Multifamily Owners Forecast More Rent Growth Despite Economic Headwinds

Despite higher inflation rates, looming recessionary fears and a pullback by lenders, multifamily real estate investment trusts remained optimistic in the second quarter, buoyed by rents that continue to rise — albeit more slowly than before — and persistent demand.

Rent growth, which hit historic peaks over the past year, is showing signs of a national slowdown, but executives at some of the country's top REITs said a continuing housing shortage and a rise in both home prices and mortgage rates would keep multifamily well-positioned for the second half of 2022. What's more, the jobs picture means tenants are positioned to weather continued, if more modest, rent increases.

“Our consumers are doing really well,” Camden Property Trust CEO Ric Campo said in a July 29 earnings call. "They all have jobs, and when you look at the year-over-year increase in income for Camden residents, it’s gone up over 10%.

“Wall Street and financial folks worry about interest rates and inflation, and that’s important. I think consumers are worried about that, too, but they also are doing pretty darn good when it comes to income growth and savings rates.”

Camden saw rents rise by an average of 15.3% in the second quarter and recorded occupancy of 96.9% across its properties. It was a similar story for Equity Residential, with rental growth of about 10% and 96.7% occupancy, and for Essex Property Trust, which posted year-over-year rent growth of 12.5% and 96% occupancy. At AvalonBay Communities, occupancy remained above 96% each month of the quarter, and asking rents have increased 9% since the beginning of the year. 

While it is likely that rents will decline somewhat from their stratospheric heights, Essex President and CEO Michael Schall said it is difficult to predict the rest of the year, given that numbers from peak rental season — the period between May and August that tends to bring the height of tenant activity — remain unknown. 

“It's really a key time in terms of trying to determine where this is going to go, potentially,” Schall said in an earnings call July 27. “Rents could keep going up or it could follow the normal seasonality, and we reach a peak in July and we start going downhill for the rest of the year.” 

UDR CEO Tom Toomey called Q2 2022 a continuation of “the strongest operating environment I've seen over my tenure in the multifamily industry.” The company projected rent growth of about 7% in the back half of the year. That would be a slowdown, but still double historical averages of between 3% and 3.5%.

“We do get a lot of questions on the affordability dynamic and the wherewithal of the consumer,” UDR Chief Financial Officer Joe Fisher said in the July 27 call. “It's important to keep in context that while these rent increases year-over-year feel relatively large, if you go back to 2019 and look at where income growth has been throughout our markets, income growth has averaged 4% or 5%, which is effectively right in line with where rent growth [is].”

Camden executives agreed higher rents weren't stressing consumers so far, pointing to its resident pool of middle-to-upper-middle-class renters with solid savings and year-over-year income increases of nearly 10%.

While confidence in tenants' ability to withstand rent increases remains, several executives said they expect economic uncertainty to have some impact. That includes a slowing of transaction volume, with fewer sales closing in the near term in light of a cooled-off lending environment.

“We're looking to get repeat business from a pool of lenders,” AvalonBay Chief Information Officer Matthew Birenbaum said of its strategy. “And I think the deal flow is probably increasing as capital gets a little harder to find.”

Multifamily lending is expected to drop to $436B this year, a 10% decrease from last year’s record $487B, according to a July forecast from the Mortgage Bankers Association, CoStar reported.

“Higher interest rates, especially for the floating-rate debt used by many value-add buyers, as well as general uncertainty about the path of the economy and evaluations, led most buyers to pause,” Equity President and CEO Mark Parrell said.

“While apartment values are not immune from the more general revaluation of risk assets going on across all asset classes, we expect apartment assets to remain in high demand from institutional buyers and for rising NOIs to partially cushion increases in cap rates,” he added.

Apartment demand isn't expected to cool off anytime soon despite the headwinds of inflation and interest rate volatility. The U.S. needs 4.3 million new apartments over the next 13 years to meet projected demand, according to a July report from the National Multifamily Housing Council and the National Apartment Association.

Meanwhile, several multifamily REITs broke or neared records in Q2. Essex, for instance, saw the second-best quarterly growth since its 1994 IPO, with net effective rents for new leases now 16% above pre-pandemic levels and 20.6% higher compared to the second quarter of 2021. 

UDR anticipates 2023 earnings growth of 5% — the highest in its history.

“It's double our previous high, which we achieved coming into 2022," UDR Senior Vice President of Operations Mike Lacy said, adding the figure was four times above its average over the past decade. 

In an earnings call July 29, Apartment Income REIT Corp. co-Chief Investment Officer John McGrath said that despite shakier economic fundamentals, companies like his have developed strategies to ride out the storm, adjusting target return thresholds to market fluctuations.

“Macroeconomic factors are top of mind,” McGrath said. "Recession and inflation fears and interest rate volatility have sidelined many buyers. Having lived through the recession of 2001, 2008, '09 and 2020 ... we see the opportunity to make profitable trades, and we remain focused on the continued systematic enhancement of our portfolio through disciplined accretive growth funded by paired trades.”

With demand still high and an overall sense renters can still tolerate increases, executives said there is particularly room to push rates in West Coast markets like Seattle and San Francisco, which had lagged but are now seeing a revival in tech jobs.

Schall said Northern California and Seattle were “the largest and last markets in our portfolio to fully recover from the pandemic.”

Net effective rents in those markets have increased between 18% and 20% year to date, he said, reflecting momentum from return-to-office programs and strong job growth.

Los Angeles, San Francisco and New York have been among the leaders in year-over-year growth, while the surge in move-ins to the Sun Belt markets was derived largely from people moving out of New York, Illinois, Pennsylvania and New Jersey.