The Resilience of the Rental Market: Insights from Multifamily REIT Earnings
"Peak deliveries are still right around the corner, but at the same time, it's during peak demand"
- Michael Lacy, Senior Vice President of Operations at UDR.
Multifamily REIT earnings reports for the first quarter of 2024 have revealed a rental market that continues to thrive despite challenges posed by new supply and economic uncertainty. According to Bisnow, “The combination of strong demand, record-low move-outs, and a growing affordability gap between renting and homeownership has created a favorable environment for rental housing”[1].
Equity Residential's (EQR) President and CEO, Mark Parrell, noted that outside of the REIT's four expansion markets, they have seen "terrific demand"[2] met with little new supply, resulting in above-average rent growth. This growth has been further supported by resident retention, with the percentage of residents leaving units to buy homes hitting an all-time low of 7.8% in the first quarter. Parrell attributed this trend to "the high cost of homes, combined with elevated financing costs and rapidly rising insurance, real estate tax, and maintenance costs,"[2] which have made rental housing a very attractive option for many people.
Other REITs have reported similar findings, with Camden Property Trust (CPT) seeing its lowest-ever percentage of move-outs due to residents purchasing homes at 9.4%, and Essex Property Trust experiencing a drop from 12% to 5% in the same metric. AvalonBay Communities (AVB) determined that in its markets, it is more than $2,000 per month more expensive to own versus rent a home.
The strength of the labor market has also played a significant role in the rental market's success. "Wages [are] growing faster than rents in Essex markets,"[3] said Angela Kleiman, President and CEO of Essex Property Trust (ESS). This trend has allowed renters to spend a smaller portion of their income on housing, as evidenced by Camden Property Trust's report that new residents are spending just 18.8% of their incomes on rent.
Despite the influx of new supply in certain markets, particularly in the Sun Belt, demand remains robust. Camden Property Trust and UDR (UDR) each saw 100,000 apartment units absorbed in the first quarter, setting records for Q1 absorption in the past two decades. While deliveries were at a 30-year high during the quarter, limiting rent growth in some markets, REITs remain optimistic. "Peak deliveries are still right around the corner, but at the same time, it's during peak demand,"[4] said Michael Lacy, Senior Vice President of Operations at UDR.
As eviction processing times shorten and long-term delinquent units are recovered more quickly, REITs have seen improvements in rent delinquency rates and bad debt levels. Essex Property Trust has adjusted its full-year guidance to increase its midpoint of same-property revenue growth to 2.25%, largely driven by rent delinquency improving faster than originally expected.
Multifamily REIT earnings reports showcase a rental market that has remained resilient in the face of challenges. The affordability advantage of renting over homeownership, coupled with a strong labor market and record-high demand, has positioned the rental market for continued success.
As Ric Campo, CEO of Camden Property Trust, stated, "Some delinquent renters did repay past-due amounts, but more often we simply received the benefit of having our real estate back, the opportunity to commence a lease with a resident who abides by the rental contract and lower bad debt from having a new resident who actually pays."[5] This sentiment underscores the overall health and stability of the rental market as reflected in the REIT earnings reports.
[2] Equity Residential 1st Quarter Conference Call Transcript
[3] Essex Property Trust 1st Quarter Conference Call Transcript
[4] UDR 1st Quarter Conference Call Transcript
[5] Camden Property Trust 1st Quarter Conference Call Transcript