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Landlords got used to rent prices growing <\/strong>every month. As home prices rose and affordability shrank, more landlords took steps to secure their cash flow<\/strong> by increasing rents by sometimes ten, fifteen, or even twenty percent. And, with inflation<\/strong><\/a> stronger than ever<\/strong>,\u00a0most renters would be willing to pay for it. But, a reversal is happening in the housing market<\/a>\u2014one that many landlords aren\u2019t prepared for.<\/p>\n Our data-first duo of Dave and Kathy<\/strong> are back on the show today to have a one-on-one debate over what\u2019s causing rent prices to drop.<\/strong> Kathy, who has invested in numerous market cycles, knows a thing or two about what causes rents to dry up, and when we can expect growth to come back<\/strong>. Surprisingly, even large investors like Kathy welcome this change in rent direction. Her team has been expecting this for quite some time now!<\/p>\n Dave also brings in some high-value data this week to show which housing markets are seeing the most dramatic drops in re<\/strong>nt and which are seeing double-digit growth even as the economy starts to stall. Finally, Dave and Kathy touch on multifamily\u2019s vacancy dilemma<\/strong> and why there are contradictory opinions on where apartment investments could head next. If you collect rent, pay rent, or want to make cash flow, this data is crucial to you!<\/p>\n Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: \u00a0<\/p>\n<\/div>\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. Welcome to On the Market. My name\u2019s Dave Meyer, joined today by Kathy Fettke. Kathy, how are you?<\/p>\n
I\u2019m doing great. Happy to be here.<\/p>\n
Good. Well, we\u2019re going to do a new show format today where Kathy and I are just going to talk about a very important topic which is rent growth. I don\u2019t know if any of you listened to this have heard or seen some of the headlines recently that rent growth is starting to stall out, and in certain segments, rent growth is actually starting to come down, or rents are coming to get them down, and there\u2019s a lot of noise out there. So, we\u2019re going to try and make sense of what\u2019s actually going on in the rental market. How\u2019s that sound, Kathy?<\/p>\n
Sounds like a very good and important topic.<\/p>\n
All right. Well, let\u2019s just start and recap what has been going on with rent over the last couple of years. How would you describe in some historical context what we\u2019ve seen in terms of rent growth since the beginning of the pandemic?<\/p>\n
Completely manic is the best way I can describe it. A frenzy, a lot of it based on fear that people won\u2019t get anything if they don\u2019t get it now. I\u2019ve seen enough cycles now to know that people think the cycle they\u2019re in will continue forever and don\u2019t see an end to it, or that cycles change pretty regularly, especially when they are caused by something rare like a pandemic. This is going to obviously throw a wrench into typical cycles, and people started to think that maybe it was normal, that low rates were normal for home buying, and that the frenzy and the lack of supply would last forever. So, people act out of fear a lot of times.
So, there was a mixture of people acting out of fear that they would never have a place to live, and also people thinking that the good time, let the good times role forever, that there would be government stimulus forever, low rates forever, and that they could just live remotely and wherever they want and be in control of their employment, tell their boss, \u201cHey, if you want me, I\u2019m going to work wherever I want.\u201d I mean, it\u2019s just been a very manic couple of years. That\u2019s the best way to I can describe it.<\/p>\n
How do you think that translates to rents going up in the way that we\u2019ve seen them going up? Because the housing market, that\u2019s one side of it. We\u2019re seeing a lot of people behave in emotional ways, but there\u2019s also this element where seemingly from a renter\u2019s perspective, there\u2019s no winning. Right? You have to either go to a super expensive home or you\u2019re facing super expensive rent. So, have you ever seen anything, or how do you explain why rent has gone up so much?<\/p>\n
I have never seen rents go up the way they have over the last couple of years, but I haven\u2019t seen anything like the last couple of years before in my lifetime. With the last couple of years, I would say the kind of mania and the kind of loss of reality that people are experiencing was that they could live anywhere. So, when you have people coming from a high priced market moving into say a vacation area, I mean, maybe not a typical vacation area, but something that they thought, \u201cMaybe I want to retire there someday, but I can do it now. I could do it now. I can move to this area, and it\u2019s cheap.\u201d Right? So, when you have enough people from high priced markets going into more affordable markets, they can pay anything, and rents can go up, especially if that area hasn\u2019t expected that kind of wave, that movement of people. I mean, there were certainly markets that didn\u2019t experience double-digit rent growth, but the sexy markets really did.<\/p>\n
Oh yeah.<\/p>\n
And that\u2019s because a lot of people were migrating to those areas, and it looked cheap to them, and they\u2019d gladly paid 20% over what the market rate was because it\u2019s still cheap. Right? It\u2019s still cheap to them.<\/p>\n
Totally.<\/p>\n
Yeah.<\/p>\n
Yeah, it\u2019s a great point. People just got in this frenzy where it\u2019s like the desperation to get a place to live which is terrible, I mean, that\u2019s just not a great place to be, but people were overbidding on rent. Just for some numbers here, on average, the rent in the US went up somewhere between 25 and 35% over the last couple of years which is much faster. I don\u2019t know about you, but in Denver where I have some rental properties, it took 10 years to get about 50% rent growth and Denver was one of the fastest growing rent markets in the country. Now we\u2019re seeing that nationwide, we got 30% rent growth in two years. It\u2019s just something that doesn\u2019t seem sustainable, and I\u2019m just, I have some theories about what drove that other than the mania. But I\u2019m curious, do you think there\u2019s any macroeconomic demographic, any other issues that sort of drove this behavior?<\/p>\n
Oh, absolutely. I mean, absolutely. After the last great recession when builders were wiped, literally just wiped out from that, they were a no hurry to go build more supply at a time when the demographics were really shifting, and this very large group of millennials, I know we\u2019ve talked about this so many times, who are now 29 to 34 and forming households, that\u2019s the largest segment of the millennials were just coming to household formation age starting in 2020 right when kind of everything shut down. They were given a whole bunch of stimulus checks and didn\u2019t have to go to work. You know what I mean? So, it was a blast. I mean, not for everybody, but for a lot of people, they got to go live in Colorado and ski, or they got to go to Florida and live by the beach and things that they normally wouldn\u2019t get to do. Right?<\/p>\n
Sounds pretty nice.<\/p>\n
I know, right?<\/p>\n
Yeah, I think it\u2019s a good point. I feel like household formation is one of the most underutilized metrics in economics or at least specifically housing economics, and we\u2019ve talked a lot about that to your point about how millennials, not only are they a big demographic, that matters, but how many of them are going out and trying to start their own home or their own family is equally if not more important because I know for example, for me, I\u2019m a millennial, and for the first many years I was out of college, I live with a roommate or several roommates. And then at a certain point when you reach the level of financial stability or capability or need because you start a family or something, you form a new household, and we\u2019ve talked a lot about that in terms of how that\u2019s driving home prices.
But that\u2019s a great point that it\u2019s also probably driving rent because not only are people more households, they were flush with cash, and so they\u2019re like, \u201cI\u2019m going to form a household, and I\u2019m going to do it with style, and I\u2019m going to go and pay for something,\u201d that maybe they previously couldn\u2019t afford.<\/p>\n
Yeah, most people aren\u2019t really thinking long term. And so, if they\u2019re suddenly given a big stimulus check and have some freedom, they\u2019re going to go live their lives and try new things and that\u2019s great. I think there was a record number of new businesses that were created over the last two years. There\u2019s a lot of good that came out of it and a lot of bad, and personally, the bad is something that none of us can really fight against because we have zero control over it. And that is the manipulation of the markets that we\u2019ve talked about with the Federal Reserve who is now, I think it\u2019s pretty common now, I think a lot of people didn\u2019t even know what the Federal Reserve was until now. I\u2019ve been studying for years kind of the control that they have over the economy and over us, and I\u2019ve based a lot of my investing decisions on what they might or might not do.
So, basically, when they\u2019re going to stimulate the economy, you can pretty much count on the economy being stimulated and growing. When they decide to pull that back, you can pretty much count on things reversing and that\u2019s all it is. That\u2019s all it is. When you boil it down, you go up to a bird\u2019s eye view and look down, all it really comes down to is the manipulation of the market from the Federal Reserve. And when we could follow that and follow whether they\u2019re pouring money into the economy or pulling it back out, you can either make a lot of money or you can prepare and get out before they pull the money back out.
It\u2019s really like a gamble, and I hate to say that, but in February when we\u2019re all scratching our heads going, or at least I was, like, \u201cWhy are they still stimulating the economy? Why are they still buying mortgage backed securities to keep mortgages low at a time when the housing market did not need stimulation?\u201d There was already lots of reports on the massive price growth and rent growth. Why would they keep stimulating? Why would they keep printing money? You only do that in a downturn. And we were up and we were up high. The economy was booming.
So, in March when they made it real clear, oh, well, we got to stop this train that we put the gas on, we got to slow this train, and they made it real clear early on this year that there would be seven rate hikes to slow it down. That means they\u2019re going to take that money off the table. I\u2019ve said this before and people don\u2019t like to hear it, but the way that that happens is usually through stock market crashes which is what we\u2019ve seen. That\u2019s if that you pull it, there\u2019s a lot of money that\u2019s been pulled out there, a lot less money that people can spend.
I\u2019ll tell you what, we didn\u2019t bring this up yet, but with young people being kind of super savvy now, and I don\u2019t know about savvy is the right word, but able to invest in the stock market just on their phone and play it like it\u2019s a casino, and you\u2019re watching your money grow, and you take some of that out, and you spend it, and you live big. Right?<\/p>\n
Mm-hmm.<\/p>\n
I had a friend that I surf with who was like, \u201cI want to invest in real estate, but I only have 40 grand,\u201d and I was like, \u201cWell, you can do that.\u201d But then I was kind of telling them the returns you can usually get from a $40,000 cash investment, and he\u2019s like, \u201cNah.\u201d He put it into Tesla stocks. I saw him a year later and he\u2019s like, \u201cI made 400,000.\u201d<\/p>\n
Oh my god. Yeah, but now, yeah, now where is he?<\/p>\n
He\u2019s still-<\/p>\n
He\u2019s probably still up a lot. I mean, it\u2019s still up way before where it was.<\/p>\n
Yeah.<\/p>\n
I sold Tesla stock in 2020, not all of it, but way too much of it. That is a very big regret of mine.<\/p>\n
Yeah, I mean, that\u2019s the kind of mania we were experiencing over the last two years, and it was exciting, and there was money to go do these things and to get these air Airbnbs up and running. That\u2019s part of the reason why rent growth went up is when you have that much money circulating, and it was 7 trillion extra dollars. Right? The amount of money circulating in the last two years, the extra money, was 50% of what had been there, and it was the amount of money that was circulating completely, entirely in 2007. So, $7 trillion added and people were having a good time who could get their hands on that money, and like I said, just invest in something and have it go up 10 x. I mean, that\u2019s amazing. Why would you not gamble it?<\/p>\n
Yeah, I think it\u2019s interesting because we associate Fed action with housing prices but not necessarily always with rent, but if you look at the pace of rent growth over the last couple of years, it follows the stimulus pretty carefully. At first, even though rents went down, rent actually dropped for the first few years of COVID, but then it just kept going up linearly like a true hockey stick. If you\u2019re watching this on YouTube, it just went straight up the charts. But then when they started to pull off the gas, you see that rent growth started to peak around February\/March when people started to realize that the party was coming to an end and we were no longer going to be in this crazy accelerated economy where money was flowing around, and people could pay for everything because their crypto or their stocks or their stimulus checks or enabling them to pay more for rent, and I think that\u2019s what we\u2019re starting to see.
So, as of now, we are starting to see rents, the pace of growth for rent really start to come down. Back in February, it was up 17% year over year which is just insane, but now we\u2019re still up 11% year over year which is still really, really high. But what\u2019s sort of the impetus for this show and why we wanted to talk about this now is because some data has come out that rent is starting to go down. I got a lot of questions about this, like oh, is rent crashing, and let me just first explain that rent going down in September is normal. That is what\u2019s supposed to happen. Just like in the housing market, this type of pricing is seasonal. It always peaks over the summer. That\u2019s when most people are moving. That\u2019s when there\u2019s the most demand for apartments. And then starting in September, October, things trail off. If you\u2019ve ever tried to lease an apartment over the winter, it\u2019s pretty tough. There\u2019s not a lot of tenants looking to move at that point. So, you know you might have to drop your prices.
So, seeing rent come down in September of 2022 is actually, in my mind, it\u2019s kind of a good thing. This is a sign that we are actually returning to normal seasonality and it\u2019s still up 11% year over year. So, Kathy, what do you make of it? Does this worry you or are you sort of on my side of things here thinking that this is actually maybe a great thing?<\/p>\n
It\u2019s a great thing. It\u2019s a great thing. Homelessness has increased, and people have been complaining about rents going up 20% in certain areas, 30% in some areas. Absolutely unsustainable, not healthy. Again, a lot of that, like let\u2019s take Phoenix or Austin, a lot of that was California money that, hey, you could double the rent. It could have gone up a hundred percent, it\u2019s super cheap for people coming from California. So, I will blame a lot of it on Californians taking their money and going to a cheaper market.<\/p>\n
It\u2019s always you guys. It\u2019s always the Californians is just screwing things up for everyone else.<\/p>\n
New Jersey and New York helped a little too, but it\u2019s, again, these areas where someone your age is like, \u201cI could live in San Francisco where they have apps showing the poop on the street.\u201d Right? Has it become kind of a dirty city? Or you could move to Phoenix or Austin, I mean, where a lot of millennials are moving. These are the places they\u2019re moving, they\u2019re cool, they\u2019re fun, there\u2019s things to do, there\u2019s young people. You\u2019re not going to probably move to, I don\u2019t know, I\u2019m trying to think of a place, Jackson, I always pick on Jackson, Mississippi, but that\u2019s not on the map. Right? That\u2019s not the city that you\u2019re hearing about. Not a lot of young people are moving there.<\/p>\n
Never makes one of the lists. It\u2019s never on the top migration lists, yeah.<\/p>\n
Never going to make the list.<\/p>\n
Never been to Mississippi.<\/p>\n
People invest there because it\u2019s stable. It\u2019s stable. Right? Doesn\u2019t really change at all no matter what\u2019s going on.<\/p>\n
Yeah, I don\u2019t know. But yeah, so I think I\u2019m with you. I mean, obviously it makes sense that things are starting to cool down now. Do you worry though that rents are going to start going down in some nonseasonal way where we actually are going to see cash flow for existing properties start to decline?<\/p>\n
I\u2019m not worried. I welcome it. I have to look at this data as a human versus an investor because what matters most is the health of our country and of the families that live in this country, and rent needs to stabilize. It can\u2019t keep going up like that, just like home prices can\u2019t either, and it was definitely stimulus based. So, we\u2019re just coming back to where we should be.
Now, at the same time, wages have gone up, wages have gone up in I wouldn\u2019t say an equal rate, but based on the data that we\u2019re seeing, the wages went up enough that some of these higher rents are still affordable, even in the C Class. I kind of was shocked to see that in the data. C Class apartments tend to get hit hard during recessions because that tends to be a group of people that are more transient. Yeah, well, look at what happened during COVID. It was those jobs that got hit the hardest, for sure, anything in hospitality. Of course, they were helped out through the stimulus. But now that those jobs are coming back and wages are up for a lot of people, surprisingly, they\u2019re able to afford rents in a lot of markets because of the higher wages.
But seeing the rent growth slow down is a wonderful thing. It\u2019s a good thing, and we should be rejoicing over that for our country. We should be rejoicing that home price growth has slowed down because a year ago we had a different conversation about that. We didn\u2019t know when it would slow down, and people were scared they wouldn\u2019t have a place to live. There was nothing on the market in some areas. When my daughter bought, she\u2019s a typical millennial, aged 30 with a baby and a husband and two dogs, and there were two properties available in the area that she wanted to live. Two, two, and maybe two for sale and two for rent in the price range she could afford. So, that\u2019s a scary time. Right? It\u2019s like are you going to live with Mom and Dad with your two dogs and your kids? I mean, what are people going to do?
So, that was the story last year. The Fed came in, turned on the lights, took the stimulus away, and here we are going, \u201cOh, okay, things are going back to normal.\u201d The headline is different. It\u2019s a better headline. It just depends on how you want to interpret that. As an investor, you better be playing defensively. You better not be writing up your pro formas thinking that it\u2019s going to be anything like the last two years. It\u2019s not. Same with home prices. There are going to be areas where there\u2019s still just not enough supply for demand and where it\u2019s still affordable enough because people moving there or living there still have high salaries. Like North Texas, that\u2019s one of the areas we\u2019re looking at, $100,000 jobs moving there. We\u2019re still buying homes for 200,000. So, the numbers work. The numbers work. But as an investors when you see these headlines, you need to be careful, you need to be cautious, you need to make sure that your pro formas makes sense and that the average person in the area can afford your rent.<\/p>\n
Yeah, that\u2019s a great point. I think that when investors who are looking for existing properties see this, they think that their rents can decline, and that might happen, to be honest. I think there\u2019s a chance that that happens. But just to ease people\u2019s mind, if this is one of you, it is unlikely that rents will fall that far. Unlike housing prices, rent prices are pretty sticky. If you looked at what happened in the Great Recession, housing from peak to trough, so the highest it was during the mid-2000s to the lowest it went where it bottomed out in about 2011, housing prices dropped 27%. Very significant. That is a genuine crash. Rent prices during that time, the worst they went down was 6%. So, we\u2019re talking about a whole different scale here.
I think most people don\u2019t believe that even the price correction for homes will be 27%, but even if it were that bad, rent might only go down a couple percentage points. It\u2019s probably very unlikely that we see double-digit rent drops because like we were saying, people formed new households, and although there was actually an article in the Wall Street Journal yesterday talking about how some people are moving back in with their parents or moving back in with a roommate, they didn\u2019t really provide any data about that, so it\u2019s hard to know, but just knowing from personal experience, I think people are very reluctant to go back and live with their parents. That\u2019s sort of like a thing of last resort right now, and right now people are still employed. We haven\u2019t seen an uptick in job losses. So, I think inflation is hurting people\u2019s spending power, but I think it\u2019s unlikely that we\u2019re going to see just a very significant drop-off in demand for rentals at any time soon.<\/p>\n
Yeah, at the end of the day, it always comes down to supply and demand, even when the government is stimulating the economy, and even if mortgages were still at 2%, but we had a glut of inventory. Let\u2019s just say that we had the amount of inventory we had in 2007 which is three times, nearly three times what we have today, it was over 3 million, and mortgages were still at 2%. There might not be the kind of price gains that we\u2019ve seen there. There still would be, right, because people decide, \u201cWell, if mortgages are 2%, I\u2019ll take three, I\u2019ll take four houses, I\u2019ll have one in each city.\u201d So, people get greedy and want more than one.
So, it comes down that we still have a supply issue. We still had a decade of slow building because like I said earlier, builders got wiped out. That is how I got started syndicating. Back in 2009, I had a 40-year veteran developer come to me and say, \u201cDo you know how to raise money?\u201d I\u2019m like, \u201cNo, I\u2019ve never done it.\u201d He\u2019s like, \u201cWell, figure it out,\u201d because he would walk into B of A, he would literally walk into the commercial division of B of A, I don\u2019t know if I can, I guess it\u2019s public news now, that he would walk down the aisles and it was boxes to the ceiling of foreclosed subdivisions and foreclosed land, and it was an unbelievable time. So, we were able to buy up all the stuff that builders had lost during that downturn, and it made sense for us because we were paying 10 cents on the dollar.
But you could see why those builders weren\u2019t in a hurry to come back. So, building was so slow over the last decade while our population grew, and this group of millennials that have been given such a hard rap over the last 10 years, basically saying, \u201cOh they\u2019re just sitting home on Mom\u2019s couch smoking pot.\u201d<\/p>\n
They\u2019re [inaudible 00:24:21].<\/p>\n
Yeah, maybe. But now they\u2019re older. I think anyone who was judging them should ask what they were doing when they were in their early twenties. Now this millennial group is older, and it\u2019s a huge demographic, and there just simply wasn\u2019t supply created for them. Add to it, the baby boomers living longer, feeling healthier.<\/p>\n
Totally. It\u2019s a really, yeah.<\/p>\n
There was all this media headline about boomers dying and of course there\u2019s a segment that are, and that they were going to leave their homes, there\u2019s going to be this glut of inventory from all these old people that die, and that just hasn\u2019t happened. They\u2019re living longer.<\/p>\n
There\u2019s a very famous real estate person I won\u2019t call out but who has been predicting a crash for years based on this theory that boomers were going to all die off and leave just a huge glut of supply, and clearly that\u2019s not happening.<\/p>\n
Just hasn\u2019t happened. So, with those kinds of headlines and that kind of lousy data that was being shared and that I guess builders were listening to, they\u2019re not going to take risks again. They were going to build spec. And so, it\u2019s just we\u2019re behind on supply. I see comments a lot of times on the On the Market podcast of people saying, \u201cWhat do you mean? Now there is more supply. Thank goodness there\u2019s more supply.\u201d But kind of not really. It just moved down again. Right? At least in home sales, the inventory just went down again. So, it\u2019s not better. There\u2019s a little bit more inventory in rentals, and I don\u2019t know what you saw in that data, but actually absorptions and occupancy is\u2026 Wait, let\u2019s see. Vacancy is rising in apartments so it\u2019s something to pay attention to, but home sales and homes on the market, that\u2019s declining again. It\u2019s just, it\u2019s incredible. So, this is still an issue. Inventory is still an issue, not in every market and maybe not in your market, but overall, nationwide, it\u2019s a problem.<\/p>\n
Oh absolutely. Yeah, just to speak, I do want to get back to the multifamily thing in a minute, but just if you didn\u2019t see the show a couple months ago with Caitlin Walter who\u2019s from the National Multifamily Housing Council, their organization showed that by 2035 we need 4.3 million new apartment units just to keep up with demand. So, yes, I think there might be some short-term things which I do want to talk about in terms of more supply coming on at a time where we might be entering recession, that could create some short-term stuff. But long term, demand for rent is going to be huge. I mean, to your point, we just don\u2019t have enough supply.
The other thing you mentioned quickly that I want to talk about first that bodes well for rents being sticky is that lack of vacancy. Right? We\u2019ve seen in the US that we are now at the point, vacancy\u2019s the lowest it\u2019s been since 1982. So, we\u2019re talking about 40 years since we\u2019ve had vacancy as low as it is now. That\u2019s not just multifamily. That\u2019s across the whole economy. And so, when you\u2019d have rent that, I mean, vacancy that low, it\u2019s kind of hard for rents to fall that much, and yeah, we could see vacancy start to tick up, but at this point there\u2019s not really a sign that we\u2019re going to start seeing this just lack of demand for rentals.<\/p>\n
Yeah, my hope is that it just stabilizes and balances out what it did over the last two years so that the next couple of years it\u2019s just flat, and that\u2019s just kind of what we\u2019ve been seeing in the last month that it\u2019s flattening. I don\u2019t think there\u2019s any chance that rents will just collapse or that we\u2019ll have a ton of evictions. That is again, unlikely, although it is very sad that homelessness has increased, and I will 100% blame that on the Fed, I will, for all the stimulus because that really separate the haves and the have-nots. Those who do not own hard assets, like real estate are just, it\u2019s going to be hard to keep up. It\u2019s going to be hard to keep up with inflation. Inflation, they will never tame it. It\u2019s never been tamed. Just look at prices of anything.<\/p>\n
Yeah, They target 2 to 3%. They want some inflation.<\/p>\n
They want inflation.<\/p>\n
Yeah.<\/p>\n
Yeah.<\/p>\n
So, I totally agree, yeah. A low interest rate environment like this, it inflates asset prices. It\u2019s just a fact. And so, to your point, we\u2019ve been in, what, a 12-year low interest rate environment, 15-year low interest rate environment. That\u2019s going to really create a lot of wealth inequality for the people who do own assets like real estate and the people who don\u2019t.<\/p>\n
Yeah, and I imagine those people will start to move to more affordable areas which is again why one of our strategies right now is to focus on those markets, just steady Eddie markets, the markets that don\u2019t do too much. That\u2019s kind of my safe place during times like this.<\/p>\n
Jackson, Mississippi.<\/p>\n
Well, maybe not Jackson. I still want to see growth. I want to know something cool is happening in that area. There\u2019s got to be a big university or big hospital. Like again, Cleveland is a market that we talk about sometimes, huge medical industry. That\u2019s important. We know we do have aging baby boomers. They won\u2019t die, but they\u2019re going to stay alive forever and want hospitals.<\/p>\n
Exactly. Well, no, I totally agree. We don\u2019t just want to go anywhere. But I think part of the challenge here is that the demographic shifts are creating, everyone wanting to move to Austin, to Portland, to Boise, rents going up crazy there, and a lot of these markets, it\u2019s been above the normal level, but it\u2019s not been double-digits every year for the last two years. I don\u2019t know what Cleveland was off the top of my head, but it wasn\u2019t 30% a year. I can tell you that much.<\/p>\n
Exactly. It did go up, definitely, and it was already cheap. Right? So, going up 10% in a market like that is still pretty darn affordable.<\/p>\n
Yeah, that\u2019s probably not so different from wage growth over the last few years.<\/p>\n
True.<\/p>\n
So, before we move on to the multifamily stuff because I want to pepper you with some questions there because I\u2019m curious, but just so people know, I did do some analysis and we have a data drop for you guys. So, if you\u2019re curious about what rent is doing in your market, we have a data drop that shows for the top hundred markets, largest markets in the US. It\u2019s going to show you how rent has performed over the last five years. We\u2019re going to talk about\u2026 It shows you month over month and year over year changes. You can get that by going biggerpockets.com\/rentaldata. Again, that\u2019s top hundred markets, all this amazing data for you. Definitely go check it out. It\u2019s free, there\u2019s no reason not to do it, biggerpockets.com\/rentaldata.
But I wanted to see if there are any markets that are actually declining, not just month over month because remember, seasonality, not surprised things are going down month over month, but year over year, and there were actually four markets that were. I think I made you guys guess on a recent one, but the number one was Spokane, Washington, went down 6% which I don\u2019t know much about Spokane, but I know it was one of those crazy boom markets over the last couple of years. Reno, Nevada is the second one which I have a friend who bought there at the peak and is very much regretting it right now. And then we have St. Paul and Minneapolis which are kind of interesting because they implemented a couple of rent and price control things and we\u2019re seeing rent start to fall down. So, it\u2019s just those four cities. So, four out of a hundred. Personally, I wouldn\u2019t be too concerned about big drops.<\/p>\n
Yeah. I went to school in Spokane.<\/p>\n
You did?<\/p>\n
Whitworth College. Yeah, I know the area.<\/p>\n
What school?<\/p>\n
Whitworth College for two years, yeah.<\/p>\n
Oh, cool.<\/p>\n
It was a small Christian college because I\u2019d partied enough in high school that I just wanted to go to a college that didn\u2019t have it.<\/p>\n
Wow. Wow. I want to know high school Kathy.<\/p>\n
But I know Spokane. It\u2019s just not high income growth area, but I think that nearby in Coeur d\u2019Alene and-<\/p>\n
Which has gone nuts too.<\/p>\n
\u2026 went crazy, so Spokane is really just not that far from there, and there were definitely some new businesses moving into Spokane, but I think it was more of a investor frenzy would just be my guess there.<\/p>\n
Totally. And one of the things I think people get wrong sometimes is when we see, oh, people are leaving big cities like Seattle, the vast majority of them stay within the state, we assume, and you do see people moving to Austin or to Las Vegas or whatever, but most migration is intrastate migration. And so, I\u2019m just guessing, but I would think people are tired of Seattle prices, making a great income. I\u2019ve heard that area of Washington\u2019s really beautiful. So, maybe people are just moving there with their Amazon salaries and moving to Spokane like you\u2019re talking about.<\/p>\n
Yeah, yeah. I mean, it\u2019s a quick drive over to Coeur d\u2019Alene. You can still enjoy that, not have to pay those prices. But I think it\u2019s really the millennial cities that pops the most because again, it\u2019s such a big demographic and so high paid. So many of those young people have really high salaries and could go live quite a nice life in some cool, hip areas.<\/p>\n
Totally. So, those were the only, the four markets that went down, but 96 are still going up at least on a year over year basis. And if you\u2019re curious, do you have a guess about\u2026 I wrote out the top three, one of them is kind of obvious, two of them are sort of obscure. Do you have any guesses? Still growing very quickly.<\/p>\n
I\u2019m looking at my notes and I\u2019m not sure. Miami?<\/p>\n
Ah, that\u2019s number three. Very good.<\/p>\n
All right.<\/p>\n
27% still, 27% year over year, Miami. That\u2019s crazy. But that was actually three. So, Lubbock, Texas. You know a lot about Texas. Where\u2019s Lubbock?<\/p>\n
I actually have a good friend who owns a ton of rentals in Lubbock. I\u2019ll have to ask him. It\u2019s kind of I think oil related which is not surprising.<\/p>\n
Oh, okay. West Texas, I don\u2019t know. I\u2019m not good at geography, but your friend is probably enjoying 31% year for year rent growth which is absolutely wild.<\/p>\n
Oh yeah. Yeah, I should have listened to him.<\/p>\n
The second is Jersey City, New Jersey which I\u2019m familiar with, not so far from where I grew up. But I think that\u2019s one of the big stories too is you see cities like Jersey City, which is right across from Manhattan, going up a lot because it was one of the places where rent actually fell in the beginning of the pandemic. So, it\u2019s recovering and then some, but it sort of distorts the data a little bit. But you do see at least the New York metropolitan area rent has recovered and then some at this point,<\/p>\n
Yeah, I think in these areas where we did see so much rent growth, what\u2019s important to focus on is which businesses moved there versus which people moved there because that\u2019s what\u2019s going to keep it sticky. And that\u2019s the thing about Miami, that\u2019s why I guessed Miami is I know that many New York financial firms moved to Miami. I\u2019m surprised it took up so long because it\u2019s like-<\/p>\n
Yeah, Wall Street South.<\/p>\n
Exactly. Why would you not choose beaches over snow? I don\u2019t know.<\/p>\n
And no state income tax.<\/p>\n
And no state income tax. So, that to me is an area that I don\u2019t see it dropping substantially because of that. You\u2019ve got New York financial giants moving there and they still think it\u2019s dirt cheap.<\/p>\n
Totally. I moved out of New York because I always thought it was a little bit of a scam. I love New York, I love visiting there, but people put up with a lot there because they\u2019re like, \u201cEverything\u2019s happening here,\u201d and you have this small apartment that\u2019s super expensive because there is a lot of culture, there\u2019s nightlife, there\u2019s great food, there\u2019s a lot. But I think some people moved during the pandemic, they\u2019re like, \u201cThere\u2019s also stuff elsewhere.\u201d<\/p>\n
There\u2019s some good food here too.<\/p>\n
There\u2019s a lot going on in Miami too, and you get a lot more for your money.<\/p>\n
Oh, that\u2019s so funny. I\u2019ve been doing this for 20 years. I would bring kind of California snobs, no offense y\u2019all, but you know what I\u2019m talking about, and I would take them to Birmingham or something, and take them to an amazing restaurant where they couldn\u2019t read, they didn\u2019t know what was on the menu, they didn\u2019t know what it was. I was like, \u201cIf I blindfolded you, would you think you were in California based on what we\u2019re seeing and the buildings?\u201d And they were like, \u201cWe wouldn\u2019t know the difference.\u201d<\/p>\n
Yeah, exactly. There\u2019s great stuff everywhere.<\/p>\n
But they just don\u2019t know. They just don\u2019t know because they hadn\u2019t been. Yeah, and I think people got a chance to go travel a little bit.<\/p>\n
Yeah, it\u2019s great. So, the last thing I want to talk about before we go is about multifamily rent. So, you have experience with this, but the data I\u2019ve seen is a little bit contradictory. Right? So, we\u2019re looking at some of the similar data. So, one thing that we\u2019ve seen is that occupancy levels in multifamily have gone down. There\u2019s still really high. They\u2019re still like 95%. Just for context, they usually hover between 93, 95 and we\u2019re still at 95%, but they had shot up to like 98% for a couple months now. So, that suggests that there could be an increase in vacancy. When vacancy goes up, rents tend to go down. But at the same time, we\u2019re also seeing that the number of lease renewals, people who are choosing to stay in place has also gone up for multifamilies. So, these are sort of contradictory data points. So, we\u2019d love to just get your read on the multifamily rent market.<\/p>\n
You know, I just spoke at several conferences and got to hear and interview a lot of investors. In fact, I\u2019m going to give those interviews to you guys and see if we put together a YouTube video on that-<\/p>\n
Oh, that\u2019s great.<\/p>\n
Yeah, just to hear what people are thinking and what they\u2019re doing in the multifamily space. So, one of the big things I took away from the conference was that we\u2019ve got to compare today\u2019s number to pre-COVID. Every city\u2019s different. Right? Every city has different dynamics, different employers moving into the area, different employers leaving the area, and different dynamics because people are moving in, and they have different political views, and so forth. So, there\u2019s been lots of change.
But to try to guess what\u2019s going to happen when you\u2019re underwriting a deal, especially in multifamily where the difference if you get it wrong could be millions and millions of dollars. We know that. Jamil shared that with us. You do not want to make a mistake in your underwriting with multifamily. So, use numbers in that market. 2018, 2019, you\u2019ll get a better idea of what a typical vacancy rate would be in that area, and even better, take the decade, take the average of the decade starting with 2012 up to 2020, and that will give you a good idea of where we might land in that market.
Now, if something really major changed, and that would be really in Florida and Texas, because the big thing, the major things that have changed in those states is so many businesses moving to those states for, what you just said, the tax benefits, but also they learned a lot during COVID. They learned that there are certain markets that are more job friendly than others. This is something I\u2019ve been focused on for years, I\u2019m sure you have too, because it matters if you\u2019re a landlord. You want to be in a landlord friendly area. So, it\u2019s easier that laws are in your favor, and that\u2019s when a lot of businesses realized, \u201cI want to be in a state where the laws are in my favor and where I can keep my doors open.\u201d
Those two areas, I think you\u2019ve got to taken into consideration the amount of new jobs that have come to the area that are permanent, that are not leaving, factories that have been built and so forth and headquarters where it\u2019s probably not changing anytime soon. But other than that, I would look at the last 10 years and pre-COVVID and just take the average, the vacancy rate, occupancy absorption.<\/p>\n
Yeah. I mean, I think it\u2019s a great point we don\u2019t talk about that much, but if you miss rent estimation by let\u2019s say 50 bucks on a single family home, you\u2019re going to be fine. It\u2019s not that big deal. Right? I was thinking about this the other day, if you miss rent by 50 bucks on a 300-unit syndication, that\u2019s 600 bucks per year per unit, that\u2019s $180,000 per year in revenue which is a lot, but not crazy. But when you consider that the way that multifamily units are valued is by cap rate, if you then sold that or if you\u2019re selling at a 5% cap rate, that\u2019s $3.6 million in value that you\u2019re wrong by just estimating $50 off on your rent.
So, I think that\u2019s very wise, very wise advice, Kathy, that to be extra conservative right now because there is sort of contradictory data, we don\u2019t know exactly which direction it\u2019s going to move nationally. If you study your market, hopefully you have a better idea of what\u2019s happening locally in your market, but I think it\u2019s true just of generally anything right now. I would personally underwrite anything single family with little to no rent growth for the next year or so.<\/p>\n
Absolutely. And I would assume that cap rates are going to increase which generally means that the price is going down.<\/p>\n
Yeah, definitely. Yes.<\/p>\n
Which is great if you\u2019re buying. Right? If you\u2019re buying, that\u2019s great.<\/p>\n
Right. I mean, I think James said in a recent episode when we were all chatting, he thinks there\u2019s going to be a lot of these opportunities coming on the market too because people are going to be defaulting. So, it does mean there could be opportunity there.<\/p>\n
Or just even if they\u2019re not defaulting, just the values are down. If your expenses go up, and again, it\u2019s coming back to the nuances of multifamily and anything commercial, it all comes down to NOI, and so, what is your net operating income, what are your expenses, and that determines basically the value of the property. And so, if the goal is always decrease expenses, increase income, even by little tiny amounts like you said, and that can increase the value by millions. But the reverse is true too. It just goes down ever so slightly if your expenses go up, your rents, your insurance, cost of money.<\/p>\n
Yeah, cost of debt.<\/p>\n
Exactly. That is going to affect the NOI. It\u2019s going to affect the price. So, again, it could be a wonderful opportunity as a buyer and really tough if you\u2019re a seller.<\/p>\n
Yeah, absolutely. Well, I think that\u2019s really, really good advice. Just generally speaking, just to sum up sort what we\u2019ve talked about today, rents are starting to come down on a month over month basis. That is normal. This is seasonality. This is what we would expect in a normal year. In 2021, that didn\u2019t happen and that\u2019s what\u2019s not normal. That\u2019s the concerning thing in my mind is that it didn\u2019t follow the pattern that exists every other year. But on a year over year basis, rents are still up 11% year over year nationally, and out of the top hundred individual markets, only four of them have seen individual declines. Vacancy is still really low.
But I think anyone who\u2019s following the market understands that there is downside risk right now, and that you should be careful. If you are underwriting any sorts of new deals, you should be very conservative in what rent estimations you\u2019re making, and I think for a couple years honestly, people were buying a deal being like, \u201cOh, it\u2019s not going to cash flow this year, but next year it\u2019s going to cash flow.\u201d And that probably actually was true for one or two years, but I would not do that anymore. That is not wise. I would personally recommend being conservative because you probably can be because home prices are probably going to come down in many markets and rents are a little bit stickier. So, cash flow prospects are going to be better, and I would recommend just being patient for that. Any other advice you have, Kathy, before we get out of here?<\/p>\n
Yeah, I mean, this is really going to be a good opportunity to get into multifamily. I would just be very cautious if you\u2019re investing in somebody else\u2019s syndication or if you are embarking on it yourself that you have somebody on your team that\u2019s been through a down market because most of the people that I meet at these conferences have only been doing it for a few years.<\/p>\n
Like me<\/p>\n
Yeah, maybe the last eight years and haven\u2019t experienced a real recession. We may or may not have a tough recession ahead of us. We don\u2019t know. It could be awful. It could be barely a blip. We just don\u2019t know. It depends a lot on what the Fed is going to do and we have zero control over that, like zero. It\u2019s going to do what they\u2019re going to do. So, just have someone on your team who\u2019s been through a down market and who knows how to navigate that and knows how to underwrite with that stress test in mind.<\/p>\n
That\u2019s great advice. And again, we don\u2019t know what\u2019s going to happen and no two recessions are alike, but history is your friend too. If you go and look at what happened in previous recessions, in previous job losses, the last time the Fed raised rates like this, you can learn a lot about what might happen and how you can protect yourself and be conservative but still be opportunistic. I think that\u2019s sort of the name of the game. Right? It\u2019s like don\u2019t get ahead of your skis. You want to be careful right now, but there will be opportunities if you\u2019re informed and know how to buy correctly in this market.<\/p>\n
It would be really cool, here\u2019s just a little idea for BiggerPockets, but it would be really cool to have some kind of mentorship program where you take these people who have been investing in multifamily for 30, 40 years and are maybe all set. They don\u2019t need to do anything else. They\u2019re raking in the dough from their acquisitions from years ago. But to come and just give some mentorship and advice to people getting into it, it would really help to bring in that wise counsel.<\/p>\n
Definitely. Well, we do have the bootcamps if you haven\u2019t, I don\u2019t know if you\u2019ve seen any of those, but we have bootcamps where people who are more experienced. I know we have a multifamily bootcamp. Do you know Matt Faircloth?<\/p>\n
Yes, of course.<\/p>\n
Yeah. So, Matt and Liz who host the BiggerPockets InvestHER podcast are both doing those bootcamps and they\u2019re super experienced. But yeah, I think that\u2019s great advice. We\u2019ll have to send those to the higher ups.<\/p>\n
Well, it\u2019s just one of the benefits of BiggerPockets is there\u2019s just so much wisdom on the website of people willing to help you and kind of mentor you, sometimes just for free. But yeah, we love Matt, we love the Faircloths. They\u2019re the best.<\/p>\n
They\u2019re the nicest people. But yeah, honestly, so many people, I don\u2019t do any mentorship or coaching, but people reach out to me on Instagram and they\u2019re like, \u201cHey, can you answer this question for me, or will you mentor me?\u201d And I\u2019m like, \u201cDid you just ask this on the BiggerPockets forums?\u201d You can for free get dozens of super experienced investors can answer these questions for you and will, and honestly it\u2019s better than having an individual mentor. You\u2019ll get a lot of opinions which is really helpful. So, if anyone\u2019s listening to this, I think a lot of people who listen to BiggerPockets podcasts don\u2019t know we have a website which we need to work on, but if you don\u2019t know, go on the forums and ask questions. It\u2019s an incredible resource for investors, and to Kathy\u2019s point, you can ask people who have been through these types of situations before how they would handle your circumstances or just approach this type of market. Very good advice.<\/p>\n
You can even just put the deal that you\u2019re thinking about getting, maybe not the address because someone might snatch it from you, but just you\u2019ll get so much input it. It\u2019s a really an incredible resource.<\/p>\n
Absolutely. And also, if you\u2019re on the website, download the free data drop that we\u2019re given out this week. It is biggerpockets.com\/rentaldata. It\u2019s free and you should absolutely do it. Kathy, thank you for being here. If people want to reach out to you for your sage advice, where should they do that?<\/p>\n
Oh, thank you. You can always reach me at, well, @kathyfettke is my Insta, but also realwealth.com is our company where we help people acquire investment property nationwide, and my syndication company is growdevelopments.com.<\/p>\n
All right, great. And I am Dave Meyer, and @thedatadeli is where you can find me on Instagram. Thank you all so much for listening. This has been On the Market, and we\u2019ll see you next time.
On The Market is Created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n