While it is only the beginning of 2022, multifamily rental rates are already seeing significant increases. According to a national multifamily outlook report by Yardi Matrix, this demand-driven increase is anticipated to continue throughout the year but will likely slow to a more moderate pace.
“The overall rental market is very robust. We see continued growth in the multifamily rental market in terms of robust construction in the next two years,” said Doug Ressler, business intelligence manager at Yardi Matrix. “It has been brought on because of a lot of different variables, but it’s very profitable and is very low risk. It is one of the hottest asset classes in the commercial real estate market right now.”
January is typically a slower month for rental rates. However, in January of 2022, average rental rates across the U.S. rose $8 during the month to an all all-time high of $1,604 per month. Year-over-year growth also increased to 13.9 percent, or about 30 basis points from the previous year.
Rental rates increased across the board, with six of the nation’s top metros reporting increases of 20 percent or more year-over-year. West Coast markets reported slightly smaller increases. San Francisco, for instance, saw a 7.6 percent increase in rental rates. Los Angeles and Seattle also reported slightly lower rent increases at 11.5 and 13.8 percent respectively. Outlying portions of Los Angeles, however, saw larger shifts in rental rates, with the Inland Empire reporting an 18.4 percent increase and Orange County reporting an 18.7 percent increase.
According to Yardi Matrix, these shifts in rental rates are likely caused by heightened occupancy rates. The report showed that the national occupancy rate increased by 0.2 percent year-over-year through January to over 96 percent. In 2021 alone, approximately 460,000 multifamily units were absorbed. According to the report, this is more than double the absorption rate of the previous year and more than 50 percent above the previous annual high.
Absorption in 2021 was led by Dallas and Houston. However, five of the next six highest occupancy rates came from the gateway metros of Miami, New York, Chicago, Washington and Los Angeles, all of which absorbed more than 20,000 units.
“What you see is millennials who typically would be moving out of rental units now, especially aging millennials. They would be moving out into home ownership, but since there is a lack of affordable housing and lack of housing in general, they are being retained as renters longer,” Ressler said. “In addition, you have the Generation Z demographic – the people that are leaving home, leaving school, graduating – are now entering the market of rentals. So you have a compound of demand of existing populations staying longer and new populations coming on board to rent.”
Despite this, luxury lifestyle units continue to outperform other types of multifamily assets, with demand driving rent up by 16.5 percent. Renter-by-necessity units, on the other hand, saw rental rates increase by 11.5 percent.
Single-family rentals also started the year strong, rising 13.5 percent year-over-year. The report showed that more than $50 billion in capital is competing for single family rental homes as they are becoming a more popular choice among tenants. Still, the share of capital allocated to the particular asset class remains small compared to other rental properties at just one percent.
“If you’re a millennial with a family, or older, and you can’t afford to move into a house but you want to move into a house-like environment that has larger square footage, these are perfect for you,” Ressler said.
He continued, “They could also be existing structures, so a lot of the initial cost has already been consumed in it. You don’t have supply chain inflation issues for lumber and pricing, so a lot of these are quick to market. You don’t have to wait for the construction process to be able to build it and it meets a certain demographic. In addition, we also see boomers renting these single family rentals. They may have gotten rid of their existing assets. They don’t want to maintain a house but they want something that looks like a house and feels like a house for rent.”
Looking to the rest of 2022, rental rates are anticipated to continue on the current upward trajectory. While this rate of increase is anticipated to stabilize slightly in the coming months, continued inflation could create more rapid increases over the next several years.
“One of the things that we want to keep close track of is the inflation and interest rate scenario. There’s an awful lot of inflation that we watch and the inflation rates, in terms of both what the Fed does and developers…We don’t see that really dramatically changing over 2020, 2022 and 2023 that it will impact it, but that’s something that we watch. We also watch the inflationary cycle as it impacts renters in terms of their salary and wage,” Ressler said.