The pandemic set off an unusual time in multifamily. The sector became part of the short game. Rents drove upward, responding to increased prices, and things moved very fast. But with the shifts of the market, it’s time for the long game — remembering, or learning, how to maintain the success of multifamily property management under the dual forces of slow rent growth and higher interest rates.
While rents were flat between January and February, that’s one small data point. The bigger issue is the year-over-year fall in many areas. “Asking rent growth remains positive year-over-year in almost every metro, but 23 of Matrix’s top 30 metros recorded negative growth over the last three months and 17 were negative in February,” as the latest edition of the Yardi Matrix National Multifamily Report noted. “Affordability, household growth and deliveries of new stock are key rent drivers.”
The flat move early in the year has been normal, at least in the six years before the pandemic leap in rents and values. Usually, the change between January and February is only $2. “The big question is whether demand and rents pick up as normal in the spring,” the report said. “Many of the high-flyers that recorded outsize increases over the last two years are now negative or barely positive year-over-year. Las Vegas (-1.6%) and Phoenix (-1.2%) saw negative rent growth over the past year, while Austin (2.0%), Atlanta (2.2%) and Sacramento (2.3%) are barely above water.”
At the same time, in the Midwest, Indianapolis saw a year-over-year jump of 9.0% and Kansas City, 7.9%. They haven’t increased multifamily inventory as many other areas have and still remain relatively affordable. There are also some standouts like New York (7.0%) and Chicago (6.3%) that are places “people want to live, if not work.”
Stronger rent performance also split by type of property. Those that were lifestyle frequently took a rent hit. But for rent by necessity (RBN), the metros with monthly gains outpaced those with declines, 19 to 7. In the 30 metros that Yardi featured, only six had a rent-to-income ratio below 30%, meaning that the other 24 were on the average rent burdened.
Where rents are high, renewal rates are low, like Los Angeles at 43.3%, San Francisco at 46.5%, or San Jose with 46.5%. Such dynamics raise the question of whether lowering rent could increase renewals and reduce the need for turnover, which comes with the costs of refreshing units and missing rent for at least some time.
One important point from Yardi is that owners, investors, and developers can no longer hope for lower interest rates as inflation holds in longer than the Federal Reserve has expected. “With rates up, transaction activity will remain low and capitalization rates may continue increasing, which equates to more downside for property values,” the report said.