Expect Rents to Rise

by John Wilhoit Jr. on

In this economic  recovery rents were not a leading indicator, but we can see the writing on the wall; multifamily rents have stabilized and are poised to rise.   Expect rents to rise beginning this year and retain rental increases into 2012.  Her is why. 

  • Multifamily housing starts are not low, they are flat as a pancake… with less than 200,000 starts in 2010.  
  • While there is still a glut of single-family foreclosures yet t0 clear the system, these properties are not rentals.  They are “stuck” in the legal system neither available for sale or rent. 
  • The price of an item is a percentage of the costs to produce it.  This same economic principle applies to  multifamily rents.  Costs of inputs (construction material) is increasing.
  • There are still thousands of properties that “include” utilities (all bills paid).  Utilities prices continue to increase.
  • The number of multifamily units delivered has decreased dramatically.   Hampered by a lack of available construction financing multifamily developers have been sidelined since mid 2008. 

Rents will rise because job creation is accelerating.  Job creation in a country the size of the United States is never evenly dispersed.  Note that in the recent downturn relocation practically stopped.  People usually move for economic empowerment (read: a higher paying job).   If the job(s) are in the same place they now reside, rental increases will not cause people to seek less expensive housing further away from their job(s).   In some instances higher rents validate that this place is where the action is happening in terms  of job creation and steady employment. 

Rents will rise most where the supply/demand quotient is most out of balance.  Where is that exactly?  In places where supply cannot keep pace with impending demand…. places where it’s hard to build stuff even if more stuff is needed to be built.   This is often referred to as urban “in fill” housing.   Otherwise known as urban areas with more people than space.  Places where light rail is needed but cannot get built.  Places people with and without college education are in high demand…. all roads lead back to job creation. 

Multifamily construction capacity is increasing at too slow a rate to make up for the constant demographic push (read: increases in population).  Multifamily builders just stopped building.  It takes time to ramp up again.  They will do so, but with caution.  

This caution is partly self-imposed but mostly because of the lack of available financing…. lender underwriting continues to evolve post-Lehman.  If you think multifamily acquisition financing is difficult, try getting a construction loan.   High on the “suspect” list is anyone engage in construction, particularly new construction.   

Construction material prices are increasing  and so is the costs of delivering these goods to a site.  The costs of cotton has tripled in the last year.  Food inflation is occurring all around the world.  The cost to produce and deliver basic materials is increasing as industrial production ramps up.   One of the inputs to production is rents.   These factors will lead to higher asking rents.

Considered also that multifamily units do go out of service, and it’s not just in farm country..  Include urban apartments that are just too old to stand-  that are no longer habitable.   Functional obsolescence does have an end date- its called demolition. 

Consider this single generality:  losing 100,000 units per year to demolition/fire/damage, gaining 200,000 from new construction, needing 300,000 units per year to meet demand.  End result: Higher Rents.

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