Record Renewals Even At Record Rents: Apartment Residents Are Staying Put

Multifamily REITs’ rents continue to rise and their tenants largely continue to pay them as turnover rates dropped in Q1.

That's a feat considering apartment rents are hot off a year of record growth. 

“We’re in this situation now where there doesn’t seem to be an end yet of these significant rental rate increases across the board,” Bloomberg Senior REIT Analyst Jeffrey Langbaum told Bisnow. 

Occupancy remains high enough that most REITs are feeling confident about the prices they are charging. 

Equity Residential reported 96.4% occupancy for Q1 2022. Existing residents who renewed faced an average increase of 11.9% in the same period. AvalonBay Communities’ occupancy is at 96.5%, and its average asking rents to date are up 4% year-to-date to over $3K. MAA’s occupancy in the quarter was 95.9%, with rents averaging 12.4% higher year-over-year. Occupancy at Camden apartments in the first quarter of 2022 was 97.1% and renewals saw their rents rise 13.2%. Q2 is trending even higher for Camden, with renewals coming in 14.1% higher for April and preliminary data for May/June renewals showing 14.4% increases.

“We've certainly gotten some pushback on renewal increases, but those folks that are leaving for price, we're replacing with someone paying 27% higher,” Mid-America Apartment Communities Chief Operating Officer Thomas Grimes said. 

Tenants making that decision to relocate are unusually rare right now.

“The percentage of tenants leaving in a given quarter is also at record lows, and it keeps actually going lower, which has surprised us,” Green Street Managing Director, Residential and Health Care John Pawlowski said. 

Equity Residential reported 8.7% turnover in the first quarter, the lowest rate in the company’s history, Chief Operating Officer Michael Manelis said in an earnings call April 27. 

Move-outs at MAA properties are declining by close to 6% compared to Q1 of last year, MAA CEO Eric Bolton said in an earnings call last week. 

A number of factors are playing into tenants’ decision to pay the increases rather than move to find cheaper housing, operators and analysts say.

One is that the cost of alternatives, including homeownership, is higher. As mortgage rates have risen, mortgage applications have dropped. The Mortgage Bankers Association reported last week that mortgage applications decreased 8.3% from one week earlier and hit their lowest level since 2018. 

"Occupancy shows no signs of deterioration as alternative housing options like single-family rentals and for-sale homes have become even less affordable versus multifamily," UDR Senior Vice President of Property Operations Michael D. Lacy said. "Based on current rents versus the cost of homeownership, it is 45% less expensive versus 35% pre-Covid to rent than own across UDR markets."

There are also fewer homes for would-be first-time homebuyers to choose from. The inventory of homes ranging in what’s considered an entry-level price point, between $100K and $250K, has declined by almost 28% from a year ago, according to Yahoo News, citing data from the National Association of Realtors.

Another is that these REITs are renting to increasingly more affluent residents. 

“If you look at our new leases, our average household income is about $116K and our lease to the rent-to-income ratio is slightly less than 20%,” Camden Property Trust CEO Ric Campo told investors last week. 

ER Chief Financial Officer Bob Garechana told investors that across Equity Residential’s portfolio, the average renter household is paying 19.5% of its income toward rent, well below the threshold of 30% that is commonly used as a benchmark of relative affordability. 

The average AvalonBay household went from making roughly under $125K to roughly under $140K. 

College graduates are earning more, Pawlowski said, and there’s also pandemic-era migration to thank. 

“In certain, predominantly Sun Belt, Southeast and Southwest markets, across-state migration is basically exporting higher wages from the California markets, for instance, into a Phoenix and it's just a much higher income level hitting a rental market, which is pushing up rents,” he said. 

There are some early indications from some of the REITs that the runway of rent growth may show signs of tapering off, at least in the short term. 

Essex Property Trust saw a slight drop in occupancy in April 2022 and said it may shift its focus later this year, after the peak leasing season, to focus on occupancy rather than raising rents, as it had been doing earlier this year.  

UDR said its updated guidance "continues to imply a second half slowdown in blended lease rate growth as we approach more difficult prior-year comps and regulatory restrictions on renewal rate growth remain in certain markets," such as those in California.

Still, Lacy said, "there is little at present suggesting a deterioration in multifamily fundamentals."