Downward Rent Growth Revisions Favor Tenants

Yardi Matrix says a recession will likely begin in the second half of 2023.

By Paul Bergeron

Yardi Matrix has revised downward its apartment rent forecast for 2023 to 3.1% from 3.5% and expects to see all that growth in the first two to three quarters of the year, according to Andrew Semmes, senior research analyst.

However, Semmes said that he’s not at the point where he expects nonseasonal broad-based rent declines.

“Rents did fall month-over-month in November, and likely will again in December, but that is not unusual; month-over-month asking rents fell in November 2011, 2016, and 2019, and the magnitude of the decrease this year (two-tenths of a percent) is also not out of the ordinary,” Semmes said in prepared remarks.

Yardi Matrix says job destruction and a recession beginning in the third or fourth quarter of next year is likely, but that it will not be particularly deep or lengthy.

“At that point, we will likely start to see broad declines or stagnation in average asking rents, but not enough to offset the gains that we expect in the first half of 2023,” Semmes said.

Moody’s Analytics’ chief economist Mark Zandi said Jan. 4 that even if the U.S. avoids a recession in 2023, American consumers and investors could face a grinding slowdown that likely won’t let up until 2024, according to a new outlook published by Moody’s Analytics, as reported in Marketwatch.

RealPage: Market Has Shifted to Favor Renters 

RealPage has downgraded its 2023 forecast for effective asking rent growth to 3%, with rent movement varying materially by asset class and by submarket, according to Jay Parsons, head of economics & industry principals, RealPage.

Parsons tells that he expects better apartment demand in 2023 compared to 2022, “though certainly not of 2021’s record levels.”

With a multi-decade high in lease-ups hitting the market, Parsons said demand is “highly unlikely to keep up with supply – and that’s creating a market that has rapidly shifted in the favor of renters. Especially upper-income renters, who Class A operators are going to be competing for with this big wave of new lease-ups.”

Parsons said RealPage believes that Class B will outperform Class A in 2023 due to the wider-than-ever gap in rents between Class B and new lease-ups.

“The old ‘flight to quality’ strategy – luring Class B renters into pricier lease-ups with concessions – won’t be as widely effective as it was in past decades. In some markets, it’d take 5 to 6 months’ worth of ‘free rent’ to bring lease-up rents on par with Class B rents.

“Of course, in the long run, we need a lot more housing – so more supply is a good thing in the bigger picture. Supply is structural, and demand is cyclical.”

Dropping Rents, Offering Concessions 

David Fletcher, Excelsa Properties’ managing director and head of acquisitions, tells that after minimal seasonality in 2020 and 2021, the winter leasing slowdown in 2022 has come on “ferociously.”

He said leasing traffic has slowed, timely rent payment has slowed, and, across market surveys, competitors are dropping asking rents or offering concessions.

“Whether these conditions will translate into a true leasing slowdown throughout 2023 or are just the first evidence that normal market conditions are back is unclear,” according to Fletcher. “The spring leasing season will be the true test.”

3% to 4% Growth ‘Very Supportive’ 

Neil Schimmel, CEO, Investors Management Group, tells that the Yardi Matrix forecasts line up with his firm’s experience as an operator with a national portfolio.

“We saw the red-hot rent growth from early 2022 begin to cool off as the year continued,” Schimmel said. “Some rent softening was the result of record rental housing deliveries and part was a cooling economy from Fed interest rate hikes. Rent growth nationally in the 3% to 4% range over the next couple of years is still very supportive.”

Property Values, Debt Will Affect Rents 

Quentin Green, partner and director of development at Downtown Apartment Company in Chicago, tells that the Chicago rental market is healthy.

“Rents have normalized to near pre-pandemic rates for the most part,” he said. “Based on the amount of new construction on the horizon in the next three years, rents will likely stay relatively reasonable. A lot of the rent increases we experienced were primarily demand driven.”

Green said property values and the increased cost of debt will affect 2023 rents.

“Typically, rents lag increases in property value and increases in debt because of the long-term nature of leases,” he said.

“If interest rates remain elevated, new construction and multifamily properties that have refinanced in the past year or will be refinancing in the future will need to pass on higher rents to compensate for the larger debt burden. If we see values stay flat and rates stay flat, I could see rents surprising to the upside.”