While there’s no question that inflation, rising interest rates and looming concerns about a possible recession are headwinds for the multifamily market as well as other property sectors, the overall forecast for multifamily developers and investors is strong for 2022, according to Kimberly Byrum, managing principal for multifamily for Zonda, a housing market research and analytics firm.
As part of the latest Multifamily Market Update, Byrum said that rents and occupancy rates are at an all-time high in the multifamily sector as of the first quarter of 2022. Rents rose 19% between the first quarter of 2021 and the first quarter of 2022. The first quarter of 2022 also had the lowest supply of vacant units, with occupancy rates at 97.5%. Renewal rates were at a record high of 58.3% during the first quarter this year.
The limited pipeline of new supply and anticipated continued high demand are expected to keep the multifamily market thriving despite inflationary pressures and a volatile economy, Byrum said.
Rent surge anticipated to continue
Between July 2021 and April 2022, many markets saw a rent surge of 10% or more, while another set of markets saw rents surge 8% and 9%. Byrum reported that in most markets Class A and Class B apartments saw similar rent increases. Markets where rents increased 10% or more include:
- Los Angeles
- Fort Worth
- Las Vegas
Markets with rent increases between 8% and 10% include:
- San Antonio
Byrum said there’s nothing in the current data to indicate that the rent surge will reverse itself.
Rising interest rates are dramatically impacting the rent vs. buy calculation in favor of renting in many markets, even with rent increases. Wages were predicted to rise 3.9% in 2022, but wages have already risen 4.8% so far this year, which helps renters continue to adapt to rent increases.
While rising rents are a concern because of the lack of affordable housing in many markets, Byrum evaluates affordability based on a comparison of market rate rents and HUD area median income estimates. A housing market is considered affordable if market rate rents are affordable to households with 80% to 120% of area median income (AMI). Among the markets Zonda covers, only Los Angeles, Tampa, Riverside and Nashville are considered unaffordable, and Nashville missed the cut by just one percentage point above the 120% threshold.
Supply and demand match-up
More affordable housing markets have been attracting new residents since before the pandemic, but among those markets where demand for multifamily housing has risen 40% or more over the past two years, absorption rates have also risen. For example, the absorption rate rose 143% in Fort Worth when comparing the pre-pandemic market to the first quarter of 2022. The absorption rate increased 114% in Sacramento, 93% in Jacksonville, 88% in Riverside, 74% in Houston, 73% in Los Angeles (while not considered affordable, this market attracts people from the more costly Bay Area and covers a large geographical region), 50% in Tampa, 47% in Orlando and 41% in Atlanta.
Demand was twice the supply in 2021, which led available units – including vacant units and new stock – to fall below 1 million during the first quarter of 2022. Renewal rates increased 5.6% between the fourth quarter of 2020 and the fourth quarter of 2022, which contributed to demand. Byrum anticipates the pipeline to begin to stabilize in the fourth quarter of 2023 as the economy slows but it will still be a healthy multifamily market.
Assuming demand normalizes, Byrum predicts that the pipeline for apartments will continue to be undersupplied in San Antonio, Dallas, Las Vegas, Riverside and Houston in 2022 and 2023. The pipeline will be balanced in more markets: Anaheim, Orlando, Denver, Charlotte, Raleigh, Seattle, Atlanta, Tampa, Los Angeles, Nashville, Fort Worth, Austin and Phoenix. Byrum forecasts that Sacramento and Jacksonville will have a full pipeline of multifamily units unless the demand equation shifts in those markets.
Inflation pressure on multifamily market
Operating expenses including maintenance and payroll costs are impacted by inflation and supply chains. While maintenance costs declined in 2020 due to the pandemic, they climbed 8% in 2021. Payroll costs rose 3.8% over the past year, but rising rents have helped to reduce the percentage of income spent on those operating costs.
Two larger issues, particularly in high-cost housing markets in states with high property taxes, and in locations with weather-related risks, are higher taxes and insurance. Those combined costs rose an average of 32% over the past two years, according to Byrum’s analysis. The largest increases of more than 50% over the past two years were in the Bay Area and the Gulf Coast of Florida.
Overall, operating expenses are anticipated to rise 5.5% to 6.5% in 2022, driven mostly by higher property taxes and increased insurance premiums.