Origin Investments Report: Multifamily Rent Growth Returns to Positive Territory by January 2025

Origin Investments’ Multilytics^SM Report: Year-Over-Year Class A Multifamily Rent Growth Returns to Positive Territory by January 2025, Reclaims Ground Lost in 2023;

Unquantifiable Risks Remain in the Market for 2024

CHICAGO (November 16, 2023)—Origin Investments’ proprietary suite of machine learning models, Multilytics^SM, is forecasting that year-over-year (YOY), national Class A apartment rent growth will normalize by January 2025 and range from 2% to 3%, in keeping with historical rent growth averages. Yet Origin also cautions that unquantifiable risks loom large over the market and could have broad implications for multifamily properties.

In its Multilytics^SM Rent Growth Forecast Report, Origin is predicting that YOY rent growth in many of its target investment markets also will return slowly to normal by January 2025, with all Origin markets climbing back into positive rent growth territory, from 1.78% in Jacksonville to 5.90% in Phoenix. This follows a year (2023) that saw negative rent growth, which Multilytics predicted approximately one year ago, and near record, double-digit rental rate increases in 2021 and 2022.

“The return to normalization has been expected because the rent growth levels of 2021 and 2022 were unsustainable. We are now paying for the distortions of the past,” said David Scherer, Co-CEO, Origin Investments. “It leads us to tempered optimism in the near term given the number of other
unquantifiable risks that loom over the marketplace.”

According to the report, YOY rent growth occurring in the range of 2% to 3% means that Class A multifamily rents will reclaim lost ground from 2023. Nearly one year ago, Multilytics predicted YOY Class A multifamily rent growth would be negative by as much as 2%.

“The fact that many markets are returning to positive year-over-year growth is somewhat misleading,” said Origin Investments’ Data Scientist Ryan Brown. “While a given market may achieve 3% to 4% growth, you also have to consider the negative growth in 2023. As a result, the return of positive growth may only get you back to the peaks achieved in 2021 and 2022. It will take longer to move beyond that peak.”

Rent growth in 2024 faces numerous potential threats because of current economic conditions and uncertainties. For example, an increase in unemployment and lower wage growth trends, along with the continued level of new supply coming online, would have a negative impact on rent growth. Historically, as vacancy rates increase with lower demand, price adjustments and rent concessions follow as owners seek to buy occupancy.

According to the new report, YOY regional rent growth for Class A units will be highest in the Western U.S. at 2.9% and lowest in the Southeast U.S. at 0.1%. YOY rent growth in Gateway markets is expected to increase by 2.5%. The report projects rent growth in the Midwest at 2.6%, the Southwest at 2.22%, and the Northeast at 1.28%.

Origin is also making 2024 Class A multifamily rent growth predictions in 15 markets where its real estate funds currently own and are developing multifamily assets. In keeping with the prediction for strong rent growth in the Western U.S. (2.9%), Origin is projecting above-average rent growth in Phoenix, 5.9%; Denver, 5.09%; and Colorado Springs, 5.1%. Further, while the Southeast U.S. is expected to achieve only nominal rent increases (0.09%), key markets in the region are expected to achieve more significant growth, including Nashville, 5.88%; Tampa, 4.5%; Orlando, 3.71%; Charlotte, 2.69%; and Atlanta, 2.6%.

One factor having a significant influence on rent growth is the amount of new supply being delivered and in the pipeline. By year-end 2023, completions are projected to be +/-400,000 units. Further, it is estimated that another 1 million units will be delivered in 2024 and beyond. However, the start of new development has slowed in the face of rapidly rising interest rates.

While development activity has swelled over the past several years, according to the National Multifamily Housing Council, the U.S. needs to build 4.3 million more apartment units by 2035 to meet the demand for rental housing. In the long term that bodes well for the multifamily sector, but fluctuations in development activity create peaks and valleys and have a direct impact on rents.

One of the underlying themes of rent growth is the affordability ratio—the percentage of monthly income spent on rent. Nationally, the 2022 affordability ratio was 31.67%, the highest level recorded since at least the 1970s. In 2010 it was as low as 25.31%. Origin Investments’ Brown believes that the 2023 affordability ratio could actually move lower than the 2022 rate.

He said affordability has improved because of a confluence of factors: Wage growth has been high, rents have either gone down or remained flat, and many more people are locked out of the housing market with interest rates where they are today and limited price reductions. As a result, there are higher income renters that are now forced to rent, which helps improve the affordability calculation.

Origin created Multilytics to generate multifamily Class A rent growth projections nationally and in its target markets that are more accurate, granular, and consistent compared with other third-party resources. Accurate rent growth predictions are critical and one of the factors Origin uses to inform development and investment decisions. Dependable information that cuts through market noise leads to better risk management and investment decision-making.

“As fund managers, we seek to quantify and predict as many variables as possible,” Scherer said. “If we had relied on industry standard models in 2022, we could have been compelled to invest heavily in places like Austin at exactly the wrong time.”

The focused nature of Multilytics, narrowing in from ZIP codes to property-level locations, helped Origin better understand future probabilities, not just point predictions.

“When you are better informed, you make more insightful decisions,” Scherer said