(Octavio Jones for The Wall Street Journal)

Realtor.com reports, "the pandemic-fueled boom for multifamily building owners is fading fast going into 2023.

Apartment vacancies are piling up. The biggest wave of new rental buildings in nearly four decades is expected to cut the pace of rent growth across the country. Some in-demand Sunbelt cities are already experiencing rent declines, in part because many tenants and people searching for apartments feel they can’t devote any more of their income to rent.

Rising interest rates, meanwhile, make rental-property investments less profitable than one year ago when debt was cheap and hefty rent increases were taken for granted.

“We’re necessarily going to get a bit of a pullback,” said Thomas LaSalvia, senior economist at Moody’s Analytics.

Lower rent growth would help curb general inflation while bringing relief to many tenants whose wages already weren’t keeping pace with rents. Of the 44 million households that rent, more than 19 million spent 30% or more of their income on rent and other housing costs, according to a December report from the U.S. Census Bureau that estimated spending from 2017 to 2021.

The reversal comes after an unprecedented run for the apartment and home rental industry that most housing economists say was shaped by the pandemic. Early lockdowns created pent-up demand for housing that later exploded in the months after the introduction of Covid-19 vaccines in late 2020. Many young people went out to rent their first home, and the sudden increase in people searching for apartments helped rents climb 25% over two years.

In particular, well-paid workers from the Northeast decamped for growing cities in the Sunbelt, where they could work remotely and where their higher incomes commanded more space.

Now, many of those same places that shot up in price are seeing slides in demand and rents are going down. Between April and October of 2022, rents fell 3% in Las Vegas, 2% in Phoenix and 1% in Tampa, according to Apartment List. All three of those cities saw rents rise more than 30% during the preceding two years.

If migration and new household formation continue to slow, analysts said some markets could see a full 12 months of negative rent growth starting sometime this year.

Meanwhile, nearly half a million new apartment units—the most of any year since 1986—are expected to complete construction by the end of 2023. That will come after more than 400,000 units were completed during 2022, according to an analysis by property data firm CoStar Group Inc. The addition of so many new apartments to slowing housing markets is expected to help keep a lid on rent growth.

Some cities with higher than average construction activity could even see full year rent declines, said Jeff Adler, vice president in the data division of property technology company Yardi Systems Inc. He cited Miami, Austin, Texas, and Raleigh, N.C., as places with an especially large amount of new supply expected to open this year.

The coming increase in new apartments is most likely to affect rents at higher-end buildings, because there might not be enough people who make enough money to rent them, according to CoStar.

“The potential demand for newly developed [high-end] properties remains dependent on an expanding pool of high income renter households only,” CoStar said.

Amid rising concerns of a recession, many housing economists don’t think job and wage growth will be strong enough to sustain much in the way of rent increases this year. Both Yardi and Moody’s expect rents to rise about 3% nationally during the next 12 months, less than half the rate seen in 2022.

“When you look at real wages, you saw that they were pretty darn stagnant for the last year or two years,” Mr. LaSalvia said.

Some tailwinds remain for the rental sector, however. Higher mortgage interest rates and high home-sales prices mean fewer people can buy their first home, bolstering demand for rental houses and apartments. Despite the expected increase in new rental buildings, most analysts think the majority of cities will remain undersupplied with the kind of affordable units that see the highest demand. Such factors should help keep vacancies from rising too much and keep rents from going negative in most cities, analysts said.

If there is a recession, history shows that the rental sector handles bear markets better than other parts of the economy, where consumers are more likely to cut back their spending.

“Rent eats first,” Mr. LaSalvia said.

Even so, investors are adjusting their expectations to the more challenging environment.

“In 2021 and into early 2022 you could raise rents significantly without doing a lot to the property itself,” said Karlin Conklin, principal of apartment landlord Investors Management Group, which owns buildings in the Sunbelt and on the West Coast. “We don’t see that happening going forward.”

Borrowing the money to make investments in existing rental properties, such as renovating them to be more attractive to higher-paying tenants, has become more expensive because of rising interest rates. Sales of apartment buildings are falling as a result. Building sales in November, as measured by total dollar value, were 74% below their levels during the same month the previous year, according to a report from MSCI Real Assets.

“The incentives for apartment investing have changed,” the report noted."

Source: Realtor.com

Written by: Will Parker

Published: January 3, 2023

Posted by Grossman & Jones Group on


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