Rent and Operating Trends Week of August 7th
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Economic optimists ended last week on a strong note, as the July employment numbers showed more than half a million new jobs added last month. New jobs were added across a variety of sectors, showing the diversity and strength of the continued employment recovery. In fact, with the significant increase in jobs created last month, the U.S. economy has now recovered all 22 million positions lost during the COVID-19 pandemic. The national unemployment rate fell to 3.5%, matching the pre-pandemic low, and wage growth accelerated, increasing 5.2% year-over-year.
While the employment market remains red hot, other economic indicators continue to flash warning signs. High inflation persists, GDP continues to contract, and consumers are very wary of the prospects for continued economic growth. Consumer confidence in the housing market fell to its lowest level since 2011 according to Fannie Mae, as only 17% of survey respondents believe it’s a good time to purchase a home. This may push prospective home buyers back into the rental market and strengthen multifamily demand. Given the growth in the employment market, I continue to believe that the recession will be shallow and short lived, however, we are in a period of economic contraction.
The Inflation Reduction Act, a bill that will likely go down as the Biden administration’s watershed legislative achievement, passed the Senate this week. Of specific importance for the multifamily industry is the carried interest provision within the tax code. While many Democrats had argued to remove the provision, in the end, it remained. A change to carried interest would have a significant impact on property valuation and transaction volume, as many owners take advantage of the current carried interest provision.
Key Takeaways – Data as of 08/07/2022
Traffic and Leases:
- Traffic and leases signed remained flat last week as most multifamily fundamentals continue to soften. Nationwide, properties averaged 8.3 tours last week and 2.6 leases were signed per property.
- As a potential sign of stabilization, 14 of the top 30 metros saw weekly traffic increase during the first week of August. Leading the nation were Los Angeles and Chicago, although weak leasing numbers in both gateway markets leave their conversion ratios below 28%.
Occupancy and Leased:
- Occupancy and leased percentages continue to fall modestly nationwide, declining 2 and 4 basis points respectively last week.
- Most metros are losing occupancy and New York is the only metro in the top 30 with occupancy above 97%. Given the overall shortage of housing, I don’t expect occupancy to crater, although we will likely see declining occupancy rates for the next few months.
Net Effective Rent:
- Net effective rent increased 10 basis points last week, after briefly falling the previous week. While the weekly growth is modest, the biggest story remains the rapid deceleration in year-over-year growth. Nationwide, rents are up only 6.2% compared to this time last year.
- Many metros continue to post small rent gains, which indicates steadiness in the rental market, however, as affordability issues arise once again, I anticipate further deceleration in rents. Like occupancy, I believe rent growth will have a floor, and will stabilize between 2% and 5%, in line with long term averages, after posting a historic year last year.