The pace of U.S. multifamily rent growth declined 40 basis points year-over-year as of May to 13.9%, continuing a cooldown from historically high rates, according to Yardi Matrix’s monthly multifamily report.
Rent growth is currently down 130 basis points from its peak in 2021, but despite the slowing in growth, multifamily rents are still strong. Rent growth far exceeds the 2.8% 10-year historical average, and average asking rents rose $19 to $1,680 per month — an all-time high — Yardi noted.
While the exceptionally high pace of rent growth in 2021 was propelled by the economic recovery from the COVID-19 pandemic, rent growth is currently being driven by:
A deceleration from the peak in 2021 was expected as it is unrealistic for historic rent growth to continue forever. Additionally, economic conditions have shifted from a year ago.
The Impact of Rising Inflation and Interest Rates on Multifamily Real Estate
The decline of multifamily rent growth coincides with the overall commercial real estate market starting to feel the effects of rising interest rates.
In March, the Federal Reserve increased interest rates for the first time since 2018 with a quarter-percentage point hike to a target range between 0.25% and 0.50%. The Fed continued increasing rates in May and June, with a half-percentage point increase and a three-quarter percentage point increase, respectively, to a target range of 1.50% and 1.75%.
The Fed is utilizing rate hikes to counter inflation, which is at a 40-year high of 8.6% as of May. However, the aggressive rate increases have pushed up mortgage rates, making it more expensive to finance properties, resulting in uncertainty in the market.
Due in part to the rate hikes, commercial real estate investment activity dropped 16% in April compared to the previous year — the first negative result in 13 consecutive months, according to Real Capital Analytics. Multifamily was just one of two real estate sectors that had expanding investment activity for April, but it experienced just 7% growth year-over-year compared to 64% in March year-over-year.
Nonetheless, multifamily continues to show why it has a reputation as an inflation hedge as national rent growth is currently outpacing inflation.
Multifamily Rent Growth in Sun Belt Metros Still Showing Strength
The markets with the highest rent growth in May were mostly located within the Sun Belt region due to strong migration to those areas, according to the Yardi report. Notably, three markets in Florida — Miami, Orlando, and Tampa — topped the list with 24.2%, 23.2%, and 21.6% rent growth, respectively.
Renters have been attracted to the Sun Belt region for various reasons, including:
- More affordable housing options compared to dense markets in the west and northeast
- Lower taxes
- Strong employment opportunities
- Warm climates
While policy shifts and the macro economic environment have begun to weigh on all financial markets, multifamily demand remains strong as indicated by rent growth that far outpaces the historical average.