Let’s talk multi family rent growth…

With many institutions and companies purchasing sub 3 caps betting on rent growth from Covid lows, who says that this short term month over month rent growth is sustainable in the longer term?Factors like unemployment, end of eviction moratorium, inflation etc. make cause rental growth to be on the lower end due to many Americans not being able to afford rent?Anyone have thoughts on how to Justify purchasing assets at a high price when looking at the macroeconomics of many Americans not being able to afford rent if that’s the case?


everyone talks about low interest rates being favorable to purchase assets for investors but what is the correlation of interest rates and tenants ability to pay rent? If interest rates are 3% versus 7% versus 10%, how does this effect apartment demand from a tenant perspective?

 

Think the question shows a fundamental misunderstanding of macroeconomics and drivers of Multifamily demand/pricing. Difficult to even address, would recommend reading Multifamily research reports and institution capital allocation trends

Edit: Im getting MS for the answer but the premises of this question are just incorrect- institutions aren’t making purchases based on rent growth, they’re buying because real estate allocations are increasing as ig bond return less than inflation. And “everyone talks about low interest rates being favorable to purchase assets”, who is saying this? Sure interest payments are low but pricing is through the roof as a result and I’d be hard pressed to find someone saying the current environment is favorable for buyers 

 

This is a great question. Pls respond better. He’s asking about how do capital allocators justify rent growth and how interest rates dictate tenant demand.

This is a pay grade above me to answer.

 
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500 RE investment funds are sitting at a Chilis and chatting with each other. The largest fund says to all the smaller funds, "who is buying at these cap rates?". Smaller funds say "Its ridiculous. We cant make money on this." They all agree to not buy anything so cap rates stabilize. However, the largest fund ends up getting a $100B investment from a pension fund. Larger fund says "Welp, if I gotta pay the bills and my staff so Im gonna buy that Southeast multifamily portfolio at a 2 cap so I can rape my investors in asset management fees". Smaller funds says "You bitch, you screwing things up, I am refusing to buy anything and you're gonna be the sucker at these low ass cap rates." After some time passes, some funds start to cave and buy as well because they also realize they need to screw their investors in fees so they can pay for those tasty appetizers. Meanwhile the remaining funds still thinking Class A MF would return to 6 caps are jerking off in the parking lot at Chilis since they can't pay for 2 for $20 and realize they can only drink the free water.

 

You think rent growth is crazy... look at home prices... toss in the fact that most of the country has limited savings (even at the top-quartile of the earnings spectrum) and you have amazing near-term and long-term demand fundamentals.  No one is underwriting 10%+ rent growth in perpetuity, but a 4% CAGR in top sunbelt or gateway market locations is not an unreasonable assumption.

 
Count_Chocula

You think rent growth is crazy... look at home prices... toss in the fact that most of the country has limited savings (even at the top-quartile of the earnings spectrum) and you have amazing near-term and long-term demand fundamentals.  

I honestly can't reinforce this enough. I'm in my low to mid 30's, just got promoted, and my wife and I are still renting since we're aggressively paying down student loans as opposed to saving for a down payment. If I can't save for a downpayment on a house, or at least am choosing to redirect my earnings elsewhere at the moment, I can't imagine how the average person is. 

Commercial Real Estate Developer
 

Same (and have a lot of friends in the same boat). When you have a friend who works at Google in a non-Gateway market and has a wife with a masters degree and they can't afford to purchase a home, that's what is driving this. My wife and I have made the decision to use our savings elsewhere (personal investments, etc) rather than try to buy into this market. I'm not saying prices will necessarily crater or even drop, but I know people who have made more than 20 offers to try and find a home. Waiving inspection, bidding over list, quick closes - this is how people end up making a huge mistake. I'll pay the higher price, but I am not going to be rushed into it. 

 

Inflation.  That is the simple answer.  The rent growth rates will track with high inflation and people will look like genisues but in reality there will be little marginal change.  Remember much of the investment industry is based on the perception of people looking like geniuses because everyone else is too dumb to spot the actual problems. 

 

Interesting q OP. I think what shes asking here is if interest rates go up, cost of borrowing goes for the landlord, but how can owners justify increasing rents? Whos certain that rent keeps going up? What if moreHomes get built and rental demand takes a hit

 

Read a pretty good article the other day that summed it up nicely:

1. young people that were impacted by covid are starting to move out from mom and dads now that economy is getting better and companies are getting closer to returning to the office, thus increasing demand.

2. Middle income is being priced out of housing market thus forced to pay whatever rents are.

3. Still limited supply, especially in sun belt markets that are seeing massive in migration.

looking at a portfolio now that is a low 3 cap but still getting mid teens levered irr. Not bad.

 

I am not the OP and I dont have excel in front of me, but the bank I work for recently started lending 80%LTV for select multifamily deals and select sponsors. We do this to compete with the agencies. It is A-B program so there is less risk for is. Plus we often keep the whole fee for ourselves, so its profitable from a return perspective as only retain the A note but get fees on the whole loan. We have several good relationships with B note lenders and for MF they go as low as 450 bps for our deals, it's insane. The low B note is significantly lowering the all in coupon to be in the 2-2.5% range over Libor. And on top of that we also fund almost all of the capex. If sponsors get $200-$500 premiums in year 2 or year 3 and get almost all of the capex funded, low 2 handle all in rate, 80% leverage, low teens IRR wont be surprising. Of course, we vet comps to make sure there are comps for projected post renovation rents, but thats a crapshoot and a different conversation. 

 

Let me put it to you this way: 

I'm 29, had an investment property in the tri-state area for the last two years. By some miracle survived the worst of the covid eviction moratorium and had no issues with tenants. Development firm put up a high end apartment complex right next to my house. If I was to rent out my units to new tenants today I could easily take 20% more in rent. 

 

What is not being discussed here is that we simply do not have enough housing units in this country due to decades of under-building. Every year that we fall short of unit deliveries, the problem has a compounding effect, getting exponentially worse.

As such, rent (and single family values) are rising steeply due to simple supply/demand dynamics. This is making investors realize that the risk of multifamily (and single family) is decreasing substantially, and they are now willing to pay lower cap rates.

I personally do not see this correcting itself anytime soon. What keeps me up at night is political risk since the media is starting to cover the issue almost daily now.

 

I'm not sure I follow on your last sentence there, I feel like the politics will shift towards more housing now that the media is covering the issue daily, that's what we're seeing with jurisdictions like California and Minneapolis eliminating SFH zoning. People are starting to recognize that we need more supply and some politicians are taking notice, what political risk are you referring to?

 

Man... if y'all are waiting on local governments to solve this in the near term... I've got some bad, bad news... NIMBYs are everywhere and wield considerable influence.

Abolishing zoning laws that restrict development to single-family is certainly a step in the right direction, but let's be real the bigger problem in CA is CEQA. 

Let's take Dallas, Texas, for example, that market has averaged ~19k new apartments units per year for the last 7 years (LTA is ~12k/yr, so 1.6x the LTA) equating to inventory growth of 3.2% (LTA is 2.1%, 52% more than the LTA), and despite all of that home prices are up like crazy (up 2x since 2014 per Zillow), and my portfolio of deals there is still seeing ~15-20% average rent growth over the last 6 months (across ~7k units).  Occupancy is crazy tight and market inventory for homes is still lacking, plus developers can't get enough materials to build anything new.  It is weird to say, but that market needs to deliver a shit load more housing to meet demand... assuming the goal is to keep home prices and rents attainable for the average Joe.  

 

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