What’s driving multifamily rent growth?
Title says it all. What factors drove the double digit rent growth we saw in 2021? Not really understanding where all this sudden demand came from. Secondly, how were renters able to absorb these increases in their rents? I understand inflation, federal stimulus, people moving out of their parents homes and relocating to new areas, Californians moving to Texas, and New Yorkers moving to Florida, may be some of the reasons. But if someone can provide holistic insight into what supported 20+% rent growth in some cities and how the various factors individually positively influence rent growth, that'd be great. Basically, looking to really understand the effect of various happenings (migration patterns, stimulus, etc) on an individual basis and understand how each event supports rent growth. Trying to fine tune my logic and better understand how the greater macro economy feeds into re. Thanks in advance!
Only way to justify buying 4% stabilized going-in cap is aggressive rent growth and driving yield to an acceptable threshold before exit. As for renters, I'm seeing rent-to-income ratios of ~50% (vs. rule of thumb around 25-25%). Add a positive forward yield curve and rising rates on top of the dynamic. Suffice to say, core, operating multifamily acquisitions is a scary place to be.
My understanding was that with so much capital in the system, cap rates are compressing and thus investors are willing to accept a lower yield. If rent growth was higher than trend, then why would cap rates compress thus leading to investors accepting a lower yield. Aren’t these investors getting just as good returns due to these massive rent increases we saw in 2021?
On the flip side core/core plus deals are the place to be in the face of affordability issues. We’re seeing a lot of value add investors move into that space under the thesis that if returns are thin might as well buy good real estate serving people that can afford the rents. Makes sense playing defense by doing some 9-10% irr deals if your fund is in a good spot. That said, feel like a lot of the groups that are financially engineering returns with floating leverage are going to get caught holding the bag if there’s a slow down.
~$50 billion in Emergency Rental Assistance + suspended federal student loans since March 2020.
Would you mind extrapolating upon this further? I hear the factors you mentioned (among other rationale) often but having trouble exactly connecting the dots all the way back to how this leads to increases in rent growth.
Always request and really look through delinquency reports. Just because someone signed the lease doesn't mean you are getting paid :-). Pretty simple, average student loan payment is $460. With people not having to pay it, the funds have moved else ware and rent as picked up a good amount of it. Everyone has eyes on the rate hikes, but the resuming of federal student loan payments will be interesting to watch unfold.
Would be curious to see an analysis that compares the impact of rental assistance vs. lost wages from unemployment ticking up the past few years. I'm not convinced it would result in increased demand to the rental market.
The student loan observation is a good one though. Quick google says outstanding loan balance is 1.6T and annual rental payments were ~520B in 2019. Assuming a 5.5% average rate that's 88B in annual debt service, enough to make a sizeable dent even if you assume half of those borrowers didn't re-allocate their budgets towards rent. Then you obviously have crazy appreciation in the stock market making people feel more confident in their wallet.
People need to realize, when this much private equity capital is being deployed, landlords NEED TO PUSH RENTS TO MAKE PROFORMA. In other words, the biggest reasons rents are increasing is because we as landlords/owners need them to move to make our nut. We pull the strings. Everything else is just BS conversation.
Don’t also forget the pressure being applied by the ever so popular CRE/CLO bridge debt that everyone is relying on to get to the closing table. Nothing like buying a 2 cap at 80% LTC, sub 1.0 DSCR.
The best is all of the "value-add" deals in Texas and Florida that sellers are putting back on the market and they can't even provide a T12 since they haven't even owned them that long. Nothings changed except its selling for a lower cap rate. Its quickly turning into a game of hot potato.
What I’m kinda getting from egold70s comment is that the investor demand is there for multi, but not necessarily the consumer demand. Thus, housing is becoming even more unaffordable. But if the consumer demand wasn’t really there, then why would developers be building so blindly. I think what you mentioned is part of the picture, but not all. OPs question is trying to get a big picture answer that incorporates the force you
Mentioned as well as others. It’s more complex than “there’s more capital out there”.
If you are in multifamily, The Eviction Lab website is great for seeing the trends in where evictions are spiking.
Yes I agree there is more to it than simply "there's a ton of dry powder chasing deals". What we should also touch upon is the human psychology element. The FOMO mentality you see in various aspects of life also plays a role here. For example, in Los Angeles over the past decade, submarkets such as Woodland Hills/Warner Center and Glendale have experienced a boom in MF deliveries. Alot had to do with upzoning in these markets, or a bunch of vacant parcels or underutilized sites. Before you knew it, every major public/private apartment developer was planting a flag in these specific markets. I recall conversations I had with a few of these developers, as to why they were building 200-400 unit projects in these neighborhoods. Every single one mentioned the fear of missing out, i.e. if 7 of my peers are building there, then we sorta "have to" follow suit. The herd mentality cannot be understated. Investors bitch about never wanting to pay a 3 cap in Tampa, Phoenix, Dallas, Vegas, etc etc. Then you watch as they get fidgety and eventually pull the trigger.
If it’s going up, Jay Powell’s behind the wheel
If you look at same store NOI in NCREIF, apartment NOI is just now at the same level it was pre-pandemic. So you have strong growth, but mostly because noi was way down in 2020.
With the eviction moratorium in place you had people staying in their units but not paying rent. This limited the supply of available units even further as in a normal market they would be evicted, and that unit would go back on market. We did see more demand and renters able to pay more with all of the free money provided by the government, but the vacancy rates we are seeing don’t take into account delinquency. I’m selling buildings that are only 80% collected in Los Angeles. I think we are at the top.
Some of it is natural bounce-back from depressed rents in 2020. If it should have been assumed that rents in Market X should grow 3-4% year over year, but declined 10% in 2020 due to COVID, then double digit growth in 2021 is just the market right sizing itself.
Also, worth noting that what rents get asked and what get paid are vastly different. A unit that asks $40/sf of rent but is giving 3 months concession is renting a lower rate than the $32/sf renewal with no concession across the street. Not a lot of transparency with those kinds of economic loss factors.
I think 2021 rent growth might be little misleading. In 2020, face rents in some of the submarkets we operate in dropped 12%. In 2021, rents basically rebounded back to normal levels for us. So 12% rent growth in 2021 was a return back to normal. If you look at it from another lens, renters received discounts in 2020, and 2021 is back to normal.
Another thing that benefitted our buildings is that there were barely any deliveries in our market in 2021. Competition did not increase for us in 2021, which is a positive thing for rent growth.
To answer the second part of your question- most luxury multifamily tenants incomes were unaffected by the pandemic, and most of those tenants earn a fuck ton, so most can afford the rent increases no problem. Those who can't move to cheaper buildings, who's rents may have increased 15%.
But its crazy. I earn $70k/yr. and pay $1,000/month in rent I know people earning the same who pay $1,800+. They can afford to live but aren't saving much.
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