U.S. Apartment Rents See First Yearly Drop Since Early 2021

For the first time since the onset of the pandemic, both annual and monthly rent growth rates have turned negative.

Apartment Rent Growth Declines for the First Time Since Pandemic Onset

The apartment market, once a hotbed of growth, is seeing a downward trend in rent prices, marking a shift from its previous trajectory, as noted in the September 2023 Apartment List National Rent Report.

Rent trends: Specifically, the rent index decreased by 0.1% in August 2023. Interestingly, this decline started a month earlier than it did the previous year, bucking the typical trend of prices rising in the spring and summer and dropping in the fall and winter. Just last year, all 100 surveyed cities reported positive year-over-year rent increases.

Contrast to previous years: The current annual rent growth is at -1.2%, meaning apartments are now 1.2% cheaper than they were a year ago. This is a significant change from past years when annual rent growth was as high as 18% nationally, with some cities even witnessing growth surpassing 40%.

Causes of rent volatility: Rent fluctuations primarily stem from the balance between apartment vacancies and renter demand. A previous shortage in 2021 and 2022 caused rents to soar. However, a 22-month increase in the vacancy index, now at 6.4%, and new apartment constructions have shifted the dynamics, making property owners more competitive for tenants.

City-wise overview: More than half of the country's 100 largest cities report decreasing rents. Significant drops are seen in "zoom towns" like Arizona, Nevada, Idaho, with Oakland, California, noting an 8.7% decline. Meanwhile, Midwest and New England cities, such as Chicago and Boston, show modest recent rent growth compared to prior years.

➥ THE TAKEAWAY

Zoom out: We're witnessing a pivotal shift in the rental landscape from skyrocketing rents to potentially greater leverage for renters. The slight rent decrease in August marks the beginning of a quieter rental phase, harking back to the early pandemic times in its year-over-year growth rate. With a slump in apartment demand and a surge in construction projects, the trend suggests a continued cooling of rent growth in the coming months.

Source: U.S. Apartment Rents See First Yearly Drop Since Early 2021

https://www.creconsult.net/market-trends/u-s-apartment-rents-see-first-yearly-drop-since-early-2021/

Billions Flow to Student Housing as Rents Soar

Investors are flocking to student housing as its rent growth outpaces traditional multifamily properties, lured by its resilience during economic downturns and higher-than-average returns.

Billions Funneled into Student Housing as Rent Growth Exceeds Apartment Market

 

Investors are flocking to student housing as its rent growth outpaces traditional multifamily properties, lured by its resilience during economic downturns and higher-than-average returns.

Rising star: Major investors are pouring billions into the student housing market attracted by its higher rent growth, outperforming traditional apartments. The off-campus student housing sector saw a 7.1% rent increase over six months, with some universities noting growth above 20%. Seen as "recession-proof," investments are especially concentrated in Sun Belt states, known for their substantial rent and enrollment hikes. However, this trend has raised concerns over the capacity of campus housing.

Student housing rent growth this year has far outpaced previous years, data from Yardi Matrix shows.

Student housing vs. apartment market: While student housing rents have surged, apartment rents have begun to plateau after reaching record highs in the past. For instance, student housing rent growth this year has substantially surpassed previous years, with data indicating a marked increase in rent growth rates. In contrast, multifamily property rents rose at a more modest rate, making student housing a more appealing investment.

Major deals: BREIT's acquisition of American Campus Communities for $13B last year underscored the growing appeal of student housing in the commercial real estate market. In addition, Blackstone's ACC has initiated two major student housing projects within its $3B program. However, as student enrollments rise, many universities struggle to provide adequate housing, leading to local market imbalances. Cities such as Boston, for instance, are experiencing shortages in off-campus apartments.

Shifting tides: Investor interest in student housing is now leaning towards luxury properties near campuses. Last year saw record property sales in this sector, with over $10B invested for two straight years. However, 1H23 saw a slower investment pace due to higher rates, changing the investor landscape. Investment funds made up 52% of deals in 1H23, a jump from 12% in 2H22, while universities and public REITs reduced their participation. There's also a spike in foreign investment, especially from the Middle East and Asia.

➥ THE TAKEAWAY

Campus housing crunch: The booming student housing sector is a double-edged sword. On the one hand, it's attracting significant investment, but on the other, it's amplifying accommodation issues in university towns. With universities experiencing record enrollments, there's an urgent need to house the growing student body without overburdening local housing markets. As enrollments surge, investors are faced with the challenge of benefiting from this growth while also addressing the housing deficits in academic communities.

Source: Billions Flow to Student Housing as Rents Soar

https://www.creconsult.net/market-trends/billions-flow-to-student-housing-as-rents-soar/

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The New Era of Rental Prices

For renters who've felt the sting of rapidly increasing costs, there's a sigh of relief on the horizon. The rapid inflation of rent prices, which has been a pressing concern for many in recent years, is showing signs of stabilization.

From Skyrocketing to Stabilizing: The New Era of Rental Prices

Analysis based on average monthly rent data for provided by CoStar Group. The data includes newly posted rents, not lease renewals, for 1,660 counties for June of each year from 2019 to 2023. Counties with fewer than 1,000 multi-units, according to Census Bureau data, were excluded.

Good news is on the horizon for renters: The rapid escalation in rental prices, which had previously seemed unstoppable, appears to be taking a pause.

Rental rollercoaster: Between 2020 and 2022, rents surged by a striking 15%, the most rapid increase in nearly a century. However, the fervor has calmed. Rent growth has reverted to pre-pandemic rates, seeing an annual growth of about 1 to 3 percent. Interestingly, in cities that recently witnessed surging rents like Austin and Atlanta, prices are now dropping. As Igor Popov, chief economist at Apartment List, observes, the rental market is "taking a breath.

Why the slowdown? A significant factor in this slowdown is the surge in housing construction. An impressive nearly 1 million new apartment units are currently under construction nationwide. By the end of 2023, over half of these are expected to be on the market. Concurrently, the demand for rentals is waning as the U.S. adjusts to post-pandemic life. The appetite for apartment living has decreased, with fewer individuals moving out and more staying in familial homes. This change has created a discrepancy between available apartments and interested renters, thereby stabilizing price growth.

The Sun Belt phenomenon: The Sun Belt region, which includes parts of the Southern U.S., experienced a unique scenario. Initially, during the pandemic, there was a spike in demand as individuals sought warmer climates and more affordable living conditions, moving away from urban centers like New York. This shift led to a boom in rental prices in cities like Phoenix, Dallas, and Miami. However, the rush to meet this demand has led to an oversupply, causing rents to stabilize and even decrease in some areas.

➥ THE TAKEAWAY

The new normal: While renters can find solace in stabilizing prices and even some reductions, it's crucial to note that the cost of renting remains substantially higher than pre-pandemic levels in many areas. Areas like Atlanta, despite witnessing recent rent reductions, still have renters paying substantially more than before the pandemic. The introduction of incentives like months of free rent indicates a market adjusting to new realities, but the days of pre-pandemic affordability seem to be a distant memory for now.

Source: The New Era of Rental Prices

https://www.creconsult.net/market-trends/the-new-era-of-rental-prices/

Mid-Priced Apartment Demand Soars Amid Economic Uptick

Plus: CoStar's analysis shows a continued dip in CRE sale prices in October, aligning with the ongoing trend of increased rates.

Leasing Surge in Mid-Priced Apartments with Improved Economy

In 2023, the U.S. multifamily market has seen a significant upswing in renter demand, especially for mid-priced apartments rated three stars. This shift marks a recovery from a sluggish performance in the latter half of 2022.

A surge in demand: There has been a 77% increase in occupancy over the last year, with 260,000 more units being filled than vacated. This surge is primarily in mid-priced, three-star properties, contrasting with the disappointing absorption of only 146,000 units in 2022.

Influencing the market: The market slump in 2022 was driven by a combination of high inflation, increased oil prices, and recession fears, which significantly impacted consumer confidence and demand, especially in mid- and low-priced properties. This led to renters seeking more affordable housing solutions or delaying household formation.

Improving economy: The rebound in 2023 has been fueled by improved consumer confidence, lower inflation, strong wage growth, and reduced recession fears. These factors have notably increased the demand for three-star properties by 54,000 units in the first three quarters of the year.

➥ THE TAKEAWAY

Positive outlook: The high-end segment of the market, comprising four- and five-star properties, has remained stable, thanks to the lower rent-to-income ratio of its renter households. Looking ahead, if the economy avoids a recession, multifamily demand could return to pre-pandemic levels by 2024, although supply is expected to exceed demand for the third consecutive year.

 

Source: Mid-Priced Apartment Demand Soars Amid Economic Uptick

https://www.creconsult.net/market-trends/mid-priced-apartment-demand-soars-amid-economic-uptick/

Commercial Real Estate Financing Rate Snapshot July 31st 2023

Average of the top competitive rates from eXp Commercial's National Capital Markets Partner CommLoan from a database of 700+ commercial lenders as of 731/23

*Rates are provided for comparison purposes only. Actual rates are dependent on property and sponsor.

https://www.creconsult.net/market-trends/commercial-real-estate-financing-rate-snapshot-july-31st-2023/

Price Gap Between Rent and Home Ownership in Chicago

The price gap between average apartment rents and the cost of owning a home in the Chicago metro area is widening, providing landlords with leverage to push rents even higher.

According to a recent report by RentCafe, the average rent in Chicago is now $2,215 per month. This is significantly higher than the cost of owning a home, which is currently $1,950 per month, including mortgage payments, property taxes, and insurance.

The widening price gap is being driven by a number of factors, including rising interest rates and strong home values. As interest rates have increased, the monthly cost of owning a home has become more expensive. At the same time, home values in Chicago have continued to rise, making it even more difficult for first-time homebuyers to enter the market.

The widening price gap is giving landlords more leverage to push rents. With fewer people able to afford to buy a home, demand for rental housing is increasing. This is putting upward pressure on rents, and landlords are starting to see more success in raising rents.

The widening price gap is also having an impact on multifamily net operating income (NOI). NOI is the money that a multifamily property generates after paying all of its operating expenses. As rents increase, NOI also increases. This can help to offset the higher commercial mortgage interest rates that landlords are facing.

In the long term, it is unclear whether the widening price gap between rent and home ownership will continue. However, in the short term, it is likely to continue to put upward pressure on rents and boost multifamily NOI.

Bottom Line

The price gap between rent and home ownership in Chicago is widening, providing landlords with leverage to push rents even higher. This is being driven by rising interest rates and strong home values. The widening price gap is also having an impact on multifamily NOI, which is likely to increase in the short term.

https://www.creconsult.net/market-trends/price-gap-between-rent-and-home-ownership-in-chicago/