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Apartment occupancy in the U.S. has hit an all-time high, meaning anyone looking for a new place is going to have a rough time of it.
Fully 97.5% of professionally managed apartment units are spoken for as of December, the highest figure on record, according to data from the property management software company RealPage. That’s more than 2 percentage points higher than the occupancy rate in December 2020, a difference that represents hundreds of thousands of households.
“I don’t think most people realize just how crazy that is,” says Jay Parsons, deputy chief economist for RealPage. “Not only is that a record, typically we consider 95 to 96% to be essentially full.”
But for most tenants, there may be a silver lining to the lack of options. Rents for available apartments have seen record increases over the last year, yet the occupancy rates suggest that most renters aren’t paying those prices.
High occupancy rates leave little margin for renters who need to relocate for jobs, education or other reasons. Winter is the shoulder season when it comes to these moves: Families typically settle in for the cold, the holidays, and the school year, then upend their lives over the summer. (The same seasonal pattern applies to forced exits through evictions.) In 2021, however, the occupancy rate rose steadily throughout the year, without the typical seasonal variation — another quirk of the pandemic.
Such low vacancy levels reflect a historically high number of renters renewing their leases. The lack of churn means that people hunting for new homes have fewer options. Apartments may be put on the market and leased before tenants leave the unit: “Clean, prep, paint, change the carpet, and get the next person in,” Parsons says.
Abnormal is the pandemic normal, of course. Rents for market-rate apartments cratered during the first year of the pandemic as some residents decamped from cities (and, more importantly, new renters didn’t move in to replace them). Rents fell furthest in high-cost cities but also dipped in the suburbs of New York, Los Angeles, San Francisco, and a few other places. This plunge led building owners to offer huge discounts and concessions to try to lure renters — followed by steep double-digit rent hikes in 2021 as tenants finally returned to those buildings.
For tenants who already signed a lease or never left in the first place, spikes in rent listings might not affect them much. Landlords face a loss on paper when it comes to filling units, known in the industry as loss to lease. This is the difference between the advertised rent and what renters actually pay. An apartment building owner in Dallas might list a vacant unit at $200 higher than what the renter down the hall is paying. Property owners want to narrow this gap, and in a tight market, they have more leverage. Yet that same Dallas landlord marking up vacant units might not want to risk maxing out a current tenant’s rent when their lease comes due. It’s easier and more cost-efficient to keep them in place paying a less-than-maximum rent than to search for a new tenant. Very few apartment operators are going to move a household up to full price, Parsons says. Keeping a paying tenant in place is a high priority, especially after the chaos of the last two years.“When you send a renewal notice, 90 days out, there’s a lot of uncertainty. Especially in the Covid era, so much could change,” Parsons says. “There’s a real risk that we could have another economic challenge. There’s a balance of a higher chance of collecting revenue in an occupied unit versus a chance of zero revenue. Do you want to roll the dice?”
Rents are rising, and the discounts and concessions of 2020 are likely a thing of the past. Moreover, demand for housing continues to outpace the supply. In this specific moment, with omicron surging and rental chaos a recent memory, many landlords will stick with their current tenants. No matter: The housing shortage is so severe that property owners likely don’t need to charge max rents to make a bundle.
End Google Tag ManagerFamilies that do need to move right now face tough choices — or rather, fewer choices.
Prices have climbed so high it will take some time for them to come back down to earth. In other words, the uncomfortable inflation numbers of 2021 will likely stay with us well into the New Year.
The latter index is what the Federal Reserve pays the most attention to when assessing the nation's inflation.
But here's the thing: Economists prefer to look at price movements over a period of time, usually 12 months. So a small slowdown like November's won't move the needle just yet.
In fact, it might take months for these incremental slowdowns to show up in the data. After a year of prices soaring on high demand and supply chain chaos, a lot of big numbers are baked into the 12-month data set. Even if inflation suddenly falls off a cliff, it would take time for the leading indices to reflect that. This is what Fed Chair Jerome Powell is talking about when he mentions "base effects."In November, rent rose 0.4% for the third month in a row, according to economists at Bank of America, and that points to higher and more persistent inflation going forward.
The "recent broadening of inflationary pressure has coincided with a notable pickup in rental inflation," said Peter B. McCrory, economist at JPMorgan, "which jumped to its highest monthly rate in 20 years in the September CPI report and has stayed firm since then."
The multifamily sector has experienced the effects of an increase in pent-up demand this past year, resulting in higher-than-average asking rents as well as concessions, depending on the type of apartment and its location.
Class A concessions peaked in March at 9.9% and have been falling since, but they remain elevated at 9.2% as of October due to competing new supply entering many local submarkets.
Those renters who have received concessions might find their benefits fleeting in 2022 though. Discounted rent from the concessions is only good for a short period of time (typically anywhere from the first month or so of free rent to discounted rent over the period of the lease).
So, this suggests that there might be a form of “sticker shock” at the end of the lease term for many tenants. That is when the new rent increase will be based on the full amount of the rent, prior to the discount resulting from the concession, according to a report from Fannie Mae, supplemented by data from RealPage.
Renewals Likely Absent of More Concessions
It may be that some tenants are expecting another round of concessions to offset that increase, but whether that materializes remains to be seen. Although the national concession rate remains elevated, fewer units are offering concessions.
That trend is expected to continue over the coming months. And as seen in the case of Class C units—the most affordable units in a location—the declining trend in concessions offered has recently started accelerating, most likely due to the improving economy and increased job growth.
As a result, Fannie Mae expects that concessions will continue decreasing, particularly for Class B and C units. It expects that the trend trajectory for Class A units will lag slightly behind, as new supply delivers over the next several quarters.
“But with the economy expected to continue and rental housing demand remaining firmly in place, we believe that concessions will decline throughout 2022, returning to more normalized levels by the end of the year,” according to Fannie Mae’s report.
Classes B and C Not Immune to Discounts
Class B concessions ended 2019 at 5.5% but recently peaked at 8.1% during the summer of 2021.
Class C began 2020 at 5.4%, and while it surpassed Class B during the earlier part of 2021, it has now begun to trend downward, to 6.6% as of October 2021.
Typically, when Class A demand softens, some tenants use the opportunity to rent more expensive units with better amenities, given that rents for these higher-quality units are now within their reach. However, the reverse happens infrequently: Tenants tend to not move back into lower quality units when those rents fall.
So, as Class A rents declined and concessions rose, a similar trend occurred with Class B and C units. And now that Class B and C concession rates are trending downward, that suggests that demand is increasing, likely keeping asking rent levels elevated.
Concessions Higher in Expensive Markets
Although approximately 430,000 new apartment units may be completed in 2021, these units are not evenly distributed on a national basis. As has been the case for the past several years, much of the new apartment supply is concentrated in specific submarkets in approximately 12 metropolitan areas.
For instance, while Dallas, Orlando, Phoenix, and Houston all have a lot of new supply underway, their concession rates remain lower than those in the more expensive metros of New York, San Francisco, Miami, Boston, and Washington, D.C.—all of which have much higher asking rent levels, thus necessitating higher concession rates.
PHOTO BY DEBBY HUDSON ON UNSPLASH
While it’s true that real estate is generally one of the most reliable markets for investment, it’s also a fact that the industry runs on cycles. The COVID-19 pandemic accelerated and even upended many of those cycles. Even now, nearly two years after it took hold in the United States, the pandemic continues to have a see-saw effect on markets.
Consider the industrial sector’s upward trajectory in relation to retail’s brick-and-mortar downturn. This inverse relationship resulted from the accelerated adoption of e-commerce, which was accelerated by the pandemic. The commercial office market has taken a hit in urban centers, but suburban office leases are on an upward swing. Hospitality is beginning to come back to life after a prolonged slowdown. But now the industry is reeling from a labor shortage.
The pandemic is not the only factor that is driving rapid change, of course. Multifamily housing continues to surge, thanks in part to a lack of single-family housing stock. The cost of living and discontent are also prompting people to rethink where they live and work. Population shifts are disrupting long-standing real estate investment strategies across geographical boundaries.
In short, 2021 was a year of flux, and 2022 looks to promise more of the same. So how can investors, developers, owners, and buyers prepare? Here are the trends to watch in the coming year:A return to the ‘burbs: Generous work-from-home policies, cost-of-living considerations, and social unrest are fueling a shift from urban centers to the suburbs. Likewise, the success of remote-work arrangements has many commercial office occupiers rethinking just how much space they really need – and where it’s located. For now, suburban rings and smaller cities are the best bet for stability and investment opportunity.
The great migration: The migration of people isn’t limited to the urban/suburban divide. People are also moving away from the coasts and across state lines in search of lower-tax communities where their dollars will go farther. This movement will have far-reaching implications across all real-estate sectors, from housing to industrial to hospitality.Housing demand: A lack of housing stock, soaring housing prices and the movement away from the urban core means multifamily housing should remain strong in 2022, particularly in suburban and rural communities. However, a buyer’s market may be around the corner. As housing inventory increases, prices should come down and the demand for multifamily housing may likely level off over time. Expect to see a shift occur in late 2022 or early 2023.
Evolving consumer behaviors: Even as people talk about a return to pre-pandemic normal, some things may never be the same – including retail shopping. E-commerce adoption by U.S. households skyrocketed during the early months of the pandemic. Now consumers have become accustomed to the convenience of on-demand delivery. It’s no surprise, then, that retail will probably see anemic growth while the industrial and logistics sector will flourish in the coming year.
Workforce challenges: The COVID-19 pandemic has reshuffled the workforce in ways that could not be anticipated last year. The hospitality sector was particularly hard hit as millions dropped out of the workforce or found work in other sectors that offered more stability. Now, as people return to traveling, the industry is scrambling to find enough help. This staffing shortage may depress growth until more people re-enter the workforce.
Tax changes: Tax hikes appear to be on the horizon in the form of the Build Back Better Act. Owners, developers and investors will need to wait until a final bill is voted on before making long-term investment decisions. The good news? Many of the strategies that have been used in the past to defer tax liabilities will likely be available going forward.
Accelerated technology adoption: Technology services and solutions are rewriting how the real estate industry does business – and not just in terms of bridging the home and office environments. The ease of working with and for a company is emerging as a deciding factor in winning over clients and talent. Stakeholders will need to invest in a strategic digital transformation plan if they want to keep pace with stakeholder expectations. Digital capabilities will also be key to managing data and predicting outcomes – both of which will be necessary in this dynamic landscape.
229 Park Avenue and 5736 South Stony Island Avenue
A pair of multifamily sales totaling $30 million on Chic ago’s South Side and its western suburb of Clarendon Hills reflect investors’ growing appetite for apartments, a stark contrast to the city’s pandemic-battered office market.
Local real estate development and investment firms Hubbard Street Group, Centrum Realty & Development, and Pine Grove Partners sold 229 Park, a 43-unit apartment building at 229 Park Avenue in Clarendon Hills, 22 miles southwest of downtown Chicago. Local real estate developer HP Ventures Group paid $19.4 million for the fully occupied building.
“With its excellent location in an upscale suburb walkable to transportation, 229 Park is a great example of our niche strategy to serve tenants who prefer to rent high-quality units in excellent locations,” said Steve Cook, HP’s managing partner.
The property is a two-minute walk to the Clarendon Hills Metra Station and about 10 miles from Chicago Midway International Airport.
While office buildings are still reeling from the pandemic, both Chicago’s suburban and downtown multifamily market gained strength last year. Owners of multifamily properties sought to capitalize on higher rents and increased occupancy in suburban Chicago after the pandemic. In downtown Chicago, tenants signed about 9,000 new leases in the second quarter of last year, the strongest multifamily rental market in more than 10 years. Local real estate investment firm 29th Street Capital also sold a 75-unit apartment at 5736 South Stony Island Avenue in Chicago’s Hyde Park neighborhood to an undisclosed buyer for $10.62 million.After buying the property in 2017, 29th Street Capital renovated more than half of the units, refinishing hardwood floors and adding stone counters. The building, which was 96 percent occupied, went under contract in two weeks after hitting the market.
The rental property is less than a mile from the Obama Presidential Center and offers multiple bus routes to downtown including the Number 6 Jackson Park Express and Number 15 Jeffery Local.
“It is walking distance to the University of Chicago, a stone’s throw from a world-class museum, the Museum of Science and Industry, and a short distance to the lakefront and multiple modes of transportation,” said Interra Realty’s Lucas Fryman, who represented both the buyer and seller. The firm 29th Street Capital, which acquired $3.1 billion of multifamily assets across the country, also sold a 42-unit rental building in suburban Mount Prospect for $5.5 million in November.
Multifamily property sales surged in the second half of 2021 and accounted for more than $1 out of every $3 spent in the fourth quarter, according to preliminary CoStar data.
The multifamily sector made up 34% of all property sales in the last three months of 2021, the highest percentage in five years. The surge comes at the expense of industrial assets, which, following a brief second-quarter spike in retail property sales, remain the second choice among investors.
In 2020, landlords were wondering whether apartment dwellers would pay rent. Now they’re wondering how long record-setting rent growth can last, according to CoStar analysts. After passing out big concessions for several months at the start of the pandemic, landlords increased rents at an annual average pace of 11% thanks to soaring demand, strong demographics, and a broader economic recovery.
With demand and rent growth surging, investment capital poured into multifamily properties. Investment sales have been occurring at a historically high pace. Dallas, Phoenix, and Atlanta sit as top markets by sales volume, as investors have shifted capital away from core coastal markets and into the Sun Belt.
Demand for apartments, however, is expected to slow in 2022, according to CoStar analysts. Without expanded unemployment benefits, stimulus checks, or an eviction ban in effect, the tightness of the rental market could loosen, softening demand.
