Rent Prices Cool Off

• Boston leads the market with 10.9 million square feet of space under construction, more than double the amount in most other cities.

• Dallas and San Francisco follow with 5 million and 4.7 million square feet under construction, respectively, positioning them as major hubs for new developments.

• Other notable cities with substantial construction activity include Austin (4.3 million), San Diego (3.5 million), and Miami (2.8 million).

After years of affordability struggles, renters are finally getting a break as rent growth stalls and leasing concessions increase. In some markets, mostly where multifamily has seen HUGE supply jumps, rent growth is going negative.

What should you expect in the next year if you’re a landlord in one of these areas with lots of new supply?

National Single-Family Rent Index

• About a 3% increase year over year, which is about the paste of inflation. Which is notable for what rent growth usually is. 

• What is crazy is that in the past three years, we saw rent growth at 15%- 20% in the last quarter of 2023, and for most of 2024 we saw 4% - 5%. Right now high-grade properties are growing closer to 4% while lower tier is closer to 2%. 

• If you’re trying to underwrite a deal on a lower-tier property you may want to forecast some lower rents. Just a heads up. 

Concessions

A property manager or owner may offer incentives like free rent or special promotions to attract new tenants. While this doesn't necessarily lower the rent, it provides financial perks for potential renters and new occupants. However, these incentives can ultimately reduce the property owner's revenue and profit.

Concessions Chart

• Even though rents are rising by around 3%, property owners may end up earning less overall, as offering concessions—like a month of free rent—cuts into their bottom line, effectively reducing their revenue to that same 3%.

• Concessions have been steadily increasing over the past few years, with roughly a third of properties now offering some form of incentive.

• While the exact impact on net revenue remains uncertain, it’s an important factor to consider when analyzing rent data.

Rent Affordability Chart

• Rent affordability has improved, with renters now paying an average of 30% of their income toward housing, which is the recommended threshold set by personal finance experts.

• During the pandemic, rent costs rose above 31%, creating financial strain for many, but have since returned to a more manageable 30%.

• A rent-burdened population can lead to higher vacancy rates and increased evictions, harming both tenants and landlords and creating instability in the housing market.

Year-Over-Year Rent Growth Single-Family Rental

• There is a significant disparity between rental markets across the country.

  • In cities like Boston (15%), Lansing (20%), and Raleigh (9%), rent remains at pandemic-era highs, well above inflation and historical norms.

  • Conversely, markets such as Baltimore (-4%), Phoenix (-3%), and Atlanta (-2%) are seeing negative rent growth. It's essential to analyze your specific market, as various factors can influence local rent trends.

Where Are Rents During Recessions

• The gray portion displays recessions. As you can see 1 of the 3 rents have continued to go up during the recessions. The notable exception of course is the great financial crisis.

• Rents often rise during a recession, though they can decline on a national level in certain cases. During these periods, renting may become more affordable compared to homeownership, but from a financial perspective, owning is typically the more cost-effective and beneficial option.

As an investor, here are a few strategies to help mitigate the impact of market changes:

1. Optimize operations: Collaborate closely with suppliers and contractors to offset inflation-adjusted losses and potential revenue declines by improving operational efficiency.

2. Retain quality tenants: Avoid aggressively raising rents on reliable tenants. With many lower-cost options available, it’s better to maintain stable occupancy than risk vacancies.

3. Project conservative rent growth: If you're a cautious investor, plan for modest rent increases over the next 2-3 years. Forecast growth at around 1% to safeguard against unfavorable market conditions.

Advanced Real Estate just made a big move, spending $62 million to purchase an apartment building in downtown L.A.

Irvine-based Advanced Real Estate, known for its focus on acquiring and managing multifamily properties, has purchased the 210-unit Canvas LA apartment complex for $62 million. The property is located at 138 North Beaudry Avenue, just over a mile from Dodger Stadium.

Link to learn more.