Falling Rents - Time to Run for the Hills?
For all of the multifamily monkeys out there, what's your outlook on the rental rates in major markets?
I've been reading more and more gloomy reports on free-falling effective (and even asking) rents in all of the major markets, particularly SF and NYC. The supply of outrageously priced and over-amenitized rentals appears to finally be reaching an inflection point. The landlord's response has largely been handing out exceedingly generous concessions, particularly free rent as the alternative to decreasing rents. I can confirm this as I just received free rent with a renewal as well as many others I know.
The consensus appears to be that the rents have officially gotten too high and with all the brand new and incoming supply, renters now just have too many choices to put up with the egregious rents that brand new buildings are asking. The supply-demand imbalance seems to be tipping in favor of renters.
Now the real question is - how long is this correction going to last and how are investors and lenders adjusting to this in the near term for their current and potential new deals? I, for one, am cutting projected rents and looking at deals strictly on an untrended basis on all new deals we're looking at.
The market's "safest" asset class appears to be getting a lot sketchier by the day...
We're pretty bearish on short term rent growth in our markets (Sunbelt, Mid-Atlantic, and Boston). We're not calling negative growth, but we sure as shit aren't underwriting 5% growth
A few notes: 1) we're usually not underwriting for big mark to markets, 2) mainly just using LTAs for growth 3) budgeting more for upfront concessions to help work through any supply gluts our deals might face 4) getting even tighter on how we look at VA deals (i.e. need a lot of head room btw us an newer deals, ~$300+) 5) we're already pretty low leverage, but if we weren't we'd be trying to fix that
All of that being said, we're still buyers and there are buying opportunities as widely marketed deals don't hit pricing or can't get financed at pre-election rates. Still bullish on the space long term, but we'll be working our way through some headwinds in the next 12-24 months (hope that's it). The sky isn't falling, it's just regressing to the mean... kinda.
From a lender POV - we aren't pulling away from deals, but we certainly aren't going full bore into multi right now. If we do, we are underwriting very minimal rent growth if we project growth at all.
so like 10 years io?
Crossing my fingers that Los Angeles rent decreases.
Same. Friend just got a 5% increase in West LA though.
I got a
I have not heard of any rents softening in San Diego. I'll be watching this thread though. Love to hear what is going on elsewhere.
Rent will not change in San Diego, too much demand and not a lot of supply. For now at least. However, rent prices might drop if people leave/relocate if prices are too high. I have had coworkers and friends take about 1-3 months to find a place.
They need to build more units, apparently.
There is some talk to allow three story development in and around places like PB. Once you get a couple blocks off the beach I don't see a problem with a general plan allowing a third story.
Vacancy in San Diego is beyond tight to say the least. One of the largest private owners in town (5000 units) has a building here in Pacific Beach by me. I know his managers well. 500sqft 1br for $1700 lease immediately.
Incomes in San Diego are really poor for being a big'ish city. I'm surprised rents keep going up with this external force of modest wages locally.
I'm pretty concerned with the rent-to-median income ratios that i've been seeing. In NYC, the ratio jumped by over 5% year-over-year (from 60% to 65%). The normal 40x rent rule equates to 30% of income. On top of that, incomes are not growing at 5% per year, and rates are about to start increasing. I don't see how the current market in many of these expensive cities can be sustainable for much longer.
If you guys have access to GreenStreet, they just put at a report that the markets with high demand usually have high supply - therefore rents aren't as strong as initially thought.
But what they did find, was that markets that had high growth in household median income had the best rent performance. Markets like SD, SF, Nashville, some others IIRC.
Also, from a lender POV we don't underwrite any rent growth. And never have as far as i know
+1 sb. In addition to income growth, I think that high construction costs are causing barriers to entry in some of the 2ndary markets which is also helping to drive rent increases.
What do you mean by 'free rent'?
It's a concession they'll give you to sign or extend a lease. EG: sign a 12 month lease and get 1 month free, etc.
[Edit]To add, it is a tactic used to make it look like they are not decreasing rents. Basically it allows them to market the units at listed rates without having to show a decrease, while actually letting the tenant get a monthly discount equal to the free rent divided by the lease term.
Bonus points for giving AMEX gift cards and lumping that shit into your marketing costs so you don't show any concessions on the rent roll or financials.
Lender's don't underwrite growth at all. They did prior to the recession, which is what screwed them up. Now they just base their rent on comps and do sensitivity analysis to see at what level of decrease in rent and occupancy will the proper still have 1.00x+ debt service. I know Houston had rent growth of like 5%+ for last couple of years. It was unheard of to see a concession. Now I am seeing the top MF developers there offer like 2 months free. Its insane.
Simply not true..
What's not true? We hold between $30-70B on our BS at my shop and we don't UW any rent growth. We size to 1.30-1.40 coverage on riskier construction deals, 1.25-1.20 on other run of the mill deals. I don't think I've ever seen something underwritten under 1.10 get approved.
"I've been reading more and more gloomy reports on free-falling effective (and even asking) rents in all of the major markets, particularly SF and NYC."
do you follow wolf street? he has been taking about gluts for a while.
edit: every time I hear/read someone mention "safe" asset classes, I think of Narcos: Plomo o Plata
Multifamily was shit in the 90's.
still a ton of multi product in the NYC pipeline coming in 1-2 years. As a tenant here im pumped. as an investor im interested to see how valuations play out with rising interest rates + flatish rent growth.
I'm pretty pumped too, but I still don't see NYC becoming affordable. But I'd love to see a 25% rent drop for a variety of reasons. 1) My rent gets cheaper and 2) more acquisitions getting done=bigger bonus.
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