I have been saying for months that rent growth would accelerate. The numbers are in and according to Corelogic, Single-family rents were up 5.3% year over year in April, rising from a 2.4% increase in April 2020. Nationally, rent growth exceeded pre-pandemic rates across all price tiers, including low-end rentals for the first time. This is not unique to Single Family as apartments also are showing impressive rent growth. What factors are driving rents higher? Will these factors be transitory? What do higher rents mean for real estate prices?
What was in the data about rent increases of single-family homes?
“Single-family rent growth showed a strong rebound in April 2021 with all price tiers back above their pre-pandemic rent growth rate,” said Molly Boesel, principal economist at CoreLogic. “While rent growth slowed last April at the start of the pandemic, the rate of rent growth this April was running above pre-pandemic levels even when compared with 2019 and shows no signs of diminishing.”
- Detached single-family rent growth was up more than 3.5 times the rate of attached single-family rentals in April
- While rent growth dipped significantly last April at the start of the pandemic, rising affordability issues and supply shortages in the for-sale housing market and ongoing demographic pressure from aging millennials have continued to place upward pressure on the single-family rental market — leading to the largest annual rent price increase in nearly 15 years in April 2021.
- Rents for single-family detached homes (not townhomes), were up an even stronger 7.9% compared with a year ago, as millennials seek more outdoor space.
Apartments also seeing large growth in rents.
According to RealPage, U.S. apartment rents and occupancy are climbing rapidly in 2021, and May’s performance results show a continuing acceleration of momentum.
Effective asking rents for new leases jumped 1.7% during the month, taking annual change to 4.2%. The last time annual rent growth topped 4% was in the middle of 2016. The increases in rent this year will surpass the last economic cycle’s peak annual growth of 5.4% seen in 2015.
What is driving the huge jumps in rent?
- More demand as Single family prices continue to increase: In almost every location throughout the country, single family home prices are soaring. Across the nation the median home price has increased 18.4% (source: National Association of Realtors) far outpacing any gains in wages. Prospective buyers are being priced out of homeownership due to prices and this trend only looks to accelerate.
- More expensive to operate and manage properties: Prices are up on just about everything with the “reopening” economy. Utility costs are higher, labor costs have soared, materials like appliances/carpet/etc…. are all up some by double digits. These increase in costs will be baked into the rental rates and are just beginning to show up.
- Less supply due to moratoriums on evictions: Over 10 million renters which is 14% of all renters are behind on their payments. Furthermore, the owners of these units must still make their monthly payments, to ensure cash flow many are raising rents on their other properties to help cover the costs of their other units that are not paying.
Will the trend of higher rents continue?
Yes, higher rents will continue and increase for four reasons.
- Mortgage rates will rise pricing more out of homes/condos: Mortgage rates are poised to jump as the economic cycle continues, wages will not come even close to cover the increases
- Expensive to build so inventory will be priced higher: Build costs are increasing due to materials, labor, land costs, etc… The higher build costs will continue to constrain inventory and focus new inventory at higher priced tiers.
- Taxes will rise substantially and be passed on to renters: Property taxes are a lagged expense. As house prices accelerate, property taxes will also accelerate. Property owners could see these increase in the next 1-3 years depending on their state and when properties are assessed. This increased cost will no doubt be passed on to tenants.
- Increased regulations due to Covid will be “baked” into the rents: Covid has spawned various regulations in cities throughout the country regarding evictions, minimum property standards, etc… All of these items will be an expense to the property owner and be passed on to current and prospective tenants.
What do higher rents mean for real estate?
- Drive interest rates higher: Ironically, it is a circular analysis, as rents goes higher, inflation increases due to higher rents, and interest rates rise because of the higher rents. It is a bad cycle that we are entering now.
- Further reduction in supply for purchasers as corporate buyers continue to increase supply due to demand: As rents continue to rise, corporate buyers will invest even more in single family rental homes to capture the increased returns. Look for this trend to accelerate.
- Help maintain the current prices of properties: The increases in rent and subsequent demand from corporate buyers will put a “floor” under real estate prices as demand will continue to outstrip supply.
The sharp increases in rent are just the beginning salvo of considerably higher prices. The sharp increase in mortgage rates coupled with sky high prices will force many into long term rentals as they can no longer afford the monthly payments or down payment. Furthermore, corporate buyers will continue their quest for yields buying more properties further restricting supply. The positive of the increased rents is a “floor” under existing prices. The only question left is how much higher can rents go?
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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