An All-Encompassing View of the National Multifamily Market

Four informative reports published this week really help us take stock of the multifamily market as we continue, with great effort, to close out 2022. We’re going to reach the end of this year, and there’s even some bright spots according to some of the stuff that’s in these new reports.

Yardi Matrix: “Multifamily National Report – October 2022” – https://www.yardimatrix.com/publications/download/file/3066-MatrixMultifamilyNationalReport-October2022

• Year-over-year rent growth is at 8.2%, and month-over-month rent growth is 0.2%.
• Yardi Matrix is a little bit of an outlier here in recording some positive rent growth where other reports have shown negative monthly growth of about half a percent on average. Not only that, Yardi Matrix reports an ever-so-slight increase in month-over-month rent growth, which was at zero in September before increasing to 0.2% in October.
• There’s a little bit of a story here, or at least an interpretation, in Yardi Matrix’s assertion that nearly all of the month-over-month gains came from growth in the renters-by-necessity class, or B and C class apartments roughly translated.
• My interpretation question is: is this renter-by-necessity growth driven by a bunch of nice, newly-built Class A apartments coming into the market, or is there a broader economic trend that can explain the rent growth among the renter-by-necessity group?
  • My instinct is to err on the side of broader economic and housing trends to explain apartment demand, but there’s at least a nominal argument to be made here that slower rent growth in Class A apartments could be the product of more supply coming into the market.
  • Alternatively, you could point to wage growth trends that were slightly higher this year for hourly workers.
  • Another possibility that’s almost too easy is that rent growth among the renter-by-necessity group is stronger because rising interest rates are making it more difficult for people to own a home, directly increasing the number of people who, out of necessity now, must rent.
• I’m looking at the performance of different markets in this report, and I’m thinking that, to really make sense as a viable market for investment, you’re going to look at more than a single month’s rent growth numbers. The yearly and monthly rent growth ebbs and flows in a different way for each market, and we’ve seen several inflection points in the past three years: A flight out of big cities initially, then the growth of markets like Phoenix and Boise, then the return to places like New York, and now a settled moderation that seems to favor the same kinds of stable markets that did well in the early portion of the pandemic.
  • Phoenix and Boise may not be doing too well currently, but they were huge last year. Maybe that means there’s some potential in those markets beyond the surface level of their current rent declines.
  • San Francisco and Minneapolis are two markets that never really had a bounce back and are almost confounding in their stagnation.
  • What about those markets that did well at the early recessionary months of the pandemic and had elevated but not-quite-top-ranking performance during the high-growth period of late 2020 through the end of 2022? These markets are really showing their strength right now. Indianapolis is at the top of these rankings, and other midwestern MSA’s like Louisville and  St. Louis, which are listed elsewhere in this report, are among the top-performing multifamily markets in the country.
  • And just like last month, Kansas City and Indianapolis are the two most affordable places to rent an apartment of the 30 markets that they list. The rent-to-income ratios for Kansas City and Indianapolis are 24.9% and 25.2%, respectively, which contrasts sharply with the 28.8% of Minneapolis-St. Paul, the 30.3% of Tampa, or the 36.7% of New York City.

Zillow: “Two-year Rent Growth Streak Ends in Small Step Toward Normalcy” – https://www.zillow.com/research/zillow-rent-report-october-2022-31676/

• Zillow hides its October rent report under a newsy-type headline, but I’m not fooled so easily.
• Zillow’s rent report, among the nine or so monthly rent reports that I follow, is on the higher end of rent growth measurements
  • when you look at how Zillow compares to Yardi Matrix and CPI measurements over the past year-and-a-half, you can see that Zillow consistently records higher rent growth than Yardi Matrix, and it’s also above the CPI measurement, but the CPI’s rent growth measurement is another animal entirely.
  • Yardi Matrix and Zillow rents are on the downswing for year-over-year rent growth after a peak in February of this year.
  • The CPI year-over-year rent growth measurement may have peaked this month and maybe it’s on the way down, but we also could have a few months where CPI’s year-over-year rent growth keeps increasing before that number goes down.
  • Comparing these trend lines, you’ve got 8 months of lag time, so far, between peak year-over-year rent growth for Yardi Matrix and Zillow and peak rent growth for CPI.
• Top markets for year-over-year rent growth are Miami, New York, Orlando, San Diego, Louisville, and Cincinnati in that order. Cincinnati is an interesting one here, only because last month’s report from Rent.com had Cincinnati at an eye-popping -6.8% change in monthly rent but, also in the Rent.com report, Cincinnati is near the top of the year-over-year rent growth rankings at 11.5% and has positive monthly numbers at 0.08% rent growth. 
• Another Ohio market, Cleveland, was the top for month-over-month growth in the Zillow report, up 0.8%, joined by Hartford, CT at .63% monthly growth, St. Louis and Jacksonville at around .3% month-over-month growth, and six other markets that had positive growth, but just barely.
• The dramatic drops here, and I’m thinking again of Rent.com report’s -6.8% reported change in monthly rents for Cincinnati as an outlier. This Zillow report shows Las Vegas with the biggest decrease in month-over-month rents: -1.81%. Does this track with Yardi Matrix? Yes! Yardi also has Vegas at the bottom for month-over-month rent grow, with rents going down .5%. A very notable difference, however, is in the monthly numbers for New York, which Zillow has at -0.73% and Yardi Matrix has at 0.8%–leading the Yardi report for month-over-month rent growth. Phoenix, San Francisco, and Austin are decreasing in monthly rents for both reports as well.

Redfin: “Redfin Rental Report, October 2022” – https://www.redfin.com/news/redfin-rental-report-october-2022/

• 7.8% year-over-year rent growth, -0.9% month-over-month rent growth
• Comparatively, Redfin is around the middle of the pack compared to the year-over-year rent growth measured in other reports. For the 8 reports that I follow that have released year-over-year rent growth numbers, the average is 7.55%. The month-over-month numbers are -0.34% rent growth, but if you eliminate the lagging CPI numbers from the average, it’s -0.49% month-over-month rent growth, on average.
• For these reports, whether it’s Redfin, Yardi Matrix, Apartment List, or what have you, the national numbers do not diverge nearly as much as the individual market numbers.
• I’ve mentioned Rent.com’s abnormal (and maybe even inappropriate!) monthly decline of -6.8% for Cincinnati, but Redfin, which owns Rent.com but somehow runs a slightly different report, Redfin’s Oklahoma City numbers are the big outlier here: 31.7% year-over-year rent growth for OKC, compared to Zillow’s measurement of 6.4% (no numbers for OKC on the Yardi Matrix report).

Berkadia: “Q3 United States Multifamily Capital Markets Report” – https://www.nmrk.com/insights/market-report/united-states-multifamily-capital-markets-report

• Rent growth numbers are going to be a little dated in this report compared to the more recent measurements we get from monthly reports, but their information on sales volumes, supply, investor activity, and other aspects of the multifamily market make this report worth reading.
• Just for the heck of it though, I have to share the rent growth numbers: they saw 13.5% year-over-year rent growth in Q3, which, if we check back to the September numbers of our monthly reports we follow, Berkadia’s well above the 8.71% average year-over-year growth at the time.
• I got a little more out of the sections where this Berkadia report outlined the different economic pressures that are shaping the multifamily market.
  • Job openings are going down, but they vastly outnumber job seekers.
  • We’ve seen the fastest wage growth in decades, particularly for the lower end of the economic spectrum
  • Expectations are landing on a recession in the first half of next year (are we not already in one?)
  • Inflation is still an issue, but I will say from looking at their chart, it certainly seems like the inflation situation has improved in recent months
  • As this report puts it: “FOMC being caught flat-footed by inflation earlier in the year now means “all gas, no brakes.” They say rate hikes have been stronger than ever before in modern history, but I think that the Volker-era rate hikes are fairly comparable to today. Rate hikes sharper than anything we’ve seen in decades is still a powerful statement.
  • SOFR benchmark rates are expected to come down following a peak close to 5% in Q1 of next year, but they aren’t expected to get back to the 3% range in the next five years. 10-year Treasury rates are projected to be about 4% through this 5-year period.
  • Some promising inflation news: The Federal Reserve Supply Chain Stress Index has been falling sharply since peaking at about 4.3 this January. It’s now at 1. 1 unit of pressure. 
    • I don’t know what units this index uses, and it was not easily determinable on the New York Fed’s website. I watched a video on this index, and they did not mention the unit of measure that they’re using. It is Pascals? I feel like it would be inappropriate to use Pascals, but that is the unit for pressure, right? 
    • Either way, we’re at one now, it used to be 4.3 times higher than it is. 
    • It has come down considerably in the last 10 months, but the historical average is about -0.5. Vacuum pressure? No, the negative number isn’t a vacuum, but I think it means that the supply chain moves with greater fluidity and resilience when it’s below 0.
  • Similarly to the de-stressing supply chain, delivery times have been going down and things are getting faster with fewer backlogs since Q1 of this year.
  • I like the simple flow chart on page 17, but I can simplify it even further:
    • Is inflation high and we haven’t felt enough economic pain? Then raise rates.
    • Is inflation going down or are we feeling enough economic pain? Then lower rates.
    • Sometimes, I like to think of the Fed as like, a dragon. 
      • It hates inflation because that devalues its dragon hoard of U.S. dollars. Not gold or hard assets, that messes up my thought experiment.
      • If the dragon senses that inflation is going up, well, it’s going to burninate the villages and cause some economic pain. 
      • Does the dragon get a kick out of burning the villages? Maybe, but burning villages is just what dragons do! Does the Fed get a kick out of raising rates? Look, the Fed is using the few tools that they have. It might be more exciting if J. Powell could breathe fire, but I don’t want to give the Fed any more levers to pull.
  • The report then gets into the more multifamily-specific areas of the economy, highlighting how household formation has outpaced housing supply since 2018. Household formation has been going down since 2020, but it’s still well above housing supply. This chart on page 19 is also a reminder that the undersupply of housing is a problem that predates the pandemic, and we can’t really rely on our recovery from the pandemic to eliminate these problems with housing affordability.
  • Household income growth shows some moderating growth, and shelter inflation is expected to come down, but the high mortgage rates and home prices on page 22, alongside the telling graph of sinking consumer sentiment, suggest that people are not ready to buy a home in the current environment.
  • When it comes to property fundamentals, Berkadia recorded abnormally lower leasing activity in Q3 and vacancy up to 4.1% for the same period. 4.1% vacancy, as the chart on page 28 shows, is as low as it was in Q1 2019, and from that point going back all the way to Q1 2001, vacancy was higher than what it is now. So yes, vacancy is un-contextually higher, but contextually, historically, typically? It’s low! Very low!
  • I was encouraged by Berkadia’s projections for multifamily demand in 2023 on page 29. 
    • The numbers for this year are very much not great. We’ve got 360,401 units of new supply up against 15,405 units of absorption expected by the end of the year. That’s like a 24 to 1 ratio!
    • Yes, we’re going to see a lot of new apartments come into the market next year, Berkadia projects we’ll have 565,166 units. But the demand is coming back up as well, with 442,181 units absorbed in 2023 by their projection. New supply is still expected to outpace absorption, but only by 22% rather than 2400%.
  • Skipping ahead to rent growth projections, the reduced demand for apartments has led Berkadia to drastically shift their projections for 2023. Where once they thought of 9.5% rent growth in 2023, which, admittedly could have been tempered a little bit from the get go, now they’re projecting 4.2% rent growth for next year. 
    • With the long-term average for year-over-year rent growth at 2.8%, this 4.2% rent growth is a great number. 
    • They do mention that this number could go up if inflation continues, but 4.2% is, again, a very good number.
    • It might be difficult to tear ourselves away from expectations of double digit rent growth after the past two years, but rent growth at more than 1.5 times the historical average is great. Underwriters and apartment buyers are likely not counting on huge rent growth in the near to medium term, but this projection is both a caution against expecting a return to skyrocketing rent growth as well as an encouraging sign that we still could see rent growth that’s much higher than normal next year.