Here's What's Next for Apartment Affordability

A new analysis from Moody’s Analytics Reis that was published in the Scotsman Guide has found that inflation is affecting different metros across the US differently – and predicts the sharp increase in the rent-to-income ratio in many cities is likely to cool in the future.  

Both demand and rent prices for multifamily units declined sharply during the initial few quarters of the pandemic, particularly in central business districts, but the trajectory changed course in 2021 in what Moody’s economist Lu Chen calls a “robust recovery.” Moody’s data shows that last year, national asking-rent growth outpaced inflation at an annualized rate of 11.9%.

The national rent-to-income ratio also increased by 270 basis points last year, according to Moody’s, and edged up from 27.5% in 2019 to 30% in 2021. By comparison, average annual growth for the RTI in the five years prior to the COVID-19 pandemic clocked in at just 26 basis points.

But there’s more to the story, according to Chen.

“This figure does not paint a rosy picture for renters as a whole, but the impact of rent increases strike differently depending on where people live,” she said in the analysis, pointing to the example of California, home to 10 of the top 30 most “cost-burdened” rental housing markets before COVID.

“It’s intuitive to conclude that these expensive cities would be even more unaffordable after the recent wave of rent inflation. The data, however, points in the opposite direction,” she says. “For the two-year period ending in December 2021, these 10 metros posted an average RTI increase of 1% while the U.S. average jumped by 2.5%. San Francisco was the most notable of these markets with a staggering 4.3% drop in RTI — the second-largest decline in the nation — while Silicon Valley neighbor San Jose saw its RTI fall by 1%.”

Conversely, in Nevada, all three major metros Moody’s tracked – including Las Vegas, Reno, and Carson City, had “record-high” RTI growth that made them near the top of the unaffordability list.

“The health crisis turbocharged Nevada’s population growth as remote workers flooded in from neighboring states such as California, Washington and Colorado,” Chen said in the Scotsman Guide piece. “Housing inventory growth simply couldn’t keep up with demand.”

The Sun Belt also saw a bigger RTI ratio increase over the last two years vis-à-vis the rest of the United States. Average year-over-year rent growth was approximately 2 percent points higher than the rest of the country in the second half of last year. Eight metros in Florida were included in Moody’s national top 20 list for highest RTI growth, with an average RTI of 31.5%. They also gained an average of 6.4 percentage points over the last two years.

“This is staggeringly high rent inflation, especially in the context of the relatively low-income level of the population that has to bear this burden,” Chen says. “Demand is once again to blame for this sudden spike. Florida led the nation with the largest net migration gain from other states.”

But Chen also opined that the sharp uptick in RTI ratios in many cities won’t continue as supply chain issues resolve and inventory picks up.

Investors continue to be drawn to the sector, which analysts say will continue to outperform the broader market.

“We still have hundreds of billions of dollars of undeployed capital still allocated to multifamily that wants to be allocated to multifamily,” David Brickman, the former CEO of Freddie Mac and the current CEO of NewPoint Real Estate Capital, told GlobeSt.com. “There will be some offset in all of this by simply taking the view that they were unable to deploy all of the capital before, so even if there is some risk in buying at a cap rate that could move a little, it is still better to be deployed. So, I think that is one reason why we will continue to see multifamily faring well compared to other asset classes.”