Track New Rents for a Clearer View of Inflation
How does today compare with 2008? What was the pandemic like? How much rent growth was there in 2021?—Today is not the day for looking at the past. Today, we look into the future! We have the data, we have all the data we need to make 100% accurate predictions for the multifamily market, commercial real estate, and the economy.
CBRE: “U.S. Real Estate Market Outlook 2023” – https://www.cbre.com/insights/books/us-real-estate-market-outlook-2023
CBRE estimates this takes 55 minutes to read. These comments won’t take 55 minutes to read, but I do want to say that we’re dealing with a very extensive piece here, and we won’t be able to cover every single aspect of it.
CBRE’s real estate market outlook report covers the office, retail, hotel, multifamily, life sciences, data center, and industrial real estate sectors as well as sections covering economic trends, construction costs, decarbonization, and capital markets.
There’s going to be a recession, but not a deep one. CBRE has a table showing their quarter-by-quarter forecast for GDP, Federal Funds Rate, and Unemployment. Looks like inflation will trend downward to 4.1 by end-of-year, but unemployment could go up to 4.7, with the Federal Funds rate around 5-5.25% by the end of 2023. Not ideal.
They go to great lengths to emphasize that their projected recession will be short-lived, and the implication is that we could have a very attractive buying opportunity next year.
I am not convinced that it is going to be a perfect environment to find and finance high-performing multifamily investment properties, only because we saw this prediction in 2020, and the market was full of buyers looking to get an apartment building on the cheap. That being said 2023’s high interest rate situation is a key difference from 2020, so that could reduce competition among buyers such that opportunities will still be available for investors able to solve financing challenges.
Moving on to CBRE’s outlook on capital markets, they predict reduced investment in the first half of next year due to the financing difficulties I just mentioned. But, they say, it could be easier for multifamily properties to obtain financing compared to other property types.
Still a lot of dry powder out there, still a lot that’s earmarked as opportunistic, but what’s interesting here is that, yes, there’s a lot of dry powder out there, but it has remained at the same level as last year, and the real significant increase in dry powder happened in 2017. I’m sure that money is flowing into and out of this dry powder category as investors find deals, but I still feel for those opportunistic investors who might still be waiting for the right opportunity. For their knight in shining armor. Some day, your prince will come.
When it comes to cap rates, CBRE predicts that they will rise to around a 5 cap average for multifamily in the second quarter of next year and essentially stay close to that level through the end of 2024.
Again, we can’t spend an hour on this report, so I’m going to skip ahead to CBRE’s outlook for multifamily in the year of 2023.
There’s a couple of headlines for this section, and they seem to be at odds with one another. “Supply is likely to outstrip demand in 2023” and “Overall demand to remain steady.”
My take is that, if you want to get the story on supply, look specifically at the market-level and city-level rather than looking at averages for the whole country. We most definitely have not built enough apartments to turn around the massive housing unaffordability crisis on a national level, but there are many places where they are building a massive amount of apartments.
RealPage published an article this week that shows how 45% of all new apartment supply falls within five states.
Texas, California, Florida, and New York are kindof expected, whether due to the sheer size of Texas, Cali and NYC populations or the rapid growth in apartment demand in Florida markets, which have (for the most part) escaped a lot of the rent growth moderation that has affected other Sun Belt markets.
But North Carolina? Man, they are adding 10.1% to their apartment supply.
Returning to CBRE, they do predict 4.3% rent growth and 95% occupancy on average for the nation. That’s not great when you factor in the 4.1% inflation that they predicted earlier in their report, but we’re a long way away from a rent growth slump. This 4% rent growth implies that we’re going to climb out of this winter rent cooldown in 2023, and that makes sense to me.
The most dramatic graph in CBRE’s report is the one that shows how much higher the cost of owning a home is compared to the cost of renting. Homeowners pay 57% more than renters on average, per month, according to CBRE. I don’t have any idea about how this report balances out how nice the purchased homes are compared to rental housing, but that’s a huge premium for ownership no matter how you look at it.
The trendline is arguably more compelling than this 57% premium. In Q4 of last year, homebuyers only paid 10% more than renters. In this year alone, that gap expanded more than five-fold what it was a year ago.
This, as CBRE notes, points to the still-healthy, still significant level of demand for housing that will continue next year.
Investors are still cautiously adapting to higher interest rates, but “As the market stabilizes in 2023, more investors and lenders will deploy capital in one of the best asset classes for hedging inflation concerns.”
National Association of Realtors: “On the Horizon: Markets to Watch in 2023 and Beyond” – https://www.nar.realtor/research-and-statistics/research-reports/on-the-horizon-markets-to-watch-in-2023-and-beyond
NAR does its own stage setting at the start of their report, calling 2022 “the year of softening.” Like a sweater? Like dryer sheets? Year of moderation seems a little more appropriate. With inflation as bad as it is, we could use a little bit of moderation.
After a little preamble, NAR explains the criteria they use to pick the markets to watch in 2023 and beyond: Better housing affordability than the national level, more renters who can afford to buy the median priced home than the national level, stronger job growth and more tech jobs than the national level, strong in-migration and stronger population growth than the national average, a lot of remote workers, faster growth of active inventory than the national level, and a smaller housing shortage than the national level.
For this last one, they argue that people are more likely to buy a home in a market that has homes than a market that does not, which clarifies things a little bit. They’re looking for the markets where people are most likely to buy a home. A lot of these indicators will also point to strong rent growth in their markets to watch, but they’re really looking for strong home sales.
So, what are these markets?
Atlanta, GA; Raleigh, NC; Dallas, TX; Fayetteville, AR; Greenville, SC; Charleston, SC; Huntsville, AL; Jacksonville, FL; San Antonio, TX; Knoxville, TN
All of these markets are arguably in the Sun Belt. Knoxville could be a stretch since some maps put TN in the Sun Belt and some don’t, but for the point I want to make here, I’m lumping TN into that Sunny American Belt.
Again, it’s important to distinguish NAR’s list of places where we’ll see home buying growth with places where we might see rent growth in 2023, but it makes perfect sense to expect people to want to live in the South for the same reasons that people wanted to live there for the past ten years.
The Midwest probably won’t be sitting at the top of rent growth lists forever, but if history is any guide, Midwestern markets will probably not be as volatile as markets like Phoenix or Boise, which had huge gains in 2021 followed by slowdowns in 2022. So, maybe we won’t see the exact same Sun Belt markets like Phoenix topping the lists in 2023, but there is room in other markets.
Yardi Matrix: “National Multifamily Report, November 2022” – https://www.yardimatrix.com/publications/download/file/3207-MatrixMultifamilyNationalReport-November2022
Regular listeners have probably lost count of how many times The Gray Report has covered Yardi Matrix’s monthly multifamily research publication, but 1: It is an excellent, detailed report, and 2: the market is always different. Especially in a transition year like 2022, following the changing trends of the multifamily market is extremely helpful.
The main shift here, and it’s a first for Yardi Matrix’s reporting, is that month-over-month rent growth is in the negative, -0.5% for November 2022. Year-over-year rent growth is at 7%.
Yardi Matrix details the same economic context that we’ve discussed earlier, noting that the “deterioration in rents was not unexpected nor is it necessarily a sign of a deep recession.” In their interpretation, the current slowdown is a correction from a level of rent growth that “would be unsustainable under optimal conditions.”
“Indianapolis, still among the least expensive of the major metros, is one of a handful where rents have continued to increase,” the report’s authors write. And skipping down to the single-family rental market, Indianapolis is in the top three for year-over-year rent growth.
But interestingly, there’s been a shift in the rent-to-income levels that Yardi Matrix tracks. While Kansas City and Indianapolis used to be reliably at the bottom, indicating a very affordable rental housing market, they’ve crept up the list a little bit, with both of them in the top ten most affordable listed, rather than the top two.
I’m going to put a little asterisk next to this list though, because for Chicago, Dallas, Charlotte, Baltimore, Denver, and Atlanta, the numbers do NOT add up!
