a down payment (44.4%), and not thinking they could qualify for a mortgage (19.6%).
For the renters that are thinking about buying a home, 83.9% have cited increasing interest rates and inflations as factors that have impacted their home purchasing plans. This increased from 80.8% in July.
These factors have impacted demand for apartments and the rental rates apartment owners can charge.
According to a recent Yardi Matrix survey, the U.S. multifamily market has experienced cooling performance, which has resulted in continued decelerating rental growth.
The Federal Reserve’s sharp increase in interest rates has resulted in a cooling off in demand, new construction, and real estate sales. This is all despite the shortage of housing, and banks are expected to pull back on providing financing for new construction projects.
Jerome Powell, the Fed Chair, has said that interest rates will likely keep rising.
These economic challenges along with a slowdown in job growth has only further dampened demand for single family houses. With mortgage rates increasing to over 7.3% as of November, hopeful homeowners are left with no choice but to stay in rentals, as reported by the National Association of Realtors.
Looking Forward
Despite back to back monthly declines in monthly rents for four consecutive months, apartment investors have seen a slower decline between October and November 2022. Rents are at a 0.4% decline, which is slightly lower than the decline of 0.6% just one month before, according to Jay Lybik, the CoStar Group National Director of Multifamily Analytics. According to Lybik, market conditions will continue this trend for the foreseeable future.
Multifamily has proven to be resilient in times of economic turbulence.
Many economists are suggesting that our nation is headed straight towards a recession. Whether it happens this year, or next, it’s a wise decision to barricade your wealth against the impacts of an economic downturn. Many other investment vehicles often leave investors with small returns and lots of risk.
So while multifamily real estate may be experiencing some turbulence, the question you should ask yourself as an investor when considering the viability of multifamily as an investment is, “Compared to what?”
Stocks are more volatile, especially during times of economic uncertainty.
Crypto has proven to be more of a gamble than an investment, as seen in the crypto owners whose wealth has taken a massive hit.
Multifamily offers investors strong tax benefits and reliable cash flow even during economic hardship.
People will always need a place to live. Shelter is a basic human need. It doesn’t matter where you live or who you are - most people prioritize their home over other expenses. The simple truth is that you cannot survive long without shelter, even over water or food.
For those who cannot afford to buy their own home, they are left with little to no choice but to rent. Regardless of how you feel about it, apartment owners provide an essential need to thousands of people. During a recession, the rental pool expands because less people can qualify for a mortgage loan. Many will also sell their homes to prevent paying capital gains and some may lose their homes to foreclosure. During these hard times, apartment owners help people keep their family under a roof.
As mentioned above, when people start running low on money, there are a lot of other expenses that they will forgo paying before they stop paying rent. They may stop making credit card payments, health insurance, or car payments. But the last thing they’ll miss is their rent.
What goes up must also come down. So even if the economy drops, it will eventually recover. And multifamily real estate has historically been quick to rebound from a recession.
So regardless of what you’re currently invested in, as a savvy investor looking to protect your wealth, you should consider all of your options when it comes to insulating yourself from the impacts of an economic downturn. Despite the current changes occurring in the multifamily industry, this asset class will continue to stand the test of time as a stable, reliable wealth preservation vehicle.