National multifamily rents have been increasing at a rapid pace — led by single-family rentals (SFR) and build-to-rent (BTR) properties — as the industry continues its strong performance this year. Rents have surged 10.3% year-over-year in August for the overall multifamily sector, and 13.9% year-over-year for SFR units, according to Yardi Matrix, a real estate research and information company.
The phenomenal increase in rent growth stems from a variety of factors, such as:
The economic recovery boosting multifamily real estate demand
Record home prices making multifamily rentals more attractive
Millennials being a tailwind for SFR and BTR
Low supply of SFR and BTR units
The Economic Recovery Boosting Multifamily Real Estate Demand
The COVID-19 pandemic triggered an economic downturn that began in February 2020 and officially ended two months later in April, according to the National Bureau of Economic Research.
During the downturn, more than 22 million jobs were lost, and the unemployment rate jumped to 14.8% in April 2020, according to the Bureau of Labor Statistics. As new daily COVID-19 cases fell, three rounds of stimulus funds were disseminated, vaccines were distributed, and states and businesses reopened, the economy gradually gained steam. Since the downturn, the labor market has reclaimed more than 17 million jobs, and the unemployment rate has steadily decreased to 4.8% as of September 2021, according to the latest U.S. jobs report.
During the peak of the virus, younger adults were disproportionately affected financially due to loss of jobs and meager savings, and many moved in with family members. During the economic recovery, there have been reports that younger adults are moving back into their own apartments, increasing rental demand. Additionally, there was pent up demand from those who wanted to move but could not or chose not to during the pandemic.
Alongside the economic recovery, inflation — the increase in prices for goods and services — has surged higher during the year, and was reflected in the consumer price index increasing 5.3% year-over-year in August. Multifamily rents typically keep pace with inflation, which is one of the reasons why multifamily real estate can be a hedge against inflation.
Record Home Prices Make Multifamily Rentals More Attractive
One of the first sectors of the economy to recover from the pandemic was housing partly due to the nature of the policies to counter the spread of the virus, such as “stay-at-home” and social distancing measures. Additionally, as companies and schools applied remote learning and working policies, many people desired to live in homes in the suburbs as opposed to apartments in dense urban areas.
Home prices began climbing since the second half of 2020 and the national median sales price has reached a record high of $374,900 in the second quarter of 2021, according to figures from U.S. Census Bureau. People who can’t afford to purchase a home and have chosen to continue living in cities are turning to rental apartments once again, and many others are leasing more affordable SFR and BTR units.
The states in the southern section of the country known as the Sun Belt have been a huge beneficiary of this trend in record housing prices, as there are more SFR and BTR units located there due to lower costs and the availability of developable land. Texas, Florida, Arizona, Georgia and North Carolina in particular gained the most net new residents in 2020, according to Census Bureau population data. (Read our prior article featuring a map of the states with the biggest net population gains and losses in 2020.)
Millennials Being a Tailwind for SFR and BTR
One of the main groups of people that have not been able to afford homes are millennials, which with 72.1 million people is currently the largest generation in the country. High student debt levels and the lack of affordable housing inventory have delayed homeownership for many of them. However, as millennials are aged between 24 and 40, family formation has become important, and many millennials require more housing space.
SFR and BTR communities provide the space and privacy they need at a more affordable price. They also have the flexibility to relocate whenever they need to. These factors have boosted SFR and BTR demand from millennials.
Another trend that is increasing SFR and BTR demand is companies relocating to more affordable markets with lower taxes, less regulations, more business-friendly policies and lower costs of living for employees. Notably, many of these markets are in the Sun Belt region, and SFR and BTR units have gained demand from the spike in residents following companies for employment opportunities.
Low Supply of SFR and BTR Units
In addition to rising rents, occupancy rates have also increased with high rental demand. Nationally, apartment occupancy grew just shy of 1% year-over-year in August to 95.6%, according to Yardi. Demand for rental units is outpacing supply, especially with SFR and BTR units.
More than 35% of SFR operators had no available inventory in the second quarter of 2021, an increase from 26% in the first quarter, according to John Burns Real Estate Consulting’s second quarter 2021 single-family rental market index survey. To meet the high demand of rental units, more operators and developers are focusing on build-to-rent communities and lenders are lining up to finance these projects.
Overall, multifamily rent growth may continue its growth trajectory as high demand for rental units continues while the economy recovers and record home prices persist. Furthermore, as demographic shifts support SFR and BTR units in particular, the burgeoning asset class is poised to continue to its tremendous growth.