Origin Investments: National Multifamily Markets on Course for Decline in Rent Growth

Origin Investments: National Multifamily Markets Remain on Course for Fourth-Largest Annual
Rent Growth Decline in U.S. History

Implications Point to Lower Valuations, Reduced Transaction Levels and Increased Distress

CHICAGO (September 8, 2023)—The pace of year-over-year (YOY) national multifamily rent growth continues at a decelerating trajectory that will result in the fourth-largest rent decline in U.S. history, behind only World War I, the Great Depression and the Global Financial Crisis.

That level of decline, according to Origin Investments, will cause further reverberations within a sector that in 2023 is delivering a record number of new units and facing further downward pressures on valuations, slowing transaction activity, a pullback in bank lending, and the threat of increasing levels of distress.

In an early 2023 report, Origin’s proprietary suite of machine learning models, Origin Multilytics^SM, forecasted that for the period from January 2023 to January 2024, YOY Class A apartment rent growth nationally would be negative by as much as 2% (-2%). It also forecasted that YOY rent growth through July 2023 could be positive by as much as 3.1%, a level that is lower than annual rates over the past few years and in some cases significantly lower than the forecast of other industry sources. In its most recent report, Origin says that actual YOY rent growth through July was 2.22% nationally.

The deviation in Origin’s forecast was explained, in part, as the result of a pronounced rise in vacancies on a seasonally adjusted basis when accounting for the ongoing delivery of new supply in the multifamily rental sector. Through June, according to a mid-year report from CBRE, the trailing four quarter multifamily deliveries totaled 351,500 units, a record level that is expected to increase through the end of the year and in 2024. For example, Berkadia forecasted that the total number of new deliveries in 2023 would be 502,375 units.

“We projected that rent YOY growth for the first half of 2023 would be especially weak on a seasonally adjusted basis despite month-over-month increases,” said Ryan Brown, Data Scientist, Origin Investments. “Our data continues to show that rental rates nationally, and in most markets across the country, will reach their peak in August or September. Then, it becomes truly negative month over month as the negative YoY rent growth forecast plays out.”

Industry sources have been predicting YOY rental rate growth ranging from 3.9% to 4.2%, producing an industry composite of 4.1% nationally.

“Some in the market suggest our forecast reflects a bearish model,” said David Scherer, co-CEO, Origin Investments. “But this is not bearish, it’s accurate. We’re in a bearish year.”

In 2021 and 2022 the multifamily sector experienced two years of rapidly accelerating rent growth. Given historical trends most industry experts knew those levels weren’t normal or sustainable. This has led to the current correction.

“This is a difficult correction necessary to encourage longer-term health in the multifamily sector,” Scherer added. “While these periods are unsettling, their relative rarity speaks to the strength of multifamily housing as a long-term investment.”

The trajectory of rent growth became a growing concern in late 2021 when apartment rents were becoming increasingly unaffordable, inflation was becoming an issue and the pipeline of new development was filling quickly given the low interest rate environment. As a result of these factors, rents moderated during the fourth quarter 2022, were largely flat to begin the year and have continued to soften through July.

For the regional, gateway and select local markets, Origin predicted modest year-over-year rent growth from January through July 2023; those projections were more bearish than other industry sources.

In the southwest region Origin predicted a YOY July 2023 rent growth range of 0.95% to 2.95% (an average of 1.94%). Actual YOY rent growth for the region was 1.44%, within Origin’s prediction range but still greater than what the market recorded. In the southeast region it predicted a YOY July 2023 rent growth range of 2.5% to 4.5% (an average of 3.52%). Actual YOY rent growth for the region was 2.75%, within Origin’s prediction range but still higher than actual results.

Even though some regions performed better than projected, Brown believes that the overall underperformance of rent growth through July lends further credence to Origin’s late 2022/early 2023 prediction that YOY rent growth through January 2024 will be negative.

“The results through July are no guarantee of what will take place over the next six months, but in this case, the trend may not be your friend,” he said.

In February, Origin also forecasted YOY rent growth in the 15 markets where it invests, including Austin, Dallas, Tampa, Nashville, Raleigh and Denver. In 14 of those 15 markets, Origin’s YOY July 2023 forecasts, which were very modest, and in all cases at least 200 basis points lower than an industry composite, were higher than actual YOY rent growth. The following table depicts Origin’s YOY predictions for July 2023 and January 2024, the range average and actual YOY July 2023 rent growth.

Select City	YOY July 2023 Origin Forecast	Avg.	Actual Growth July 2023 (YOY)	YOY Jan 2024 Origin Forecast
Austin	0.17 to 2.17%	1.17%	-1.84%	-1.0 to -3.0%
Dallas	1.27 to 3.27%	2.27%	2.31%	0.0 to -2.0%
Tampa	0.42 to 2.42%	1.42%	0.81%	-4.0 to -6.0%
Nashville	0.87 to 2.87%	1.87%	0.47%	-3.0 to -5.0%
Raleigh	-0.85 to 1.85%	0.85%	0.20%	0.0 to -2.0%
Denver	1.49% to 3.49%	2.49%	1.58%	-1.0 to -3.0%

The implication of negative rent growth will be seen in lower net operating income (NOI), which will reinforce the discrepancy that exists between buyer and seller expectations, thereby muting capital market activity.

Mutilytics is forecasting that after one year of negative rent growth, rents will again turn positive for the foreseeable future, based in part on the traditional strength of multifamily fundamentals. The median annual rent growth rate from January 1947 to January 2023 is 3.5%, according to the St. Louis Fed. Further,
between June 2021 and October 2022, the median annual growth rate was 15.06%, according to the Zillow Observed Rent Index.

In addressing the negative rent growth that is forecasted in markets where Origin invests and develops, Scherer said, “As long-term investors, we analyze a broad spectrum of variables, not just rent growth projections, when committing to a market. Population and income growth also matter and lead us to believe that positive rent growth will come back quickly, as it has historically.”

The logical outcome of negative rent growth in 2023 is downward pressure on property NOI. Further, when combined with likely increases in debt service obligations and other rising expenses including insurance premiums, employment costs and maintenance costs, NOI likely will decrease further.

“We’re going to see some headwinds as we digest the Fed rate hikes and the bank contraction of credit,” Scherer said. “This is all being compounded by the record amount of supply that’s just starting to hit, three years after the zero-interest rate policy that led to all this development.

“This is an environment that we see creating acquisition opportunities. But success requires a long-term outlook, and we believe that information we are able to access through Multilytics, along with informed decision-making, leads to better investment outcomes.”