Rent and Operating Trends Week of June 19th

The U.S. economy remains on very shaky ground as the Fed continues to tighten monetary policy quickly. Last week, the Fed increased interest rates 75 basis points, the largest single increase since 1994. As the central bank tries to curtail inflation, the multifamily industry is beginning to feel the effects of higher interest rates. Multifamily mortgage rates have increased significantly over the past 6 months, and borrowing costs now exceed cap rates for many deals. As a result, properties are staying on the market for longer, trading at lower prices, or being pulled off the market all together.

At the recent Commercial Real Estate Finance Council meeting the tone among lenders was far more subdued than it has been in years. Deals are harder to pencil not only because of the rising rates, but the uncertainty of how far and how quickly rates will continue to increase. The Fed has made it clear that they will raise interest rates quickly and steadily until inflation is under control. I expect transaction volume to drop meaningfully compared to record highs seen in recent years, however investment activity won’t completely dry up, as multifamily has proven its recession resistant nature.

Despite the slowdown in multifamily investment, operating fundamentals continue to perform well. NER increased another 20 basis points and crossed $1,900 nationwide last week. Year-over-year rent growth continues to decelerate and will likely fall into single digits for the first time since early 2021 in the coming weeks. Traffic and leasing are falling as we near the end of the prime rental season, while occupancy and leased percentages remain mostly flat.

Key Takeaways – Data as of 6/19/2022

Traffic and Leases:

• Traffic fell slightly nationwide, as properties are averaging 9 site visits per week. Leases signed were flat week-over-week, and the national average conversion ratio is 32%.
• While traffic is slowing in most metros across the country, a few west coast metros including San Jose, Los Angeles, Riverside and Portland saw modest increases in traffic last week. Southeastern metros Jacksonville and Raleigh have seen traffic fall off most significantly of late.
• Once again, Chicago led all markets in new leases signed, averaging more than 4 new leases per property last week. Strong traffic and leases signed are leading to healthy conversion ratios across the windy city, as demand for apartments remain strong, especially in the urban core.

Occupancy and Leased Percentage:

• Occupancy and leased percentages remained mostly flat nationwide last week. Both metrics remain stable and comfortably higher than their long-term averages. As transaction volume slows and the economy braces for a recession, the healthy occupancy and leased percentages will provide a buffer for owners and operators when operating fundamentals begin to weaken.
• California markets including San Diego, San Jose and Riverside have some of the highest occupancy and leased percentages. The tight restrictions on housing development in the Golden State will likely support elevated occupancy going forward.

Net Effective Rent:

• NER continues to rise, as rents increased 20 basis points last week.
• The national average net effective rent eclipsed $1,900 for the first time. Rents in coastal markets including Boston, Los Angeles and San Diego are approaching $3,000 per month, while rents in San Francisco and San Jose have already eclipsed that mark.
• As the economy softens, rents are likely to continue their deceleration and return to more normal levels in the low to mid-single digits for annual rent growth.