From 2017 to 2022 the average rent across the country increased by 5.77%. Yet the average increase in rent for a typical one or two bedroom apartment from 2021 to 2022 jumped 24.2% [1]. Any economic metric jumping 24% in the course of one year clearly signals instability in the market. All signs point directly to the pandemic. But why did rents go up so much? Inflation…sure. But what else? And why does this matter to us as real estate investors?
For starters, let’s talk about inventory and interest rates. Prior to the start of the Federal Reserve interest rate hikes in March of 2022, the active listing count in the United States reached its lowest point on record at 347,476 active listings [2]. The contributing factor to the low inventory was the average 30 year fixed mortgage rate hovering around 3%. Putting those metrics in the context of the pandemic, and the desire for millions of Americans to live in a desirable area and home, it becomes clear that demand for homes exceeded supply.
Rising home prices, quickly followed by rising mortgage rates in the Spring 2022, caused many households to be priced out from home buying. These would-be homebuyers remained renters, thus surging the demand for apartments. With rising demand, came the increase in rent. Unfortunately, the disparity between rent growth and income has widened recently meaning the US is now rent-burdened nationwide for the first time in its history. That is to say, the national average rent-to-income (RTI) reached 30% for the first time since being tracked [3].
So how do we interpret this information as MFH investors? The opportunity lies in demand. As the RTI reaches new highs, the demand for ‘recession proof’ rental prices will remain strong. Recession proof prices are metro dependent, but consider ~$1,500 for a one- or two-bedroom apartment. This price tag fits the resident looking for a safe, comfortable community they are happy to call home. This same resident has no problem skipping the dozen amenities a Class A apartment complex offers at twice the rent. We believe that with much of the new construction in metro areas being Class A apartments, they will be vulnerable to downturns in the economy since the typical household simply cannot afford a >$3,000 monthly rent. Therefore, a ‘recession proof’ cost of rent proves to be resilient during any market condition.
