Podcast Summary
Real Estate Manager's Perspective on Rent Trends: Real estate manager identifies rent increases as a concern, with potential downturn unclear, focusing on New York's impact on national prices, private equity's role in multifamily housing, and technological advancements.
Principal Asset Management, as a real estate manager, combines local insights and global expertise to identify compelling investing opportunities in public and private equity and debt markets. Meanwhile, in the real world, rent increases continue to be a concern for individuals, with some experiencing significant hikes despite negotiations. The topic of rent is complex and multifaceted, with various measures suggesting a potential downturn, but the extent and timing of any decrease are uncertain. New York, with its large impact on national rent prices due to its sizeable presence in the Consumer Price Index, is a particular focus. Additionally, the rise of private equity in multifamily housing and technological advancements are significant developments in the rental market. The trend of multifamily housing outpacing single-family construction over the last 15 years has led to a boom in the sector, making it an intriguing topic for further exploration.
Will rent prices continue to decrease?: Rent prices have decreased recently, but the impact may not be felt by all renters. Economic factors like consumer and labor market strength, household formation, and housing supply play a role in rent price forecasts.
The current outlook for rent prices, particularly in the multifamily housing market, is heavily influenced by the question of whether or not supply will continue to keep up with demand. Chris Salviati, senior housing economist at Apartment List, explains that rent prices have been decreasing for the past few months, as evidenced by a 3% discount from the August 2022 peak in their national rent index. However, this discount may not be applicable to all renters, especially those who signed leases before the recent price drop. The calculation of the rent index involves tracking individual units and comparing their previous and current rent prices, controlling for quality. From an economic perspective, the strength of the consumer and labor market are important factors in modeling rent price forecasts. While demand can cause short-term up and down swings, the longer-term supply response in the housing market is more prolonged due to the time it takes to permit and build new construction. Therefore, household formation is a key driver of demand in the housing market.
Rents rise more often than they fall: Despite some exceptions, rents have consistently risen since 2017 due to household formation dynamics and the challenging mortgage market, with larger landlords using algorithmic pricing to respond to market changes.
Rent hikes tend to outpace rent decreases in the housing market. According to the discussion, rents have generally risen over the years, with only temporary seasonal declines. This trend is particularly noticeable in large, professionally managed multifamily complexes, which use sophisticated algorithmic price setting techniques to respond to market changes in real time. However, smaller landlords may prioritize avoiding vacancies and retaining tenants for longer periods over adjusting rents frequently. Despite some exceptions, such as during the aftermath of the Great Recession, rent growth has remained positive overall since 2017. This trend is influenced by the dynamics of household formation and the current challenging mortgage market, causing more people to stay in rental units for longer periods.
Considerations for smaller landlords in apartment pricing: Smaller landlords prioritize tenant relationships and vacancy minimization over short-term rent increases, potentially leading to less volatility in rent prices.
The decision-making process behind apartment pricing can significantly vary depending on the size and type of the rental property market. For smaller rental properties, especially those managed by mom and pop landlords, maintaining good tenant relationships and minimizing vacancies can be more important than maximizing short-term gains through rent increases. These landlords may be hesitant to raise prices significantly due to the potential negative impact of vacancies and the cost of finding and retaining new tenants. The use of algorithmic pricing services and the increasing presence of large landlords in the multifamily space might lead to more volatility in rent prices. This is based on the discussion where it was acknowledged that existing tenant quality and potential costs of losing them are essential considerations for smaller landlords, but the specifics of how these factors are incorporated into algorithmic pricing remain unclear.
Rent Growth Slowing Down: Economic factors and a historic supply boom are causing rent growth to decline, with new tenant indexes showing a larger decrease than more representative indices.
The rental market is experiencing a shift due to a combination of factors. While there was a significant rent boom over the past year, demand is now cooling down due to economic factors like a slowing labor market and wage growth, as well as a decrease in household formation. At the same time, there is a historic supply boom with more multifamily units under construction than at any point since 1970, and this supply is expected to hit the market in 2023. These factors are leading to a notable decline in rent growth, and it is unlikely that we will continue to see extreme rent increases. The difference in trends between a new index focused on new tenants and a more representative index may suggest that large professionally managed buildings are reacting more to market changes.
Strong demand and growth in multifamily sector: The multifamily sector continues to thrive due to persistent housing shortage, large demand from younger generations, and underbuilding in expensive coastal cities, despite interest rate fluctuations.
Despite the challenges in single family housing, the multifamily sector continues to experience strong demand and growth. This is due to the persistent housing shortage in the US, particularly in the Sunbelt markets, where new construction activity is most prevalent. The bull case for multifamily investment includes the large and growing demand for housing, especially from younger generations, and the continued underbuilding in expensive coastal cities. Financing for multifamily construction can vary widely, from floating rate loans to issuing bonds, depending on the size and scope of the project. While interest rates have impacted single family housing demand, they have not had the same effect on multifamily, allowing the sector to maintain a positive outlook.
Millennials moving to suburbs impacts multifamily market: Millennials' shift to suburbs due to pandemic and family desires leads to faster rent growth and challenges for multifamily developers and investors
The trend of millennials moving to the suburbs could impact the multifamily real estate market in the medium term. This demographic shift, driven by factors such as changing preferences due to the pandemic and the desire to start families, has already led to faster rent growth in suburbs compared to core cities. Additionally, new developments in urban areas often lack suitable accommodations for families, exacerbating this trend. This could present challenges for multifamily developers and investors, as they may need to adapt to this changing market dynamic.
Apartment rental market facing potential rent declines due to oversupply and weakening labor market: Historically low rent growth could turn negative due to macroeconomic conditions, potentially leading to significant rent declines.
The apartment rental market is experiencing some softening, with rents potentially continuing to decline due to an oversupply of new units and a weakening labor market. Historically, there haven't been significant rent declines, but the current macroeconomic environment could lead to a different outcome. For instance, if we enter a recession and unemployment rises, it could negatively impact the demand side of the equation and lead to further rent declines. The most recent rent declines, which have seen a 3% drop over the past three months, are unusual and are the largest since the index was started in 2017. However, it's important to note that the base case is for modest positive rent growth in 2023, and the magnitude of any potential decline would likely not reverse the significant increases seen in 2021. Ultimately, the biggest wild card is the broader macroeconomic environment and the labor market, which will significantly impact both the supply and demand sides of the apartment rental market.
Rent prices experiencing a sharper decline compared to previous years: Historically, rents have only declined around 1.5% during October, November, December. However, a potential 5% decline could occur in a recession, with a 10% decline being extraordinary.
The recent 3% decline in rent prices over the past three months (October, November, December) is a sharper decline compared to previous years. For instance, the typical decline during those months was around 1.5%. However, even during the 2008 recession, rents didn't experience a significant decline but rather stalled. Despite this historical trend, economist Chris Salviati suggests that a potential 5% decline could occur in a recession, but a 10% decline would be extraordinary. The multifamily industry has been on an upward trend, with rent prices far exceeding pre-Great Financial Crisis and pre-COVID levels. Given the structural lack of housing in the US, it remains to be seen if the industry's expansion will lead to a correction. However, the industry's current strength is notable, as evidenced by the US multifamily units started for rent index being above pre-GFC levels.
Multifamily Housing: Sale vs. Rent Trends: The number of multifamily units built for sale has declined sharply, while the number built for rent continues to rise. Single-family units being rented out is an emerging trend. Implications for the housing market and economy are significant.
The trend in multifamily housing has diverged significantly in recent years, with the number of multifamily units built for sale declining sharply while the number of units built for rent continues to rise. This shift, which may be driven in part by demographic changes and changing housing preferences, has important implications for the housing market and the economy more broadly. Another intriguing finding from the discussion was the increasing prevalence of single-family units being rented out, a trend that has received less attention but is worth exploring further. The podcast also noted that the lack of discussion about rising rents during the episode was noteworthy in itself. Overall, the conversation provided valuable insights into the current state of the housing market and highlighted some intriguing trends that merit further exploration.
