• Jason Tuvia

Rental Demand Cools Off After a Record-Breaking Stretch, but Housing Market Dynamics Indicate Longer

After national vacancy plunged to a historic-low in 2021, the rate trended up in the first half of 2022 as inflationary impacts and broad economic headwinds slowed household creation. These near-term challenges will persist, but last year’s stellar performance put the sector in a strong position to withstand some obstacles. Additionally, longer-term shifts in living preferences are coming to light as the millennial cohort ages and homeownership is out of reach for a growing share of the population.


Rental demand momentarily settles after an outstanding stretch. The multifamily sector entered 2022 in a historic position of strength. National vacancy was 120 basis points below any quarterly recording spanning 2000-2019, stimulating a competitive market among tenants, which accelerated rent growth. The average effective monthly rent in the U.S. rose nearly 16 percent in 2021, with annual jumps eclipsing 25 percent in several major Sun Belt markets. However, in the first half of 2022 — particularly in the second quarter — demand began to normalize as roughly 80,000 fewer households were created in the U.S. relative to the same six months of 2021. The cool down was prompted by economic headwinds, as well as inflationary impacts on household budgets, including adjusting for higher rent payments. Even with a slower second half, vacancy at midyear leaves ample leeway before rates in most metros approach pre-pandemic levels.


Top-performing markets in 2021 had the most notable inflections. Many of the locations that were standouts during the pandemic took a step back in the first half. After totaling more than 72,000 units of net absorption during the second half of last year, Atlanta, Dallas-Fort Worth, Houston, Las Vegas and Phoenix had a combined negative measure in the opening six months of 2022. The aggressive building pace in these markets is creating some near-term pockets of oversupply amid temporary demand slack, as some residents rebalance living costs after historic hikes. Nonetheless, migration patterns and thriving labor markets support elevated construction long term.


Sector outlook remains overwhelmingly positive. Despite the 60-basis-point rise in national apartment vacancy during the first half, approximately 20 percent fewer rentals were available at mid-year across the U.S. compared to year-end 2019. These circumstances and steep barriers to homeownership support sustained momentum in the apartment sector, with the median price of a single-family home jumping by more than 30 percent over the past two years. More recently, mortgage rates have climbed to a post-Global Financial Crisis high. This is swelling the affordability gap, or the difference between an average monthly payment on a median priced home and an average rent obligation. The margin now exceeds $1,000 per month, about three times the magnitude of pre-pandemic norms, exemplifying the relational value of rentals. The cost-saving benefits, coupled with lifestyle elements, locational advantages and flexibility, will sustain apartment demand.


IMPLICATIONS FOR MULTIFAMILY


• Historically elevated home costs, coupled with a period where mortgage rates are the highest they have been since the Global Financial Crisis, is creating pronounced challenges for first-time homebuyers. It is estimated that the minimum annual income needed to purchase a median-priced house is now well above $100,000, based on the standard Freddie Mac debt ratios. This is a benchmark that about three-fourths of U.S. households fall short of.

• As the millennial cohort enters an age range typically aligned with household expansion, more of this generation will gravitate to the high-end rental market to meet their needs. A substantial share of millennials will rent longer than in previous generations, and Gen Z will likely do the same. An acquired fondness for lifestyle and cost-saving aspects of apartments is another potential outcome.

• Spillover demand from the single-family market to apartments is amplifying rental costs, while the sector was also playing catch up after a national rent decline of 0.8 percent in 2020. The average Class A and Class B effective rents in the U.S. grew by about 17.0 percent year-over-year through June. The annual Class C gain was comparatively moderate at 12.3 percent. This variance stretched the rent gap within the quality spectrum, as Class C apartments are now roughly $400 per month less costly than Class B, compared to $290 one year ago.

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