Periods of extreme optimism and those mired in an environment of rising inflation are circumstances the multifamily housing industry has faced before.
But rare is today’s mood, according to RealPage’s Jay Parsons: “I’ve never seen so much exuberance about the ‘now’ and anxiety about the ‘future’ at the same time.”
Parsons is the property management software company’s vice president, responsible for economics and housing. He sat with Daniel Mahoney, Managing Director, LaSalle Investment Management; and Grant Montgomery, vice president of research, WashREIT; during a panel at the National Apartment Association’s Apartmentalize conference Friday in San Diego.
“Focus on the Road Ahead: The Economy and Multifamily Housing Sector,” addressed where investment and energy should be targeted to achieve maximum results as economists and their investors explore economic conditions and expectations American.
Key to this decision-making is changing demographics and residents’ preferences for owning versus renting added to the new economy.
Inflation and stagflation in conversation
Borrowing a line from Mark Twain, “History does not repeat itself but it often rhymes,” Mahoney said, citing today’s inflation at a 40-year high.
“But we’ve been here before and we can see what happened next. From 1974 to 1986, rents increased another 9 to 10% per year. The Fed stepped in and raised interest rates, which plunged us into two unique recessions. Even during these recessions, rents were on the rise.
Interestingly, the country’s demographics were then dominated by baby boomers, who became homeowners first. Now tenants are between 25 and 34 years old and there are 6.6 million and they have different prospects, more favorable to renting—than baby boomers and their desire to own a home.
Stagflation also entered the conversation—defined as a period when wages stagnate, but the cost of goods continues to rise. “It’s a script right now, not the reality,” Mahoney said.
Renewals at historic highs
Parsons pointed out that not so long ago—during the Great Recession of 2008-2009, the apartment industry was still able to maintain an occupancy rate of around 93%.
Parsons said landlords and investors can see renter incomes rise with inflation, but for how long?
He drew attention to the rent growth and income growth of residents in the C-class segment. Here, the rent growth is the lowest compared to As and Bs, and those earners with the lowest incomes are currently experiencing one of the strongest salary increases.
“The steady wage growth we’re seeing is key to helping keep affordability issues at bay,” he said. “Affordability right now is a tailwind. High-income tenants are also doing well with wage increases because most are paid well up front and it’s an employee market and they’re getting increases in this competitive labor market.
In addition, tenant turnover rates are around 57%.—an absolute record. And these residents renew at about 10% more rent.
“Operators, however, know it’s always harder to get those bumps on the second and third corner than the first,” Parsons said. “But you hear property managers softly saying to these residents who are renewing, ‘Go ahead, shop the competition. ”
Mahoney agrees: “Tenants see they can get a better deal by staying put.”
Montgomery added, “Tenants are able to make these logical decisions.”
Single-family market more expensive than rental
Mahoney, like many, has his eyes set on the astonishing market for single-family homes.
“National house price growth rates are even higher than those for apartments—around 20%,” he said. “Mortgage rates and financing costs are up 60% year over year, so you can see how this will help the apartment industry continue to be successful for now.”
Montgomery said apartment rents are starting to spike, “but this comes after a long period of strong growth, and 20% of signed leases are still new leases. Lease renewals are showing rent growth rates double digits in many key markets.”
Buyers and sellers breaking the bank
Meanwhile, apartment sales are not slowing down. Last year’s transactions topped $350 million, more than double the next highest period on record, the panel said.
“Some potential buyers and sellers are still waiting,” Parsons said. “But holding money right now is almost like losing money.”
As for expenses, Montgomery said his team is feeling the pressure of rising material costs. “Tthis is the area where we are under the most pressure,” he said.
Mahoney said rising rents help offset those spikes in spending.