Bend but Don’t Break Defense Weathers Economic Uncertainty: Part 2

The potential for an economic downturn has not dampened rental housing industry executives’ spirit or outlook. Part two examines issues related to construction and rent growth. 

By Michael Miller |

4 minute read

Multifamily starts declined 4% in October, according to Dodge Data & Analytics. Despite the drop, multifamily starts are ahead of single-family starts 26% to 10%, respectively, during the first 10 months of 2022 compared to the same period in 2021.

Meanwhile, the National Association of Home Builders reports a decline in multifamily developer confidence during the third quarter as both its indices—the Multifamily Production Index, which measures the construction of affordable housing units, market-rate apartments and for-sale condominiums, and the Multifamily Occupancy Index—declined substantially to levels not seen since the Great Recession, excluding the initial onset of the pandemic. 

One way Peter DiCorpo, Co-Founder and COO, and Brook Farm Group are combatting construction cost increases or materials issues is with advanced purchasing. “One of the benefits to the development pipeline slowing is that it will help bring down some of those costs,” he says. “We’re trying to mitigate this issue by meeting with general contractors well in advance and getting them involved early in the process. We’re also buying products earlier in the development cycle and having them stored nearby so we can lock-in the costs and manage the variability.” 

Don Brunner, President and CEO of BRG Realty Group, and Chair of NAA’s Board, says similar buildings only a couple of blocks away are now costing 20% to 30% more than they did just one year ago. “The supply of product is available, but the cost of the manpower to put those new communities together has increased from site development work to utilities to finding the cost of the products going up—everything is more expensive.” 

Bonnie Smetzer, CPM, HCCP, Executive Vice President with Asset Living, is “seeing a pullback on rents in some markets along with increasing interest rates. Lenders are now requiring more equity than in previous years. We are finding it hard to make deals work and worry these factors will impact the ability to continue to develop new apartments in 2023 and beyond.”

Rent Growth

Rent growth continued to subside during the latter half of 2022. The December 2022 Apartment List National Rent Report shows the national index declined 1% during November, which is the third straight month-to-month decline. The 1% dip was also the largest monthly decrease in the national index since the firm began the index, dating to 2017.

Despite the record monthly decline, rents are still up 4.6% year-over-year. However, that’s a far cry from the record-setting mark of a 17.6% increase in 2021. A decline in the final quarter of the year is not unusual as it follows seasonality, even dating prior to the pandemic.

Many believe, while rents will remain somewhat elevated, rent growth will be subdued slightly in 2023.

“After robust rent increases in 2021 and most of 2022, we started seeing a pullback in rent increases and are starting to see concessions in markets again,” says Smetzer. She adds that Florida markets have witnessed exponential rent growth during the pandemic, and “we are forecasting 6% increases in Florida for 2023 and more conservative increases in other state markets.”

According to John Foresi, CEO of Venterra Realty, says, “There is already evidence in broader wage data that income growth is starting to return to a more trend-like pace. While we don’t expect things to go backward, by late 2022/early 2023, we would expect to see rent growth much closer to historic norms, consistent with moderating renter incomes.”

Jamin Harkness, President, The Life Properties, also says rent growth will return to lower single-digits, around 5% to 6%. “The past two years have been an anomaly, and we cannot count on that history to repeat.”

And with a potential recession on the horizon, rent growth will likely be subdued from the historic growth during the past couple of years. “We believe, as most economists do, that a recession will likely cause rents to either flatten or increase only moderately,” says Alliance Residential President/COO Jay Hiemenz. “We’re not projecting net effective rents to fall, but that depends on the overall economic picture, job losses, etc.”

While vacancy is more than a percentage point and a half higher now than the low seen last fall, it’s still lower than pre-pandemic levels. Vacancy hit 5.7% compared to the 4.1% in October 2021, according to Apartment List.

“Our industry has been on a great ride the past few years in terms of occupancy and rent increases, but I think that is going to start changing,” says Curt Knabe, CFO, Realty Center Management, Inc. “As a matter of fact, I have already seen the decrease start in certain markets. People are starting to cut costs, and job layoffs have started as well.” He says this will affect occupancy, which he predicted would slip from the high 90s to the low 90s or lower “if the economic turmoil is worse than forecasted.” 

Michael Miller is Managing Editor for NAA.

Learn more about inflation and workforce issues in Part One of the Executive Preview.
Learn more about technology and legislation and regulation in Part Three of the Executive Preview.