Multifamily has been on a roller coaster over the last few years. From rent declines in key markets during the early days of the pandemic followed by rent growth across the board from a variety of factors, the sector is now dealing with slowing economic growth and further interest rate hikes. One could understandably expect caution. But according to Moody's Analytics economists Lu Chen and Dr. Ermengarde Jabir, it might be time to think of a different term: sustainability.
"Apartment rents usually go up when the economy is contracting, especially when a high inflation environment means an instantaneous hit on the single-family housing market," said Chen, Moody's senior economist. "We expect the demand for apartments will sustain for some time, which will help multifamily rent grow."
Rents are Leveling Out
Moody's is not expecting a national level apartment rent decline, although its post-second quarter forecast shows the effective rent growth decelerate and revert to a long-run average range between 3% and 4%. Chen reminds that the markets with the highest rates of growth – Miami, Las Vegas and others with 20% or more expansion – do also tend to decline the most.
"The multifamily outlook remains somewhat bullish given that current new supply is comparatively limited in relation to demand due to the ongoing elevated costs of land, labor, and construction related to supply chain pressure leading to a spike in the cost of raw materials," said Jabir, Moody's economist. "Apartment rent growth will remain reasonably strong, although not to the extent seen in 2021."
What Slowing Single-Family Home Sales Mean
Tight single-family housing supply persists as a critical factor with Jabir asserting that new housing starts over the past decade was the lowest it has been over the previous five. There was an oversupply of speculative construction, coupled with unchecked subprime lending, from 2000 leading up to the 2008 crash preceding the Great Recession. Then following the economic downturn, single-family housing construction "fell off a cliff," according to Chen. Fast forward to the present where construction is still lagging, but also institutional buyers, reacting to the robust rental market, are taking nearly 20% of supply from the market.
On the demand side, the Fed increasing interest rates yet again means the cost of borrowing continues to go up, which, along with heightened inflation, prices out more would-be homebuyers who then must stay with the multifamily alternative. This squeeze also shakes out by degree within the apartment sector itself with some would-be luxury renters more likely to adjust their sights and switch to B and C product, while in the most extreme situations, lower-level renters might have to make roommate arrangements or stay with parents.
"Luxury apartments will likely see lower demand. Class B and C apartment absorption has been outweighing the Class A segment at a very big magnitude," said Chen, citing first quarter 2022 numbers. "That was a big note which we'll continue monitoring."
An Affordability Crisis Lingers
Moody's is also seeing what Chen calls an "affordability crisis" where rents as a percentage of household incomes are exceeding 30%. She reports that many of these "rent burden" markets are in the Sun Belt, including Miami, Las Vegas, Southern California and some Texas markets. Ultimately, that squeezes further rent growth, she added.
Not surprisingly, many questions remain, including the after-effect of the pandemic-induced flight to tertiary markets as well as the discrepancy in CBD Class A multifamily deliveries between traditional gateway and newer, high-growth markets. Will Miami go boom-bust and will residents find their way back to the City by the Bay? One major housing issue perhaps tops them all.
"The need for affordable housing is growing," said Jabir, mentioning the potential for a public-private partnership solution. "People are increasingly being squeezed out of markets that, until recently, they could afford. A better framing of the question is not where and how much is being built but perhaps what products are needed."
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Brian A. Lee
Brian A. Lee is an Atlanta-based freelance writer and former editor of Western Real Estate Business magazine. The Wake Forest and University of Georgia graduate has covered commercial real estate since 2000.
