Leading multifamily researchers weighed in on industry fundamentals, the supply pipeline, rent growth, and the best and worst markets at the MFE Conference in Dallas in late September.
With high interest rates and single-family home prices, the math currently favors renting.
“Renting is still more expensive than normal but not to the levels when you compare mortgage payments to incomes,” said Ryan Davis, CEO of Witten Advisors.
While the nation had two years of unprecedented rent growth during the pandemic, downward adjustments are being seen in markets across the nation. However, Jeff Adler, vice president of Yardi Matrix, said it’s not because of a reduction in demand.
“In markets where there’s decent demand and not a lot of supply—the Northeast and Midwest—rent growth looks pretty good,” he noted. “Markets where there has been a lot of supply, even though a lot of demand growth—Phoenix; Austin, Texas; Las Vegas—they are suffering.”
According to Adler, prior to COVID, the 10-year rent growth average was 2.8%. After the two years of crazy increases that moved the 10-year average 200 basis points, the industry is coming back to 3% rent growth on average, which he referred to as “normalish.” “The market is decelerating, but it’s not the end of the world,” he added.
Greg Willett, first vice president and national director of research at Institutional Property Advisors, which is part of Marcus & Millichap, noted that Class A or luxury product rent growth hasn’t take as big of a hit as he would have anticipated. However, the middle market has slowed a little more than expected. “Part of it is strategy and that a lot of operators are going for the occupancy over the rent growth right now,” he said.
Willett also said the resident retention rate at the top tier is still great. While stabilizing concessions have ticked up slightly, he noted those also are still below historic norms.
“You’re not really seeing people chase the new construction deals and move around the way you have seen in previous cycles,” he said. “And, that doesn’t mean that it won’t happen over the course of the next year or year and a half, but so far I’m not seeing any evidence.”
The industry is closely watching the supply pipeline that’s expected to deliver this year and in 2024.
“Over the next five years, the pipelines are not crazy. It’s just, there’s a group of cities in the next two years that are really high. That’s the issue,” said Adler.
The entire supply pipeline that Yardi Matrix is tracking totals 5.5 million units, with 1.1 or 1.2 million units under construction that will deliver this year or next year, roughly 1.2 million units with approved plans that haven’t poured foundations, and 3.3 million identified units that are still in the early stages and don’t have approved plans.
Adler said he projects that almost 500,000 units will be delivered this year and another half-million next year, and then the numbers begin to drop.
“But the numbers are in the 400s or 300s, and you’re setting up the stage for the next cycle,” he said. “We will drop down supply and have a recovery from whatever downturn we have. There’s another upcycle starting in 2026 or 2027.”
Willett added that he expects some of the million or so units under construction right now will be pushed further out.
“Either next year we have a one-year completion rate that is completely unprecedented from what we have had in the past, and I don’t know how we have the labor force to make that happen, so that suggests you’re still delivering quite a bit of product in 2025. That means some of these projects have taken 2.5 years to finish,” he said. “Those are your two choices, you either have to really stretch out the delivery time frame or you’re going to have a one-year completion volume that does not feel physically possible.”
Davis also noted that he is seeing a slowdown in starts data, which is down over 40% from the peak levels in 2022. “We had expected starts to slow much faster, but there’s a huge backlog of deals just waiting on permitting and entitlements. It has taken longer than expected,” he said.
With supply slowing for 2026 and 2027, he added that opportunities exist for developers. “If you can break ground now, you’ll deliver at the perfect time,” Davis said.
Adler and Willett also pointed to opportunities on the investment side through “buying the pain.”
“You know the next year or two aren’t going to be good. But at the same time, product that is for sale might be discounted to some degree. Buying at the beginning of the new cycle could be a good choice,” Willett said.
Adler and Willett agreed on most of the markets to target for these opportunities: Austin; Charlotte and Raleigh, North Carolina; Colorado Springs, Colorado; Las Vegas; Nashville, Tennessee; and Phoenix.
“In these markets, look for who transacted in 2021 and 2022 and who had variable-rate notes. There are 400 or 500 properties in this strike zone of cities that will do great long term. This is finding a special situation and buying the pain and leaning into the oversupply,” Adler said.
In addition, Adler and Willett discussed some of the other markets they favor as top investment locales based on expected performance in the next couple of years as well as those with the most risk.
Willett selected Boston; Columbus, Ohio; Dallas; San Diego; and Washington, D.C., while Adler went with Boston, the Chicago suburbs, New Jersey, and the Seattle suburbs.
“It’s the suburbs of the gateway markets—the ones that have struggles with their downtowns,” he added, noting that Boston is the least worst governed among the gateways.
Both had strong lists for their favored secondary and tertiary markets, noting that star performers include small college towns, where both student housing and conventional product are faring well.
“It’s a function of cost of living and spreading of population. Some of these tertiary markets don’t take a lot of demand overflow to move them,” Adler said. “They are really great smaller markets. However, the major risk is that they have less diversified economies.”
Willett added that you can also overbuild in them quickly.
For Adler, Albuquerque, New Mexico; Huntsville, Alabama, which will have a lot of supply coming online but has done well so far; Kansas City, Missouri; Knoxville, Tennessee; Madison, Wisconsin; Mobile, Alabama; and Northwest Arkansas, where there’s a strong public policy consensus around growth as well as a college town, top his list.
Willett noted Albuquerque; Grand Rapids, Michigan; Greenville, North Carolina; Knoxville; and Manchester, New Hampshire.
“That Carolina-Tennessee pocket is the place to be over the next cycle. I put Greenville, but I could have gone with Asheville and Chattanooga. There’s a lot of places that are attractive in that part of the country,” he said. “And then New Hampshire, maybe a surprise. But there are markets if you think of hybrid back to work and you have to work in Boston two days a week, then the commute from New Hampshire Is doable.”
When it comes to the more challenging markets, Adler said the ones that concern him most have political risk, including San Francisco and New York. While he said he loves San Diego, and Willett picked it as one of his favored markets, Adler noted that it’s still tethered to California’s political environment.
“The political risk is hard to underwrite,” he said, adding that markets with breakdowns in consensus on public safety, such as the West Coast cities of Seattle, Portland, Los Angeles, and San Francisco, also concern him.
