Coming off the best year ever for rent growth, multifamily experts foresee another strong year for the industry in 2022.
Panelists at the National Multifamily Housing Council’s Annual Meeting in Orlando last week predicted a deceleration in the heady growth rates achieved in 2021 for the economy and the multifamily segment. Nonetheless, experts expect the strong fundamentals performance will continue, driven by robust economic growth, healthy consumer balance sheets, pent-up demand from the pandemic and the long-term shortage of housing.
Multifamily is coming off a year with the highest asking rent increases ever, due to extremely strong demand that lifted occupancy rates near all-time highs. Although growth is expected to moderate in 2022, the industry does face challenges that include rising interest rates, a national labor shortage, evolving migration patterns, and changes in renter preferences.
Economic Growth with Headwinds
Richard Barkham, global chief economist & global head of research for CBRE, said he expects GDP to increase by 4% to 4.5% in 2022, driven by robust spending by consumers and businesses. However, he said inflation will remain high before settling down into the 2.5% to 3% range. The fear of an inflationary spiral is prompting the Federal Reserve to increase policy rates and sell off some of its bond holdings.
Barkham said the increase in interest rates “is a sign of success, a sign of recovery in the economy.” However, he said there are headwinds that include inflation, rising rates, the labor shortage that has driven wage growth, and a potential economic slowdown in China and emerging markets.
Barkham said that the decline in immigration in recent years means that the U.S. will have 2 million fewer workers than was projected in the past. “If trends continue, the U.S. labor force will shrink for the first time in generations,” he said, noting that the drop would put a crimp in future economic growth. The tight labor market has produced 20-year-high wage growth, with the average wage rising about 5% in 2021.
Sustained Rent Growth
Rising wages have played a role in the apartment market, providing households with the ability to pay for the 13.5% increase in U.S. apartment asking rents in 2021, according to Yardi Matrix data. A big part of rising rents is the rent growth in luxury apartments. Rents for luxury Lifestyle units in the U.S. rose by 15.9% in 2021, compared to 11.0% growth for Renter-by-Necessity units, per Matrix. Renters have more to spend on housing for many reasons, including government stimulus, higher wages, and increased savings during the pandemic.
Another factor in rent growth is the migration of renters to secondary and tertiary markets that was exacerbated during the pandemic. Renters that moved to less expensive markets were able to pay more for rent because it was relatively cheap compared to the higher-rent markets they moved from. Because of the wave of population growth, asking rents in 2021 rose by 20% or more in many markets in the Sun Belt and Southwest, despite large increases in apartment deliveries in those metros.
Migration is closely related to trends in work-from-home. Return to offices has been delayed as new variants of COVID-19 continue to emerge, disrupting corporate plans and making it difficult to develop permanent policies. Yardi Matrix vice president Jeff Adler said it will take another couple of years before workplace issues shake out.
Adler said the pandemic exacerbated existing migration trends. He said population will continue to shift from urban to suburban submarkets within the same metro and from high-cost gateway markets to secondary and tertiary markets with a lower cost of living and appealing lifestyle amenities. As people continue to seek urban-style amenities such as restaurants and entertainment, secondary metros and outer-ring suburbs are developing “urbanized nodes” that appeal to renters, he said.
Speaking on a different panel, John Affleck, senior vice president at John Burns Real Estate Consulting, agreed. “What we’re seeing today is a strategic location change from people who realize they are not going back to the office anytime soon,” he said.
The growth outside of gateway markets is having a huge impact on investment strategies. Ned Striker, senior managing partner of investments and capital markets at Cortland, said that over the last decade institutional investors have become more comfortable with secondary and tertiary markets that they would have avoided in the past because they were too small and illiquid.
Read the full analysis: Multifamily Demand Remains Strong