Leading multifamily researchers weighed in on industry fundamentals, the supply pipeline, rent growth, and the best and worst markets at the MFE Conference in Dallas in late September.
With high interest rates and single-family home prices, the math currently favors renting.
“Renting is still more expensive than normal but not to the levels when you compare mortgage payments to incomes,” said Ryan Davis, CEO of Witten Advisors.
While the nation had two years of unprecedented rent growth during the pandemic, downward adjustments are being seen in markets across the nation. However, Jeff Adler, vice president of Yardi Matrix, said it’s not because of a reduction in demand.
“In markets where there’s decent demand and not a lot of supply—the Northeast and Midwest—rent growth looks pretty good,” he noted. “Markets where there has been a lot of supply, even though a lot of demand growth—Phoenix; Austin, Texas; Las Vegas—they are suffering.”
According to Adler, prior to COVID, the 10-year rent growth average was 2.8%. After the two years of crazy increases that moved the 10-year average 200 basis points, the industry is coming back to 3% rent growth on average, which he referred to as “normalish.” “The market is decelerating, but it’s not the end of the world,” he added.
Greg Willett, first vice president and national director of research at Institutional Property Advisors, which is part of Marcus & Millichap, noted that Class A or luxury product rent growth hasn’t take as big of a hit as he would have anticipated. However, the middle market has slowed a little more than expected. “Part of it is strategy and that a lot of operators are going for the occupancy over the rent growth right now,” he said.
Willett also said the resident retention rate at the top tier is still great. While stabilizing concessions have ticked up slightly, he noted those also are still below historic norms.
“You’re not really seeing people chase the new construction deals and move around the way you have seen in previous cycles,” he said. “And, that doesn’t mean that it won’t happen over the course of the next year or year and a half, but so far I’m not seeing any evidence.”
The industry is closely watching the supply pipeline that’s expected to deliver this year and in 2024.
“Over the next five years, the pipelines are not crazy. It’s just, there’s a group of cities in the next two years that are really high. That’s the issue,” said Adler.
The entire supply pipeline that Yardi Matrix is tracking totals 5.5 million units, with 1.1 or 1.2 million units under construction that will deliver this year or next year, roughly 1.2 million units with approved plans that haven’t poured foundation, and 3.3 million identified units that are still in the early stages and don’t have approved plans.
Adler said he projects that almost half of million units will be delivered this year and half million next year, and then the numbers begin to drop.
“But the numbers are in the 400s or 300s, and you’re setting up the stage for the next cycle,” he said. “We will drop down supply and have a recovery from whatever downturn we have. There’s another upcycle starting in 2026 or 2027.”
Willett added that he expects some of the million or so units under construction right now will be pushed further out.
“Either next year we have a one-year completion rate that is completely unprecedented from what we have had in the past, and I don’t know how we have the labor force to make that happen, so that suggests you’re still delivering quite a bit of product in 2025. That means some of these projects have taken 2.5 years to finish,” he said. “Those are your two choices, you either have to really stretch out the delivery time frame or you’re going to have a one-year completion volume that does not feel physically possible.”
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