What Peak? Housing CPI Continues Hike In April
Fourteen months of interest rate hikes haven’t reversed the country’s seemingly unstoppable housing cost growth. Despite some projections that home prices had peaked at last, the consumer price index for shelter in the U.S. grew again in April, albeit by a sliver.
The overall shelter index increased 0.4% month-over-month after rising 0.6% in March, according to data released last week. Compared with a year ago, rent for primary residences was up 8.8%, which reflects the surge in rents beginning with the overall spike in inflation. The increase between April 2021 and 2022 for rents came in at 5%.
“Last year's rent spikes were unsustainable, but that doesn't mean rent growth is over,” said CP Capital U.S. Managing Director Jay Remillard, whose company has about 70,000 multifamily units under management nationwide. “In a lot of places, rent growth is merely back to its normal annualized rate of 3% to 4%. That's still good. If you have conservative underwriting, that's still exactly what you would hope for.”
Apartment List's national rent index increased by 0.5% during April, its third straight month of increases, though a slight slowdown from March. Rents were up in 69 of the country's 100 largest cities in April. Increases were reported in 83 cities in March.
Even markets that saw heated double-digit rent growth last year followed by a slump in early 2023 still have some momentum. April's numbers represent an uptick from the first quarter, when overall rental growth nearly came to a halt.
In addition to levers pulled by the country’s financial luminaries, other factors are keeping a lid on apartment rents, including the delivery of 2022’s record number of new units in development.
The threat of recession is another important factor in keeping Q1 rents in check, Excelsa Properties Director of Asset Management Curtis Holder said. Excelsa has about $589 MM in value of assets acquired, more than 95% of which are multifamily properties by value.
“The primary driver behind lower rent growth has been the delinquency pressure we're seeing as we enter into the recessionary environment,” Holder said. “Residents aren't able to pay their rent due to job loss or pressure to relocate back into an office, and that pressure has impacted occupancy and the ability to push higher rent growth.”
Drilling down into the country’s various regions offers a more nuanced picture of the direction of rents and the multifamily market.
“We operate in two hot markets, northern New Jersey and South Florida, where rents continue to grow,” DMR Construction Director of Real Estate Gardner Rivera said.
“Rents will still trend up because interest rates are slowing down new for-sale production, and the average homebuyer is thinking twice about shelling out a five-figure down payment at bubble pricing,” Rivera said. “Until sellers adjust, we are at a standstill. A lot of eggs will crack before property sellers come to their senses.”
“Rent pricing trends are like fingerprints, unique to each region,” said Neil Schimmel, CEO of Investors Management Group, which owns and manages over 5,500 multifamily units nationally.
“The trends we're seeing in our investment markets stem from a complex web of local influences, from economic conditions to demographic shifts," Schimmel said.
Many Sun Belt submarkets are experiencing cooled-but-steady rent growth due to a diverse, resilient economy and high demand for housing, Schimmel said. Other regions, such as the Midwest, are seeing more moderate or even declining rent prices due to a supply-demand mismatch.
“We're actively expanding our national portfolio, so having a deep understanding of emerging regional patterns is critical to making informed investment decisions,” Schimmel said. “We expect a shift to pre-pandemic standards of rent growth will foster a more sustainable, balanced apartment market.”
The Sun Belt has been the darling of the multifamily sector, with developers flocking to put up thousands of units serving the needs of the many people who migrated to the more affordable portion of the country from pricier coasts with the rise of remote work.
Here is a graph of shelter in the CPI (April) and housing in the PCE (March) reports. Even though asking rents have softened sharply, these measures are up over 8% YoY.
— Bill McBride (@calculatedrisk) May 10, 2023
This is due to both 1) a lag as renewal rents increase, and 2) the sharp decrease in household formation. pic.twitter.com/9QVlIDkLiC
Although there is still population growth and other demand drivers in the region, some of the excitement around the Sun Belt has dried up, as a huge development pipeline delivers new units in places like Florida, Texas and Arizona in particular, in a trend that is expected to continue until next year.
“There is probably going to be a period of slight oversupply in those markets,” Remillard said, adding that in the longer run, demand is still going to outstrip supply in many places, especially popular Sun Belt markets.
Big cities are also posting rental rate growth as the pandemic recedes. Apartment List reported that New York City saw the nation’s largest month-over-month increase in April, with rent up by 1.9%.
Those who have remained in cities or come back to them crave more space since they are spending more time at home, filling in some of the demand left by their departed compatriots.
“That desire for more space is one reason rents haven't fallen in cities like New York, Boston, Seattle and San Francisco, where a lot of people moved out earlier in the pandemic,” Zillow Senior Economist Jeff Tucker said. “Enough of those who stayed formed their own households without roommates or family members to keep the pressure on prices.”
CORRECTION, MAY 15, 2:22 P.M. ET: A previous version of this story incorrectly stated the size and distribution of Excelsa's portfolio. The story has been updated.
