\n<\/p>\n
On a national level, Fannie Mae is predicting the multifamily market to\u00a0remain subdued<\/strong>\u00a0<\/b>in 2024. Ever since interest rates began to rise, multifamily transactions have slowed considerably. Higher rates made profits fall, and as a result, buying and improving multifamily properties halted. And, with a massive lag in multifamily construction<\/a>, new units were popping up left and right in already saturated markets, creating a race to the bottom for <\/strong>rent prices<\/strong><\/a> as multifamily operators struggled to keep their units occupied. But, the multifamily woes may be close to over.<\/p>\n Kim Betancourt<\/strong>, Vice President of Multifamily Economics and Strategic Research at Fannie Mae, joins us to share the findings of a recent multifamily report<\/strong><\/a>. Kim knows that there are oversupplied multifamily markets across the country. Cities like Austin have become the poster child for what oversupply can do to home and rent prices. However, Kim argues that this is only a fraction of the overall housing market, and\u00a0many markets are in need of more multifamily<\/strong>\u00a0housing.<\/p>\n So, if much of America is still struggling with having enough housing supply, shouldn\u2019t rents be on an upward trend? Kim shares her team\u2019s findings and rent forecasts<\/strong>, explaining when rents could begin to climb<\/strong>, which multifamily properties will experience the most demand, and why we need MORE multifamily housing<\/strong>, not less.<\/p>\n Dave: Henry: Dave: Henry: Dave: Henry: Dave: Kim: Henry: Kim: Dave: Kim: Dave: Kim: Dave: Kim: Henry: Dave: Henry: Kim: Henry: Kim: Henry: Kim: Dave: Kim: Henry: Kim: Dave: Kim: Dave: Kim: Dave: Kim: Dave: Kim: Henry: Dave: Henry: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hello everyone and welcome to the BiggerPockets Podcast. I\u2019m your host Dave Meyer, and my friend Henry Washington is here with me today. Henry, good to see you.<\/p>\n
You as well my friend. Glad to be here.<\/p>\n
Do you invest in multifamily?<\/p>\n
I guess the technical answer to that is yes, I invest in small multifamily, so my largest multifamily unit, I have two or three different eight-unit buildings, but I don\u2019t have a building above eight units.<\/p>\n
But that\u2019s technically multifamily. And just for everyone listening, the traditional cutoff is at four units, and that might sound really arbitrary, but it\u2019s actually not. It comes from lending. Anything that is four units or fewer is considered residential property, and so you can get a traditional mortgage on those types of properties. Anything five or above, usually, you\u2019re going to have to get a commercial loan. So, that\u2019s why we make that designation. And today, we\u2019re actually going to be talking about the big ones. We\u2019re going to be talking about five plus properties and what\u2019s going on with rent there because the commercial market with these bigger properties and the residential market actually perform really differently. Oftentimes, one market\u2019s doing well, the other one\u2019s not. And that\u2019s kind of what we\u2019re seeing right now. The residential market is doing its thing, it\u2019s chugging along, but multifamily, there are a lot more question marks right now about what\u2019s happening and what\u2019s going to happen in the near future. So, we are going to bring on an expert to talk about this.<\/p>\n
Today\u2019s episode we\u2019re going to be talking to Kim Betancourt, who is the vice president of Multifamily Economics and Strategic Research at Fannie Mae. And she\u2019s going to go over the ins and outs of this asset class and talk to us about what she sees in terms of rent growth, in terms of vacancy, and many other factors that could play into how multifamily is going to do over the next several years.<\/p>\n
All right. Well said. With that, let\u2019s bring on Kim Betancourt, vice president of Multifamily Economics and Strategic Research, that is a cool title, at Fannie Mae.
Kim, welcome to the show. Thanks for joining us. We are going to jump right into sort of the macro level situation going on in multifamily. Where are we with rents as we\u2019re recording this at the end of February 2024?<\/p>\n
So, it\u2019s a little too early yet to get rent data for January, and clearly, for February. But where we were at the end of the year, at the end of 2023 was that on a national level we had seen negative rent growth. So, rents were estimating declined by maybe 66 basis points, ending the year at just under 1% year-over-year rent growth. And so what does that mean? Well, normally rent growth tends to be between 2% and 3% on an annual basis. As you can guess, it usually tends to track inflation, sometimes slightly above, maybe slightly below, but somewhere in that range.
So, as you can tell last year, even though inflation was up, we definitely saw that decline in rents. Again, that\u2019s at a national level. It really does depend where you are. I\u2019ve been saying that this is really a tale of two markets. So, in some places there was rent growth and in others, there was negative rent growth. For example, it\u2019s estimated that rent growth was maybe negative by over 3% in Austin just in fourth quarter of last year alone, but was positive in other places like St. Louis and Kansas City and some other places. So, it really does depend where you are. Primarily, it is in markets that seem to have either undersupply, so not enough supply, rent is higher. Oversupplied, a lot of new units coming in online, rent growth has been lower.<\/p>\n
Do you feel like the slight rent growth decline is due to such a big steep rise in rents after the pandemic? We\u2019re just coming down off that high.<\/p>\n
It\u2019s partly that. It\u2019s also partly this new supply I\u2019m talking about. So, some of the data that we\u2019ve seen, it shows that, for example, rent growth on new leases has actually been declining. Instead, where the rent bonds have been coming is for people that are renewing their rents. And I believe what that\u2019s due to is that people came in 2021, 2022, they remember getting really sock with rent increases when they changed apartments. And so, what they\u2019ve probably thought is, \u201cHey, you know what? I\u2019m going to try to stay where I am, even if that\u2019s going to cost me maybe 2% or 3% or 4% of an increase, that\u2019s probably better than what I remember paying.\u201d
Not realizing that actually in a lot of places, especially in a market with a lot of supply, they probably could have not paid as high of a rent increase, but it\u2019s because of that new supply. Again, it depends on what market you\u2019re in. Some markets have seen a lot of supply. We actually estimated that more than 560,000 new units were added last year, which is much higher than we\u2019ve seen last year or the year before 2022, it was about 450,000 new units. And before that, it was under 400,000. So, it\u2019s been definitely increasing.<\/p>\n
Kim, I\u2019d love to dig into that a little bit. For those of our audience who might not be as familiar with the sort of construction backdrop that\u2019s going on in the multifamily space, can you just give us a little historical context?<\/p>\n
Yeah, sure. And actually, it\u2019s important to remember the timeline is very different for multifamily new construction versus single family. So, in a lot of times, single family, those properties will go from a hole in the ground to a house that\u2019s built in the matter of a few months. But in multifamily it tends to be a much longer timeline. Now, again, depending what kind of property where you\u2019re located, but on average is anywhere from 18 months to three years, and it\u2019s a little closer to the three years usually. So, that\u2019s a much longer timeline.
So, a lot of these units that are coming online, they were started a long time ago. So, a lot of multifamily builders, they\u2019re having to figure out in the market where they are, when they\u2019re going to be coming online, what are the demand drivers. So, that leads to part of the issue in multifamily where you\u2019ll see that certain markets may get out over their skis in terms of supply, but then what happens is the market self-corrects and you\u2019ll see that just in a few years, a year or two, then that market might actually be undersupplied again. So, it can be more volatile than you\u2019ll see on the single family side. They can sort of turn that on and off a lot more quickly than in the multifamily space.<\/p>\n
And so, given that timeline, which is super important context for everyone to understand, it sounds like we\u2019re still working our way through this glut of construction that could have started 12, 24 months ago.<\/p>\n
Right. So, not only are we working through it, but actually there\u2019s still not enough housing, believe it or not, being built to meet the expected demand. Part of the issue is that there\u2019s more than a million units of multifamily rental underway, and that sounds like a lot. But in reality, we still have a housing shortage. The problem is that there\u2019s a lot of new supply in about maybe 20 metros, and within those metros it\u2019s concentrated in a handful of submarkets. So, that\u2019s part of the issue is that it\u2019s not evenly distributed. It\u2019s sort of bunched in these markets where there\u2019s been migration, and job growth, and demographics are very important for multifamily. That\u2019s because the person most likely to rent an apartment is between the ages of 20 and 35.
Lots of people rent apartments, but that\u2019s the majority of folks that rent apartments. And so, when builders are looking at where they\u2019re going to build, they\u2019re looking in metros that have a much younger population. So, for example, Austin has a very large younger population, not only because of the university, but they\u2019ve got tech jobs, it attracts a younger demographic. So, there\u2019s been a lot of building there and especially because they\u2019ve also seen a lot of migration in terms of job growth, especially in the tech sector. And so, that was a market that was terribly big, but over the past few years saw a lot of people coming in, so builders have been really building. So, yeah, so there\u2019s definitely an oversupply and I just want everybody to understand that, yeah, there\u2019s still a lack of affordable housing in a lot of places.
When I talk about oversupply, I\u2019m just talking about when you count up all the units, it\u2019s mostly in this higher end, the more expensive units, but that\u2019s getting built. And of course, I sometimes make the joke, it\u2019s a shame we can\u2019t build the 20-year-old building because that is what tends to be more affordable in a lot of places. But when we\u2019re building new, it does tend to be more expensive and the owners are charging the higher rents. So, you\u2019re absolutely right though about it depends on the market, depends where you are because when we talk about certain markets, we never look at states because a state is big, it\u2019s very different. We\u2019re looking at these different metro areas and they\u2019re not necessarily cities even. They are sort of the metro area because the metro will draw people from a wider radius for jobs and lifestyle, things like that.<\/p>\n
Kim, thank you for explaining that because something that\u2019s sometimes confuses me and maybe it confuses some other people, is that we hear that there\u2019s this national housing shortage. At the same time, we hear there\u2019s an oversupply. And that sounds contradictory, but when you explain that so much of this is just mismatch, both in terms of class where it\u2019s like they might be really high end properties where what we need is class B or class C properties, and in terms of geography, where we might need housing in the Midwest, but it\u2019s getting built in the Southeast. So, that is super helpful. Thank you.<\/p>\n
Right, and even in the metro that I\u2019m talking about, it\u2019ll be in a handful of submarkets, so that can also be an issue. Maybe we need it a few miles away, but it\u2019s all being built sort of in the same neighborhood, the same submarket. So, that\u2019s another issue as well.<\/p>\n
All right, we are getting into the dynamics of supply and affordability, but there\u2019s more to come. After the break, we\u2019ll talk about the demographics of who is renting and why, and what Kim anticipates we\u2019ll see in terms of rent growth over the next few years. Stay with us.<\/p>\n
Welcome back, everyone. We\u2019re here with Kim Betancourt, vice president of Multifamily Economics and Strategic Research at Fannie Mae. And Kim is taking us through the ins and outs of the multifamily space. So, let\u2019s get back into it.<\/p>\n
So, what I wanted to ask was most of the new construction is around this A class, and that\u2019s where a lot of the units are getting added, but there has to be some sort of trickle-down effect, meaning that if we\u2019re throwing new A class out there, then that gets oversaturated, then technically what they can ask for rent will be less. How does that impact B and C class in affordability there?<\/p>\n
No, it\u2019s a really great question, and what that is called filtering. So, as the new stuff comes online, then the older properties that were class A, in theory, now become class A-, B+, B, and the class B becomes class C. And you\u2019re absolutely right, the affordability does move in tandem with. What has disrupted that in the past, when interest rates especially were lower, was a lot of properties were getting purchased as value add. You might\u2019ve heard about that. And so, what would happen is people would buy those properties and they would fix them up and turn them from class B to class A or A-, and class C to class B+, that type of thing. There was quite a lot of that going on. And so that sort of also eroded the amount of class B and C already existing out there.
So, that\u2019s been sort of an issue that we\u2019re trying to sort of catch up with. But now, let\u2019s just talk about our new supply. So, our new supply comes online. We have been moving down a little bit, but because there isn\u2019t enough across the country, when I was talking about that housing shortage, it hasn\u2019t really been enough to move a lot of that supply into the class B and C. On top of that, those rents have also been increasing, so not as high as the class A, but they\u2019ve still been increasing. And actually the delta between class A rents and class B rents has been widening over the past few years. Sometimes we think back to the great recession, and what happened was class A rents fell during the great recession, which was 2009 to 2010, we saw those rents drop. And so, what happened was they dropped enough and the differential between a class A and class B wasn\u2019t so great that some people were actually able to do what we call the great move up.
So, people who been in class B moved up to class A because they could afford it now, same with class C to class B. We\u2019re not having that now because again, that delta between the rent levels of class A and B have really widened out over the past several years due to inflation, higher building costs, the increases in the time to bring properties to market and demand from demographics has really pushed up that differential, especially between class A and B. The other thing that we\u2019ve been seeing is that a lot of folks that would normally be moving into that homeownership, first-time homeowners, that age has gotten older over the past few years. So, now it\u2019s currently at around age 36. But we\u2019ve got a lot of people that are still in that younger cohort as well as gen Zers that they\u2019re in rental now.
Some of those older millennials would like to buy a home, but they\u2019re not necessarily able to buy a home for whatever reason. In many places, there\u2019s not enough supply, interest rates are higher. And a lot of people that have mortgages, especially baby boomers, of which I\u2019m one, we got a really low interest rate when we could refinance a few years ago. So, there\u2019s a big portion of folks out there of homeowners out there that have 4% or 3% or lower mortgage rates, they\u2019re not selling. So, everybody\u2019s kind of like in this holding pattern, but the demographics keep adding people to forming households.
So, especially as we have positive job growth, those people tend to form a new household. So, it\u2019s sort of think about it as sort of bunching up and what\u2019s happening is people are getting stuck in rental longer, and we tend to call some of those renters renters by choice. In other words, they could technically afford to buy a home, but for whatever reason, they are not. And so, instead they\u2019re renting a little longer. And so, that\u2019s also been putting a lot of pressure on supply. Because in the past, a lot of those folks would\u2019ve maybe moved into home-ownership or even renting single family homes, and instead they\u2019re staying in multifamily a little bit longer.<\/p>\n
Yeah, I mean that makes sense definitely with people who have the lower interest rates, they\u2019re not selling. And it\u2019s interesting to see the average age of someone who rents now going up because more people are now choosing to rent. And so, I would assume that that correlates to vacancy and that vacancy would typically now be a lot lower in these buildings. Is that what you\u2019re seeing across vacancy rates?<\/p>\n
Well, vacancy rates have inched up because of this new supply. So, as we add that extra supply and it\u2019s taking a while to get people in there, it does push up the vacancy rate. But when you look at the vacancy rate for class B and C, that\u2019s really tight. So, you\u2019re exactly right. That has not been rising nearly as fast as it is for the class A.<\/p>\n
Okay, so class A vacancy is going up because we just keep adding new supply, but the people in the good old faithful B and C, they\u2019re just locked in, and so you\u2019re seeing lower rates there. Is that what I\u2019m hearing?<\/p>\n
Yeah, those rates are pretty tight. They\u2019re not moving much, and so that creates a lack of that affordable housing for a lot of folks because people just aren\u2019t moving out if it\u2019s a rent that they can afford.<\/p>\n
Kim, as we talk about rent trends and what\u2019s going on right now, can we talk a little bit about what you\u2019re expecting for the future? Do you expect this softness of rent to continue as we work through the lag? And how long might this softness continue?<\/p>\n
Yeah, that\u2019s the million-dollar question everybody asks. Yeah. No, I mean, we are expecting that rank growth will be subdued again. This coming year in 2024. Might improve slightly because we are expecting job growth to be a little bit better than what we had originally been expecting. So, right now we think job growth will be about 1% this year. And we, in the multifamily sector, we tie very much the performance of the sector to job growth. And that\u2019s because, again, a lot of jobs, you start a new job, especially if you\u2019re a young person, you start a job, you tend to form a household when you start that job. Now, it could be with roommates, it doesn\u2019t matter, but you form a household. Then, as the job growth continues, then what might happen is you get a better-paying job and then maybe you don\u2019t live with roommates, you get out on your own.
So, we\u2019re always taking a look at job growth because that forms that household, that first household. Usually a first household people don\u2019t run out and buy a house when they get their first job, they tend to rent. So, we do focus on that. So, that\u2019s been where we expect to see this type of demand. And so, therefore, we\u2019re expecting that rent growth will be a little bit better in 2024 than we did see in 2023, despite the fact that we have a lot of this new supply still coming online. So, that\u2019s the plan, but it\u2019s not great. We\u2019re still thinking 1%, maybe 1.5%, but it\u2019s probably going to be closer to 1% this year, very close to what we saw last year. Now, that said, come 2025, as we start to see that this new supply has been delivered, we\u2019re not adding that much more new supply, then we\u2019ll start to see that rent growth start to pick up.
So, we do expect it to be a little higher in 2025, and then by 2026, it could really start to see some momentum because we\u2019re not putting online all this new supply, and we still have the demographics that I\u2019ve been talking about, the gen Zers, they\u2019re still going to be in that sweet spot of renting that age for rental, and now all of a sudden we don\u2019t have a lot of new supply coming online. So, as that supply that came online last year and this year gets absorbed by 2026 in a lot of places, we could start to really see rents get pushed because there\u2019s not enough supply.<\/p>\n
Yeah, we\u2019ve talked a lot about the supply and demand and rent growth taking a slight dip, but just because rent growth has come down a little bit, that doesn\u2019t necessarily mean that people can afford the rents of the places that they are. Where are you seeing affordability in terms of these rent declines?<\/p>\n
Yeah. No, that\u2019s a very good point. And like I was talking about earlier about the class B and C, even though their rent growth has declined, their incomes have not necessarily grown, especially from the rent growth that we saw in 2021. So, we saw that that rent growth really escalated in 2021, and it was still elevated in 2022. And even though wages have increased, we\u2019re still playing catch up, right? Inflation was up and rents were up 10% or higher in a lot of places. I don\u2019t know anybody who got a 10% increase in wages. So, people are still playing catch up. And then remember that we\u2019ve also had inflation. So, it\u2019s not like they\u2019re not just paying more rent, they\u2019re paying more for food and other costs. So, there is still this pressure, especially on that class B and C component, because the wage growth, while positive is not enough to offset the increases we\u2019ve seen over the past few years.<\/p>\n
But in theory, if rent growth stays where it is, then affordability should come back a little bit given the pace of wage growth right now, right?<\/p>\n
It should, but again, we\u2019re expecting that because of the supply that we\u2019re probably only going to have another year of this subdued rent growth. And I\u2019m not sure that the wage increases are still going to be enough to offset that increase that we have had in \u201921 and \u201922. But again, it does depend where you are.<\/p>\n
Yeah, all this with the caveat that this is regionally variant, but I do think that\u2019s really important for investors to note that they\u2019re just expecting rent growth to slow down for a year. I think everyone\u2019s wondering where valuations and multifamily might go because cap rates are starting to go up, but the one thing that could offset cap rates going up is if rents and NOIs start to increase over the next couple of years. So, I think there\u2019s maybe a bunch of multifamily investors here hoping that you\u2019re correct there, Kim.<\/p>\n
No, I totally understand that. And I would say most of the data we get from our vendors and lots of other multifamily economists are seeing the same trends. So, we\u2019re actually a little more conservative. I know that some are expecting rent growth to really sort of pop later this year and next year. We\u2019re taking a more conservative view. And it\u2019s because of that tying of demographics, that job growth, and then that household formation. I always think of that as the three legs of the multifamily stool in terms of demand.<\/p>\n
Got it. And before we get out of here, Kim, is there anything else in your research or team\u2019s work about multifamily, specifically from the investor perspective that you think our audience should know?<\/p>\n
Yeah. No, if you put on your investor hat, as you were talking about earlier about cap rates and valuations, I would say trading has been very thin when you look at the data. So, price discovery is still sort of\u2026 We don\u2019t really have price discovery for multifamily just yet. I do think that if we start to see interest rates come down, that that might spur some of the folks on the sidelines to say, \u201cOkay, at this interest rate, at this cap rate, I can make that work.\u201d But one of the big reasons that I\u2019m not concerned too much about the multifamily sector overall is because of the power of demographics.
We have these people, we have the age group that rents apartments. And so, this is just a timing in terms of new supply and where it\u2019s located. But overall, you cannot deny the power of demographics. And as long as we continue to have positive job growth that leads to those household formations, we\u2019re going to start to need more multifamily supply over the longer term. And that is actually my bigger concern, that we are not going to have that necessary supply, and it\u2019s going to be here sooner than we think.<\/p>\n
Well, thank you, Kim. We appreciate that long-term perspective. It\u2019s super helpful for those of us who try to invest and make our financial decisions on a longer timeframe. For everyone who wants to learn more about Kim\u2019s amazing research, you should definitely check this out if you\u2019re in multifamily. We will put a link to it in the show notes and the show description below. Kim, thank you so much for joining us. We appreciate your time.<\/p>\n
Sure. No, it was great. Thank you so much.<\/p>\n
And if you\u2019re listening to this conversation and wondering what does this mean for me? How should this impact the deals I\u2019m going after? Stick around. Dave and I are about to break that down right after the break.
Welcome back, investors. We just wrapped up a heck of a conversation with multifamily expert Kim Betancourt, and we are about to break down what this means for you.<\/p>\n
Another big thanks for Kim for joining us today. Before we get out of here, I just wanted to sort of help contextualize and make sense of what we\u2019re talking about here. Hopefully, everyone listening understands that rent growth and vacancies are super important to anyone who\u2019s buying multifamily and holding onto real estate over the long term because that impacts your cashflow and your operations. But what we were talking about at the end was really about multifamily valuations and growth. If you\u2019re familiar with multifamily at all, you know that one of the more popular ways to evaluate the value of a multifamily property is using something called cap rate.
So, the way you do that is you take the net operating income, which is basically all of your income minus your operating expenses, and you divide that by the cap rate, and that gives you your valuation. And the reason this is so important is because the way that NOI grows, one of the two important factors of how you grow the value of multifamily is from rent growth. And so, that is one of the reasons why multifamily was growing so quickly over the last couple of years is because rent growth was exploding and that was pushing up the value of multifamily. Now that it\u2019s slowing down, we\u2019re seeing NOIs flatline. And at the same time we\u2019re seeing cap rate goes up, which not to get into it, that pushes down the valuation of multifamily, which is why a lot of people are talking about multifamily crash and how risky multifamily is right now.
And so, if you sort of zoom out a little bit about what Kim just said, she was basically saying she expects this to continue, that NOIs are probably not going to grow much over the next year, but she thinks after that they might start growing again, which is probably good news for multifamily investors, many of which are trying to weather a difficult storm right now with high interest rates, rising cap rates, stagnating rent. So, just wanted to make sure everyone sort of understands what this means for prices in the multifamily market.<\/p>\n
It\u2019s also great information for prospective multifamily buyers who are looking to jump into the market and potentially buy some of these B and C class properties that are going to become available, especially with the new A class coming on board. But if you\u2019re going to try to get a bank to underwrite your deal, you\u2019re going to have to forecast, hopefully, long-term and be conservative with that. So, understanding or having an idea of where you think rent growth is going to go, or I should say a more realistic idea of where you think rent growth is going to go, will help you have more conservative underwriting and hopefully keep you out of trouble if you get into a property and it\u2019s not producing the results that you need in a short-term fashion.<\/p>\n
Very well-said. Well, thank you all so much for listening. We appreciate it. Hopefully, you learn something from this episode. We\u2019re going to be trying to bring on more and more of these experts to help you understand some of the more actionable recent trends going on in the real estate market. So, hopefully, this information from Kim was helpful. Henry Washington, as always, it\u2019s always fun doing shows with you. Thank you for being here. And thank you all again for listening. We\u2019ll see you for another episode of the BiggerPockets Podcast very soon.<\/p>\n