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?

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Comments (26)

Sep 16, 2021 - 9:05pm

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

  • Associate 1 in RE - Comm
Sep 16, 2021 - 9:48pm

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.

Sep 16, 2021 - 9:55pm

Complex but generally, interest rates go up buying a house becomes more expensive and Multifamily tenant demand increases.

Rental growth is sub market dependent but at sub 3 cap it's urban core in high demand, supported by professionals and rent growth will at least match inflation

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  • VP in RE - Comm
Sep 16, 2021 - 10:51pm

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.

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Sep 17, 2021 - 9:48am

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.

Sep 17, 2021 - 10:00am

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. 

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  • 1
Sep 17, 2021 - 3:12pm

In a similar situation but a few years younger. My slightly accelerated timeline has me paying off my loans by 35, and then I can start saving for a down payment. I'll probably have to move back to a lower COL city to make it work. It's a lot easier scrapping together a down payment on a $400k house than $1.5m. 

Sep 17, 2021 - 9:55am

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. 

Sep 17, 2021 - 5:32pm

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

  • Analyst 1 in RE - Comm
Sep 17, 2021 - 10:47pm

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.

  • Associate 2 in RE - Comm
Sep 20, 2021 - 5:06pm

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. 

Sep 21, 2021 - 2:59pm

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