Rent prices peaked in 2022 after a double-digit percentage run-up. Due to more household formation, disposable income, and remote work availability, Americans were doing whatever they could to upgrade their housing to bigger, better, and often more expensive options. But, after interest rates shot up, the economy began to cool, and work-from-home became a not-so-sure thing, Americans became more budget-conscious. As a result, vacancies rose, and rent prices began to fall. So, how close are we to seeing rent growth return?

Apartment List’s senior housing economist, Chris Salviati, joins us to share what his team has seen in the nationwide rent data. Chris looks mostly at large apartment data—the sector that’s been hit the hardest in recent years. With multifamily properties struggling to find renters and lowering their asking prices to prompt demand, you’d think the market had found a bottom—but this isn’t the case.

A tidal wave of multifamily inventory is about to come online, and when it does, multifamily investors will be forced to compete with the newest and most luxurious options on the market. Will this oversupply trickle down to single-family rentals, or will renters turn away from the A-class buildings in search of more affordable options? Chris gives us his thoughts, plus future rent growth predictions, in this episode!

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Dave:

Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. Joined today by James [inaudible 00:00:13] James, you ready to talk about rent trends? We haven’t talked about this in a while.

James:

No. We’ve heard about everything else, the doom and gloom, and now we’re starting to hear more of that. Where’s the runway on this multifamily, going forward?

Dave:

Yeah, it’s a really important topic because at least what I was seeing for a long time is that investors were jumping into the market with the assumption that rents were going to go up, and even if things didn’t pencil in year one, they might pencil sometime in the future. And today we’re going to examine if those are safe assumptions to be making in today’s day and age. So we are bringing on an expert. We have Chris Salviati from Apartment List. He’s their senior economist and he’s going to teach us a little bit about rent. He’ll first start with historic trends and context, so we all are on the same page about what happened with rent during the pandemic. Then we’re going to shift gears and talk a little bit about what’s happening with rents today and how different sectors of real estate are performing differently. Residential might be different than multifamily, one market might be different than another.

Lastly, Chris is actually going to give us a prediction on where rent is going to go throughout 2024. One thing I’m super excited to talk to Chris about is the saturation of the multifamily market, because we’re seeing a huge boom in multifamily supply, and that is going to cascade throughout the industry. So this is a great episode if you’re in multifamily, if you’re in residential, if you’re trying to buy a property, because this type of data, this type of information really helps fuel your underwriting. If you’re going out there to analyze a deal, this is the kind of information you should be paying attention to and building into your performance and your assumptions. So with no further ado, let’s bring on Chris from Apartment List to talk about rents. Chris, welcome to the show. Thanks for being here.

Chris:

Hey Dave, thanks for having me on.

Dave:

So Chris, before we get into some of the more recent data that you and your team are working on, can you give us some historical context about what has been going on with rent growth over the last few years?

Chris:

Yeah, definitely. I think it’s important when we talk about what’s been happening with rent growth recently to really place it in that historical context. And really I would go back even pre-pandemic just to set up the lay of the land of how rents had been growing, and then how obviously this crazy disruption that we’ve had in recent years has impacted that. So our rent estimates go back to the start of 2017. When we look at that pre-pandemic year period, 2017 to 2019, we were seeing pretty modest rent growth, just in line with what inflation had been at that time, two to 3% per year. We were seeing the average rent growth from 2017 to 2020 was about two and a half percent.

Then fast-forward to the pandemic, we see obviously all sorts of wild disruption that first year of the pandemic, we really saw a pretty big divergence in rent trends happening in different markets. A lot of the expensive coastal markets saw folks bleeding as they had new remote work flexibility, rents really plummeted in places like San Francisco, New York, DC, Boston, and then a lot of the more affordable and mid-size markets were actually seeing prices increase in that period. But that all added up to our national rent index seeing a very slight decline in 2020. Then 2021 is when things really went through the roof, basically everywhere. Our national rent index was up by 18% in 2021, which is really wild.

Shattering the records of previous rent growth there for a single year. That really hot market persisted into 2022, in the first half, and then the back half of 2022 is when things really started to cool down. And that’s persisted through present day. And so rent’s now about four to 5% lower than the mid 2022 peak, still about 18% higher than they were at the onset of the pandemic. And so if you add that all up, that 2020 to 2023 period, we saw average annual rent growth coming around four and a half percent, when you put together that one really crazy year of rent growth and a couple of years of cooler rent growth.

James:

Yeah, I remember when the pandemic hit, it was, as landlords, we were all freaking out for a minute. We were like, “Are we going to not be collecting rent? What’s going to happen?” And it was like doomsday for a 45-day period. And then as it heated up, it was the most unreal thing I’ve ever… Well, there was two things going on. There was home appreciation that was rapidly shooting up and then rents were climbing just as fast, and it turned into this consumption of your units. And we’re in an expensive coastal town, Seattle, but we still saw a ton of rent growth because people just wanted to live where they wanted to live during that time.

And I just remember sitting there watching this and going, “Okay, what’s going to happen? Is there a massive crash coming?” And then what we saw was kind of that 5% pullback, just like the appreciation when hockey sticked up, real quick, rates spiked and then it deflated, and now it’s leveled out. And that’s definitely what we’re seeing right now in our rents. Not a lot of drop, it’s just consistently being absorbed right now.

Chris:

Yeah. I think that’s reflected in our rent data too. Like I said, we’re seeing a little bit of a dip over the past year, but it’s not reversing that really massive rent growth that we saw in 2021. It’s really just the market stabilizing and cooling off after this really hot period.

Dave:

Chris, during the pandemic, you talked a little bit about migration and how that jacked up rents and pushed demand in certain markets, but one thing that is a little unclear is if people were leaving some markets to move to the southeast, like so many people did, or wherever they moved to, wouldn’t there be less demand in the markets that they left and there would theoretically then be downward pressure on prices in those places people were leaving? But we saw pretty much ubiquitous rent growth, even from places like California, where you saw a decrease in population. So how do you square those two data sets?

Chris:

Yeah, I think there’s a couple of things going on under the hood here. So like I said, in that first year of the pandemic, we did see the dynamic that you’re describing, where we saw a lot of that migration happening from expensive markets to more affordable markets. And in that first year of the pandemic, we saw actually sizable rent declines in a number of those markets. The Bay Area led the way there, prices down about 25%, by our estimates in 2020. And a lot of those markets then did rebound. And so I think what we saw was in that first year of the pandemic, maybe that dynamic that you’re talking about where there actually was a big migration shift that led to prices diverging, where the expensive markets were getting a little bit more affordable and the more affordable markets were seeing prices increase.

2021 is when we saw things really pick up basically across the board. And I think what’s happening there is really, in addition to this migration channel, we were just seeing really strong household formation, basically everywhere. So more folks striking out on their own to form new households. I think intuitively that makes sense, right? In that first year of the pandemic, you had a lot of people hunkering down, sheltering in place, not knowing what was going to happen, and just being really cautious. And then after about a year of that, we realized, “Okay, this isn’t going away anytime soon. This is the new normal.” And folks that had been particularly maybe a lot of younger folks that had maybe moved back with their parents to save on rent in those first few months of the pandemic, after six months of that, I think a lot of those folks were deciding that they needed their own space.

And that’s one example. You can take a similar dynamic with folks that had been living with roommates. Maybe that was a great setup when four people living together were all going to work every day, but after a year of everybody working from home, a lot of folks deciding that they needed their own space. And so I think that drove this real surge in household formation, and that was happening pretty much across the board. So you had two things going on, where there was both these migration channels that were shifting demand from certain markets to other markets, but you were also seeing demand rising across the board, at least in that 2021, early 2022 period.

James:

Yeah, I think there was that hermit factor where everyone was kind of stuck inside and they’re like, “I got to get out, I got to get out.” But there was also just a massive amount of disposable income increase. People were making a lot of money in the stock market, Bitcoin, housing. It felt like the faucet got turned on in the US and people just go, “Okay, well I’m making tons of money. I’m going to go live where I want. I want this freedom.” And then as rates have increased pretty dramatically, we’ve seen the trends shift. People are being a lot more cautious on what they want to spend money on and go, “Well, do I really need this property or can I live here and be happy right now?”

Because I know disposable income, it was up around 25 to 30% in 2021, and then in 2022 it was decreasing as rates go up. And what we’ve seen, in a lot of our portfolio, is just people are being a lot more selective when it comes to spending that more luxurious rent. They’re being very cautious. The more affordable rents are still getting consumed pretty quickly right now. If you’re on the bottom end of the rent market, the medium price, it is getting absorbed very quickly, but as you get towards that premium price, it is stalling out.

Dave:

Okay. So now that we’ve gotten through the historic stuff and what was going on during the pandemic, we’re going to move on to what is happening today right after the break.

James:

Welcome back to On the Market. What are you seeing in today’s trends as far as the luxury versus the more affordable in the consumption rate of what’s going on in the rental market across the US?

Chris:

First thing I’ll say is just a little bit of a, not to get too in the weeds and wonky here, but just a little bit of disclaimer about the Apartment List rent estimates and how our methodology works. So we’re looking at rent changes across new leases and we do basically a same unit methodology where we’re looking at, for a given unit, what price is it renting for today and how much did it rent for the last time that it was available? And then we aggregate those up. But the thing that I think is important that relates to your question is the sample of properties that we’re looking at, the properties that show up on Apartment List platform, we do see more of the large professionally managed multifamily properties that tend to hit at the higher price tiers.

And so to the extent that price trends are maybe diverging a little bit in that high price tier versus the lower price tier, I think that probably our data is a little bit more reflective of that high tier. And as I said, what we are seeing is that things are definitely cooling down there and have been over the past year and a half, and I think it’s for a lot of the reasons that you just laid out. We just talked about this crazy rent growth that we saw in 2021 and the first half of 2022. And so now if you are looking for a new place to rent, you’re going to be looking at prices that are a lot higher than they were a couple of years ago.

We’ve also had a period of heightened inflation where folks budgets are being eroded for non housing goods as well. So I think a lot of folks are finding that their dollars aren’t going as far, and also having a lot of caution about the economy. I think through this period of inflation and rates increasing, a lot of folks have been fearing that there might be a recession around the corner. We are seeing some of those consumer sentiment numbers starting to rebound a little bit. But I think we’ve been seeing that we’ve been in this period where a lot of folks have just been behaving a lot more cautiously over this past year than they had been maybe two, three years ago.

Dave:

And Chris, how does that trend translate to vacancy rates and through the overall national median rent?

Chris:

Yeah, so vacancy rates, we are seeing climb, our national vacancy index right now is sitting at 6.5% per comparison. That’s just slightly ahead of where we were in the pre-pandemic average, 2019 average of 6.2%, where there was a bit of a peak in the early phase of the pandemic where it hit 6.8%, so we’re still a little bit below that. But it has been easing for quite a while now, during that period of really rapid rent growth in 2021 where the market was really tightening up, a lot of stuff was moving really quickly, and there was a period there where our vacancy index got as low as 4%, and so it has been consistently easing for a while now.

That varies by market. There are markets where it’s a bit higher. We are seeing, right now, that there’s actually a historic amount of multifamily units in the construction pipeline. A lot of that is expected to hit the market this year. And so as a lot of that new inventory comes online, I think where we think that there’s potential for vacancy rates to ease even a little bit further. And yeah, as far as the growth numbers, just to bring that back to present day, our national index right now is showing prices down about 1% year over year nationally. Again, that varies a bit, market to market.

Dave:

I just want everyone to make sure they understood what Chris just said. We talked in the beginning of the show a little bit about demand and how it shot up during the pandemic, and that’s been leveling off. But there’s also this other variable at play here, which is a very big increase in supply. And if you know about supply and demand, just as a refresher, if you’re getting slowing demand and increasing supply, that is what leads to downward pressure on prices. So Chris, can you just tell us a little bit more about this glut of multifamily construction that’s been going on, and all these new units that are poised to continue hitting the market throughout 2024?

Chris:

Yeah, yeah, absolutely. So right now there are almost a million multifamily units in the construction pipeline, and that is the highest number in decades. Part of this is backlog of some projects that were delayed in the early phases of the pandemic, so there were disruptions to construction. Some of this has just built up. But then we’ve also seen really fast permitting activity over the past couple of years as well. And so right now there’s huge number of units in the pipeline. That does, like I said, vary a lot, market to market. A lot of this is coming in Sunbelt markets. Austin, in particular, is one market that really has been permitting and building a ton of new housing. That’s the market that, on a per capita basis at least, has been leading the way here for a number of years now. But a lot of those markets throughout Texas, Florida, really most of those Sunbelt markets, have been building quite a bit. And a lot of that inventory is slated to come online this year. 2024, we’re expecting to see the most new multifamily units be completed again in decades since the 80s.

I should say also that putting that in the supply and demand framework, we’re expecting that all of this new supply is really going to temper rent growth again, having much more of an impact in some markets than others. The other thing that I’ll say though is that this period of having a lot of this new supply coming online, this isn’t going to be an indefinite phenomenon. We’re already seeing that, as rates have increased, that new permitting activity is really slowing down. And so a lot of the projects that are under construction right now are still projects that maybe broke ground in a lower interest rate environment. And so now, if you’re just thinking about this from the developer’s standpoint, with rates so much higher now, it’s a lot more difficult to make these projects pencil out. And so we are expecting to see a ton of new come online this year, probably into next year. But as we get solidly into 2025 and into 2026, I think that is going to settle back down.

James:

Yeah. And a lot of these markets we saw prior or during the pandemic is there’s that gold brush approach for developers and apartment buyers and they were really getting after the permits to bring in more units, in especially these metro markets in the Sunbelt. Regionally, do you see certain areas having a lot more issues than others across the US? Because I know in the Pacific Northwest or in LA, or even in Phoenix, where I know a lot of people that were developing apartments, there is so many units in the queue, and not only that, they’re way behind schedule because the permitting timelines took so much longer than they thought.

A lot of these permit timelines doubled what they were thinking. They thought it was going to be about a year and a half and it took three years. And now their money’s adjusted, the cost adjusted, bill costs went up by 10, 15% during that time. And the numbers and the math look a lot differently. But it seemed like everyone was goal rushing to the Austins, the Scottsdale, the Seattle, the San Franciscos. Where regionally are you seeing the most amount of inventory coming in?

Chris:

Yeah, like I said, Austin has really been going crazy there. That’s the market that is seeing, by far, the most new per capita housing construction. And just to come back to this impact of all this new inventory on prices, we’re seeing pretty clearly that that is starting to have an impact. Our rent index for the Austin Metro is down about 6% year over year right now, and that’s the biggest rent decline that we’re seeing nationally. And so that’s a market where at least in the short run right now, it’s looking like there might be a little bit of actually an oversupply, at least when we’re talking about this multifamily segment. But again, I think it’s a lot of those markets throughout the Sunbelt. So really all of the markets in Texas, Florida, Vegas continues to build a lot.

Nashville is another one that’s building a lot too, Charlotte and Raleigh. So a lot of these markets, what were maybe a few years ago, I would have said more affordable Sunbelt markets. A lot of these markets have seen really crazy rent growth in recent years, so maybe affordable isn’t necessarily the right word right now. A lot of the more traditionally pricey coastal markets that you mentioned, your Seattle, San Francisco, LA, as we’ve seen in some of these markets, Seattle is actually one that has seen definitely a notable uptick in new construction, not at the level of a place like Austin, but definitely seeing a little bit of a boom there. Places like San Francisco, LA still really building pretty slowly. It’s maybe started to tick up a little bit, but these are markets that the reason that they have become so expensive is because they’ve been under building for a long time. These are markets where it’s really difficult to get new housing built and that has continued to be the case.

Dave:

Yeah, Chris, I just want to follow up on that. Actually, the CEO of BiggerPockets, Scott Trench, wrote an article for the BiggerPockets blog, that you can all check out for free, where he was theorizing, the thesis he has is that multifamily is going to continue crashing through 2024, and he provided a good example using Austin, which we’re all beating up on here today. But he was saying that, just so everyone understands, Austin is forecast to have a 10% increase in their deliveries of multifamily units. So they’re, in one year, going to see a 10% increase in their stock. And to offset that, you would theoretically have to have a 10% increase in household demand, otherwise something’s going to break there.

I don’t know, I’ve never seen a city grow 10% in terms of household demand in a certain year. So I think that’s why, for everyone listening, when we’re talking about why this increase in supply could negatively impact rents, it’s because just household formation and demand can’t keep up, at least in this period of time right now. But Chris, I want to make sure that when we’re talking about this increase in supply, we are talking about multifamily. So do you think that that increase in supply multifamily may spill into the residential or small multifamily space as well?

Chris:

Yeah. I think that this is a really important call out here. We’re talking about all of this new supply coming online, but a lot of this new supply, it’s not as if we’re seeing an even distribution of new supply representing all types of inventory and levels of affordability. A lot of this new inventory is coming online in the form of larger multifamily complexes that tend to hit at higher price tiers. That in and of itself isn’t really atypical. It’s always the case that new construction tends to come in as class A higher priced units, and then over time, as those properties age and depreciate, they become more affordable.

But to have this glut of new inventory coming at once, I think what we’re seeing is, to take a market like Austin again, we’re going to see a lot of this new inventory that’s, a lot of it is going to look pretty similar in terms of type of inventory and price point that it’s hitting at. And again, this is the segment that we’re tracking closely in our rent index. I think that’s the area that’s going to see the most competition from the new supply and also probably the most softness in prices going forward. I think when you’re talking about different types of inventory, I do think that there is the potential that there’s going to be some different trends happening there. Certainly there is some spillover happening.

Having all this new competition from new supply in this one particular segment, is going to affect different segments. But when you’re talking about more affordable, smaller property sizes, I think those are properties that are probably going to see a little bit more resilience in prices in demand going forward than some of this higher price tiered multifamily stuff. Single family rentals is another thing that we can talk about too. That’s been an area of the market that has been really picking up in recent years as well. And so I think that that’s another example of an area where I see some differentiation in the market. Not all inventory is built equal. And so just because there’s a ton of new inventory hitting the market, that’s not necessarily going to affect every slice of inventory equally.

James:

Yeah, we’re seeing a lot of that, the new construction spillovers actually, what I’ve found, as a smaller operator, is we’re seeing a better spill off from that because if you’re bringing renovated product to the market right now, on average we’re about a dollar to two bucks rentable square foot cheaper than new construction. We’re in the same location. We’ve updated the whole property. They’re getting their new cabinets, their new cabinets, new flooring, the washer, driers and units, they get all the amenities that they want. And it’s not new construction, but it’s shiny and it’s a nice place to live. And we’re seeing the demand spike on our rental units pretty dramatically over the last six months because we are a good place to live, we’re a great option, and we’re not the same price. And we’ve seen, it’s crazy, in Seattle, and I’ve talked to a lot of other operators too in the Phoenix market and even in SoCal and their units are getting growth.

We’re getting about three to 4% growth in our rental pricing right now. And our vacancy rates are staying around 3%, and we’re not seeing a lot of movement out of our building if it’s a fully stabilized building. People just don’t want to pay for the move right now either. And that is one trend we’re starting to see is people, they’re nesting because they don’t want that expense. And if you’re not really raising your rents really high, they’re just staying where they are. I am thinking that actually all these new construction units come into market, it is actually helping us, as the small mom and pops, because it’s naturally dragging up the price. It’s the median home price in the US right now. Rates are up and we’re still getting that median home price is still increasing throughout the year. It’s because it’s on the lower end of the affordability in a lot of different markets and it’s almost like a natural poll that’s helping us up right now.

Chris:

Yeah, I think to your point here, again, just going back to what we’ve been seeing with demand and broader macro trends over the past couple of years, folks are definitely more budget conscious right now. And so if you’re able to offer them a unit that is still a high quality unit but is a little bit more affordable than that new construction, I think that’s definitely really appealing to a lot of folks right now. And I would say also that some of this maybe comes down to type of inventory as well. I mentioned single family rentals.

A lot of folks are priced out of the for sale market right now, but are maybe in a phase of life where they’re looking for that type of living rather than living in a large multifamily complex. And so I think we’re seeing some demand too just for in terms of property types, folks, a lot of this new construction that’s coming online maybe just isn’t aligning with the type of inventory that they’re actually looking for. And so other segments of the market that aren’t being as affected by this competition of new supply, I think are still seeing some strength.

James:

Yeah, It seems like their competitive edge right now is their rent considerations, because they are offering a lot to get their units filled. They’re offering two, three months worth of rent credit sometimes, especially in that higher end market. One question I had is, do you think that affects any of these statistics? If Austin’s down 6% on rent right now but they gave away three months worth of rent just to get it to that 6% level, do you think that that data could be really skewed, or is that something that you guys look at as you’re digging through the statistics of the markets?

Chris:

That’s a great question. Speaking to our data, our estimates are not accounting for any of the concessions of the type that you’re talking about. And so we’re just looking at the transacted monthly rent price. So if that lease incorporated one or two months of free rent, we wouldn’t be capturing that at all. So if anything, we might be understating the softness if there there’s, in addition to the price softness that we’re seeing, in addition to that, there’s been an increase in these sorts of concessions, which I think that there has been, not something that we track at Apartment List, but I have seen outside data sources that are showing concessions on the rise. And so it’s not factored directly into our rent increases, but I do think that’s something that’s been increasing, and actually would maybe indicate that things are maybe even a little bit softer than we’re showing, at least for that particular segment of the market.

Dave:

So we’ve heard a lot of great information from Chris already and there’s plenty more where that came from right after this quick break.

James:

Welcome back to the show. Let’s get back into it.

Dave:

Chris, while we have you here, I’d love to ask you something a little bit wonky because that’s what we do on this show.

Chris:

Absolutely.

Dave:

One of the main things that has been keeping the CPI, the consumer price index, which for everyone listening is just the most common way of measuring inflation. One of the things that’s been touted as keeping the CPI high is rent and housing costs. And if you’ve listened to the show, we’ve dug into this a little bit before, but a lot of the way the government tracks rent lags by six or even 12 months. So I’m curious because you have all this private data that is hopefully a bit faster than the government is collecting things, is this decline in rent that you’re seeing starting to be reflected in some of the inflation data?

Chris:

Yeah. So this is something that we’ve been tracking closely for a while now. I love this wonky question, it’s a great thing to nerd out on a little bit. The short answer is yes, I think I would say that, to give a little bit of background here, really the difference between what we’re seeing in our data and how this is tracked in CPI and inflation measures, really is just that it’s tracking different things, right? While we’re looking at price changes across new leases, the CPI is tracking rent changes across all leases. And so because only a small share of households move in any given month, most rent increases happen when you move for new leases. For tenured tenants who are renewing a lease, oftentimes they see much lower or even no rent increase. And so that difference between looking at new leases only versus looking at all households, that’s basically the source of this lag that we’re talking about here.

And so it is the case, like you said, that the CPIs measure of rent inflation has been much slower to track this cool off that we’ve been talking about than our index, but it has started to happen. The rent component of CPI actually peaked last year and has been gradually declining for a little over six months now. It still remains elevated though, so both things are true. It’s cooling off, but it’s also still one of the factors that is keeping top line inflation elevated. It’s still exerting upward pressure. The rent component of CPI is currently at about plus 6% year over year, again, compared to our index, which is showing rents down slightly year over year. And so it’s catching up, but it is going to take a while to fully reflect that cool down. I think the one other thing that I would add here is just that this is something that the Fed is very well aware of this.

They keep an eye on private sector data sources such as our own. And so this is one unique component of how inflation is calculated, where most parts of it, we don’t really have a clear indication of where it’s going to be headed in six, 12 months. The housing component is actually unique in that sense, where there is this really good private data such as the Apartment List rent estimates, and other private sector data sources that can tell us, with pretty good clarity, where we think that the official CPI measures are going to be headed. And so we do think that this cool off, it’s going to take a while longer, but it’s definitely headed in the right direction.

James:

So Chris, the big question, is where do you think, personally, where do you think rents are going to go throughout 2024? Do you think we’re going to still see this gradual decline or do you think we could start seeing things turn around, or is it also market specific? Do you think certain markets are going to do better than others?

Chris:

I guess I’ll start high level. I think we talked a lot about supply, that part of the equation is pretty clear. We know that there’s a ton of new supply coming online this year. I think the place where there’s a little bit more of a question mark is what’s happening on the demand side. We’ve talked about what’s been happening recently, how folks have been really behaving pretty cautiously in response to macro conditions. As I said, we are seeing a little bit of an improvement in consumer sentiment recently. And so I think that there is probably some pent-up demand for household formation, and some of that may start to play out over the course of this year, assuming that we continue to see the inflation numbers improve and the rest of the economy remain relatively strong, which it does look like the Fed has starting to head in for this soft landing and that some of these recession fears are starting to abate.

And so as demand rebounds, I think that that will be the X factor, seeing how good demand ends up coming in this year and whether it’s enough to absorb all of this new supply. I think my best case assumption is that rent growth nationally is going to remain pretty soft this year just because really, again, all of this new supply that we’re talking about, I think it’s going to be pretty hard even if demand does rebound, which I think it will rebound a bit. I think it’s going to be pretty hard for demand to come in so strong that it’s really going to outstrip all of this new supply. And again, to the second part of your question there, I think this does vary a lot, market by market. Some of these Sunbelt markets, again, not to keep picking on Austin, but that’s probably the top example of a market that is probably a little bit oversupplied right now when we’re talking about, again, particularly in this multifamily segment.

And so that’s a market that could see some real continued price softness. A lot of the other Sunbelt markets, I think, are probably in similar situations to lesser extents. But again, I think this also varies by segment of the market too. I think that when we’re talking about the prior, the higher price tiered segment, that’s probably where we’re going to see the most softness. I think the lower tiers might be a little bit more resilient there. So overall I think it is going to be another relatively cool year in terms of rent growth. But I think that I would also say is not going to be something that we’re expecting to last long-term. I think once we get into 2025 and 2026, things are going to look a bit more normal probably.

Dave:

All right Chris, well thank you for making the prediction and for sharing your research with us. If you all want to check out Chris’s most recent report, I highly recommend it. It is a really good read, tons of interesting information, super digestible. We will put a link to that in the description and show notes, so definitely make sure to check that out so you can learn about what’s going on nationally but also in your specific area. Chris, thanks again for joining us. We really appreciate having you on here and hope to have you on again sometime soon.

Chris:

Thanks so much. It was great chatting with you both.

Dave:

So James, given what Chris just told us, how worried are you about rent growth? Does this impact your portfolio?

James:

There’s so much doom and gloom around this, and I think the data’s a little off in a lot of the new construction renting. I’m actually not as worried about it for what we’re offering as the mom and pops investor or the smaller investor. We’re still a lot more affordable than the new construction on average, 25, 30% cheaper per square foot and it’s been helping us. So I’m not as worried about it. And I’ve heard enough doom and gloom about the commercial market, the short term rental market, everything’s going to collapse, multis on the topic right now. I think it’s actually helping us a little bit more than hurting us in our current economy.

Dave:

Just because there’s less competition?

James:

Well, there’s more units coming in, but we’re so much cheaper and the affordable product in everything is being chased right now. It’s not just housing, it’s people’s cars, anything that people can get their cost down a little bit, they’re opting for. And so for us mom and pops operators, we are cheaper than new construction options, which is actually in higher demand. And with all these units coming on, it just makes us look more affordable and then they get absorbed a lot faster. So I’m not entirely worried about it too much. Unless we stepped all over our [inaudible 00:38:35] If your [inaudible 00:38:37] were off, today’s rents with steady growth, mom and pops, I think you’re going to hit your numbers.

Dave:

Yeah, I think the main thing here, at least the takeaway for me is that people need to be underwriting with very modest or no rent growth over the next few years. I just think it’s unwise personally, correct me if you think differently, but I think it’s unwise if you’re buying a stabilized asset to assume that rent is going to go up. I know you do a lot of value add, so that’s a more reliable, predictable way to grow rent. But I think if you’re just buying something and expecting rents to grow up 5%, even 2%, you might not hit that in the next year. And personally for me, when I think about that for a residential asset, it doesn’t really worry me that much, because I think things will be fine, but it does, to me, underscore the need for caution in multifamily, just because multifamily values go up either from cap rates going down, which they’re not, they’re starting to go up, or rent’s going up, which they’re flat. So I think it’s another reason to be really cautious in multifamily right now,

James:

Yeah. And I think you need to be cautious in all realms of real estate right now. Just go with steady historical growth. Again, we’ve gotten out of this fast lane of real estate that we’ve seen the last couple of years. And you just got to get used to being on the exit ramp. Slow it down, steady numbers. And I am happy to hear, like every multifamily broker, when I would talk to them is like, “Oh, the property is just mismanaged. Raise rents, and all of a sudden your return goes way up.” The sales pitch of mismanaged rents. I am glad I don’t have to hear that anymore. But if you want to grow rents, add amenities, make it nicer, then your rents will grow. But I think you just have to bank on steady growth for quite a while. I think it’s going back to normal for the next five years.

Dave:

Yep, totally agree. All right, well again, thank you to Chris for joining us. Again, you can check out his work in the description or show notes below. He is Mr. James [inaudible 00:40:45] I am Dave Meyer and thank you all for listening to On the Market. We’ll see you next time.

On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

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In This Episode We Cover:

  • What happens to rent prices when 1,000,000 more multifamily units come online
  • Markets that have the most oversupply and could see significant rent cuts
  • The massive concessions multifamily apartments are giving new renters 
  • When real estate investors can expect rent growth to pick back up 
  • 2024 rent price predictions and whether demand could come back
  • How single-family rental prices will be affected by multifamily’s huge oversupply
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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