Multifamily Highlights, 9/16/2022: Inflation and the Multifamily Market

Stock markets fell after the latest CPI report showed higher-then-expected inflation, but the nominal increase—0.1% month-over-month—is relatively low. More significantly, the CPI shows that rental housing has become one of the most powerful drivers of inflation. Notably, market rate apartment rents remain below the 30% unaffordability threshold, and elevated mortgage rates have kept rental housing as a more affordable option than buying a home, suggesting that there may be room for further growth.

Bureau of Labor and Statistics: “Consumer Price Index” – https://www.bls.gov/news.release/cpi.nr0.htm

• I skimmed over the summary of this report, I did some easy mental math, and then I rushed out of my office ready to talk to someone about my great new hot take. It’s a little different than what I’ve gleaned from some of the news sources and reactions in the stock market, but it’s not wrong!
• Inflation is still heating up or hot or what have you. 8.3% year-over-year. Prices were flat in July’s report but they went up—UP!—in the report this month. If we don’t see a thumbnail with the face of a dejected business YouTuber superimposed in front of flames in the background with the title “Inflation Apocalypse Is Here” or maybe “Inflation Conflagration in the Nation.”
• How much did the CPI go up month-over-month? Only 0.1%, and I think, at least in the narrow case I’m about to make right now, that it’s not downplaying things to use the word “only” to describe 0.1% month-over-month inflation.
  • The year-over-year inflation number reported this month was actually less in this month than it was last month.
  • Why? Look, if you have a full year of 0.1% month-over-month inflation, you’ll get to 1.2%. To re-phrase, and please let me know if I am wrong, if we take the inflation increases from last month, keep that steady for a whole year, we’ll have prices 1.2% higher at the end of that year. Typical inflation is near 2%, and the Fed is targeting what, 3%?
• The most relevant CPI news for multifamily, and it is one that we have reported before, heck, we have reported that we reported it before, is the ever-increasing force of rental housing increases in the overall strength of inflation. Rental housing is up .6% month over month, 6.1% The CPI rent growth measure is a lagging indicator, and we may not see it fully crest before the end of the year. The amount of weight assigned to rental housing in the CPI report is above 30%, which is the highest weight for any single category this month. (I found the CPI spreadsheet file and here is a link.)
• In addition to CPI rent measurements being a lagging indicator, it may be a flawed measurement altogether, as Jay Parsons explains in a recent LinkedIN post: https://www.linkedin.com/posts/jay-parsons-a7a6656_us-inflation-tops-forecasts-cementing-odds-activity-6975454752809635840-N5oa?utm_source=share&utm_medium=member_desktop
• Now, that being said, the information on CPI rent trends is publicly available, and you can measure it against other sources of rent growth information to see how much of an outlier it is.
• A few months ago, we covered an article that included a chart of market rent growth, renewal rent growth, average rent growth, and CPI-measured rent growth, and CPI was lagging behind all of the other trends and it was much less volatile than the other trend lines.
• Given the general trends, changes in CPI-reported prices tend to be recorded after changes recorded by many of the other reports that we cover, but, just like I try to dig into the methods of these reports, it’s great to see how Jay Parsons gets into the methodology of the CPI report. 
  • The research methods and most importantly the sources of data are going to be different for each report, and some of the reports we cover have a bunch of paragraphs describing their research methods, and some of them have none of paragraphs describing their research methods.
  • It sounds ridiculous to even say it, but none of these companies want to be wrong. Marcus & Millichap, RealPage, Yardi Matrix, Newmark, Berkadia, Redfin, Zumper, CoStar, Colliers. They may lean one way or another depending on their audience and their place in the market, but they all stand behind their numbers.

Yardi Matrix: “August 2022 National Rent Report” –  https://www.yardimatrix.com/publications/download/file/2686-MatrixMultifamilyNationalReport-August2022

• Average rent growth nationally is up 12.6% year-over-year.
• The monthly rent growth, which is worth watching now because we’re entering a little bit of a different paradigm now compared to last year, is down 0.1%–the first time monthly rents decreased since June 2020. Wow. Still, this decrease is negligible, and is actually just a $1 decrease in the specific average rent, which went from $1719 to $1718.
• The deceleration in August was strongest in many of the markets that have had the most growth over the past two years, a sign that affordability is becoming an issue. For example, year-over-year rent growth dropped 7 to 8 percentage points over the last two months in Orlando (16.9% in August), Miami (16.7%) and Tampa (14.0%).
  • We can look back at some of these specific markets in a comparison between some of the other data published recently from CoStar and Marcus & Millichap.

GlobeSt: “Here Are Some Metros That Might Concern Multifamily Owners”

https://www.globest.com/2022/09/12/here-are-some-metros-that-might-concern-multifamily-owners/

• I’m mentioning this report because sometimes, I read a take on a report that gets me thinking in an interesting direction that isn’t explicitly stated in the report itself. 
• In this case, we’ve got three decent multifamily reports that have come out this week, and they all cover the moderation and seasonality that is returning to the apartment market that we didn’t see at this time last year.
• GlobeSt’s take on this acknowledges the seasonality angle, sure, but I really liked the article because it’s a reminder that different cities are experiencing far different rent growth trends right now, and it is worth paying attention to the way these markets are moving right now.
• This isn’t in the GlobeSt article specifically, but I think that the post-pandemic, post-2021 multifamily market is finally coming into focus. We have come out of the hypergrowth of 2022, and ea rlier in the year, it was not quite certain what rent growth and demand would look like, but it is much clearer now.

RealPage: “Rent Growth Continues to Moderate in August” – https://www.realpage.com/analytics/apartment-rent-growth-moderates-august/

• Monthly rents increased by 0.4% according to RealPage, which is a little bit higher than Yardi Matrix and CoStar report.
• Year-over-year, we’re still at a dang-high 10.5%. Now, as we continue with this slower monthly rent growth, I’m guessing this year-over-year rent growth is going to get lower, but we’ll still end up well above historical averages.
• Here’s a great quote:
  • “There’s a lot of panicky “It’s a big slowdown!” analysis out there right now, but remember: Nearly every major rental owner, operator and analyst expected to see moderation in rent growth in 2022 compared to the historic peaks of 2021. Demand and pricing power are not evaporating for rentals like we’ve seen in for-sale housing in some parts of the country. Apartment fundamentals are still very healthy and should continue to be. Apartments are just trending more toward sustainable balance.”
  • I agree.
  • Another thing worth keeping in mind: The rent growth we’re seeing now is on top of last year’s big rent growth. We’re at 10.5% rent growth now, and last year was at around 10.5% rent growth looking at the graph they have here.
  • Now, a lot of the huge year-over-year rent growth in 2021 was coming after a year with negative growth. For August, rent growth in 2022 is coming after a year with huge rent growth.
    • Granted, rent growth is moderating, but there are these clear signs of a robust multifamily market that get obscured when you are looking at the moderation in rent growth itself
• RealPage has Phoenix rents down 0.4% monthly and growing 7.9% year-over-year, Vegas down .5% monthly and at 8.8% growth year-over-year.
• Where are we seeing more growth? Wait… Is that the Midwest?
  • “Markets seeing the least slowdown in rent growth tend to be steady-eddy Midwest markets like Cincinnati, Minneapolis, Milwaukee, Cleveland, Kansas City, Columbus, Detroit, St. Louis and Indianapolis.
• RealPage notes that not all Sunbelt markets are seeing these rent decrease trends, and actually, I don’t think all those Midwestern markets are growing the same way either, but the general trends hold true, and we can return to these specific Sunbelt and Midwestern markets shortly.

CoStar: “August 2022 Rent Growth Report” –  https://www.costargroup.com/costar-news/details/apartments.com-releases-august-2022-rent-growth-report

• CoStar joins Yardi Matrix in reporting a 0.1% decrease in rents between this month and  the last.
• Like many of the other reports have said, this decrease is led by a number of what were, last year, the fastest-growing markets in the nation. Nashville, Austin, Las Vegas are among the markets with the most steep drop in rents. San Francisco as well, which is a little interesting.
• Without extending this too far, having just gone through several national rent reports, I’d like to dig into some specific markets, and we can compare some of the CoStar information with some market-specific reports from Marcus & Millichap as well as the Yardi Matrix and RealPage research published this week.

Marcus & Millichap: Selected Market Reports, Tampa, Phoenix, Seattle, Las Vegas, San Francisco, and Indianapolis

• Link to Google Drive with the reports
• Tampa-St. Petersburg
  • Economy: 62,000 jobs added, unemployment at 2.8%
  • Rent Growth – 15.9% year-over-year
  • Vacancy – 3.7% (150 bps increase)
  • Supply – 2.8% increase in inventory, 7,500 units
• Phoenix
  • Economy: 90,000 jobs added, unemployment at 2.7%
  • Rent Growth – 10.6% year-over-year
  • Vacancy – 4.4% (180 bps increase)
  • Supply – 2.6% increase in inventory, 9,800 units
• Seattle-Tacoma
  • Economy: 80,000 jobs added, 3.2% unemployment
  • Rent Growth – 10.6% year-over-year
  • Vacancy – 3.5% (40 bps increase)
  • Supply – 5% increase in inventory, 10,300 units
• San Francisco
  • Economy: 54,000 jobs added, unemployment at 2.1%
  • Rent Growth – 7.5% year-over-year
  • Vacancy – 6.6% (60 bps decrease)
  • Supply – 0.7% increase in inventory, 1,900 units
• Las Vegas
  • Economy: 52,000 jobs added, unemployment at 5.6%
  • Rent Growth: 10.9% year-over-year
  • Vacancy: 5.1% (250 bps increase)
  • Supply: 0.7% increase in inventory, 1,550 units
• Indianapolis
  • Economy: 15,000 jobs added, unemployment at 3.2%
  • Rent Growth: 15.9% year-over-year
  • Vacancy: 3.8% (70 bps increase)
  • Supply: 0.7% increase in inventory, 1,100 units

Mortgage Professional America: “Investing in existing real estate properties vs new ground up construction” – https://www.mpamag.com/us/specialty/commercial/investing-in-existing-real-estate-properties-vs-new-ground-up-construction/419818

• This article garnered a significant amount of attention from readers of our newsletter, and it’s hard not to see why. It’s an interesting question, investing in new ground-up construction versus an already-built real estate property.
  • Right off the bat, I think about risk, and how, for all but the most brand-new properties, you have pro-forma information and a history to fall back on, and when you’re dealing with ground-up construction, you don’t have that history. The building doesn’t exist yet.
  • But I’m sure that this extra risk is baked into the investment model for projects like this, and a lot of the issues with ground-up versus existing properties fall to how comfortable and knowledgeable an investor is with the process of ground-up development and the specific people and businesses working on the project.
• Before the author gets into a list of benefits and drawbacks to ground-up development, he cite an important benefit: “On a new development, there is a much faster “recapture period” (the length of time it takes to regain your initial investment). Once the construction is completed and the building is leased up, the developer can get a new loan in order to capture all its equity.” 
• I like how they start their Pros/Cons list with really what is my favorite “Pro” for ground-up development: It would be so cool to build and design a building. I’m not an architect, but even if I had the smallest amount of input on the color of window treatments, I would be so proud and excited about that.
• Another “benefit” cited is using nearby properties to get the valuation of the planned development, but that seems like more of a wash to me.
• A more clear benefit is that the owner of a newly-build development will have much more flexibility to set rents and establish things right off the bat, without the effort of transitioning renters and staff.
• In terms of cons: planning process is more intense. Lots more permits are needed.
• Con: More room for error and delays given the complicated nature of construction.
• Con: Labor and materials costs fluctuate. That’s a bit of an understatement, but yes.