At Atlas, I oversee a portfolio of multifamily assets primarily located in the Southeast. What an easy job that was in 2021! Rents and occupancy boomed as we experienced record new lease demand and high resident retention. The chart below highlights the YoY lease trade-outs by month from Feb 22’ through September 22’.
This post is my desire to better understand the dynamics of 2020 and 2021 rent growth explosion. At first, it was a bit of a mystery to many housing economists, but looking back it’s obvious.
From 2009 to 2015, I Iived in NYC with two buddies. We converted a 2BR to a 3BR and split the rent three ways. We worked all day, partied most nights, and were always out and about on the weekends. With our lifestyle, the size/quality of the apartment didn’t matter much to us. For people in a similar situation in 2020, it was a different story. I try to imagine living in that same apartment during COVID lockdowns; talking over each other on Zoom calls, competing for bathroom/kitchen space, and spending the evenings together with no sports. It would have been miserable (no offense to my roommates) and we each would have moved out and got our own apartment within a few months. And that apt likely wouldn’t have been in NYC, but rather somewhere with a higher quality of life like Nashville, Miami, or Tampa.
This scenario played out all over the country and not just with roommates, but for kids living with their parents. Mom and dad were all the sudden using your basement bedroom as their home office, which was less than ideal. What was once a great way to save money became a painful daily life.
Roommates decoupling and kids moving out of mom and dad’s and into apartments and houses drove what we call in the business, new household formation.
Recent research has shown that remote work accounted for over 60% of the U.S. housing market’s home price surge (both for-sale and rentals).
“Analysis shows that the shift to remote work may account for more than half of overall house price increases and similar increases in rents. This fundamental evolution in work-related housing demand may be important for future house prices.”
Peter Linneman estimated that 1M new renters were created in a 14-month period which equated to a 2.5% increase in demand in an asset class where supply typically lags demand.
When you have relatively static supply and 1M new renters, many of whom concentrated in areas with great weather, lower cost of living, and less stringent COVID restrictions, it’s no surprise that we experienced 30%+ rent growth in Southeast markets.
In addition to the rent growth and record occupancies, we saw the average space per renter and number of occupants per unit shrink. The demand for 1BR’s and studios was outsized, and on-site co-working spaces became the norm in new developments. This is a secular shift with long-lasting impacts on the rental industry.
Today, household formation is cooling dramatically as demand was pulled forward during the pandemic and the economy is slowing due to the Fed’s actions on inflation. This is going to have a negative effect on demand for both for-sale housing and rentals in the short-term.
The rental industry has a dismal Q3, however, the September jobs number was recently released and beat expectations. The U.S. added 263k jobs and unemployment dropped back down to 3.5% which leads me to believe that rental housing demand will rebound.
Supply, however, is a different story. We’re at a 40-year high in terms number of apartments under construction (917k) which reflects the starts from 2019-2022 combined with supply-chain driven construction delays. We’re going to see a significant completions in 2023 – 2024, creating competition for high-income renters.
Given the structural under-supply of housing these units will lease up, it may just take longer than expected and more concession may be needed.
At Atlas, we’re currently raising a $100M Opportunity Zone fund to capitalize an active pipeline of multifamily development opportunities.
The short-term is going to be bumpy, but I believe quality multifamily real estate investments are best held long-term and the favorable fundamentals within select high-growth markets in the Southeast remain highly attractive today. While I keep my pulse on the market, I try not to get caught up in short-term market turbulence, but rather focus on identifying the best sites, designing projects with our target renter in mind, and executing ruthlessly.
What do you think?