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Tuesday, March 15, 2022

Rapid rent growth will persist

The rent is too damn high. Once only referring to a single-issue political party led by former New York City mayoral candidate Jimmy McMillan in the 2000s, the phrase now resonates across the U.S.

Rent growth, not just soaring energy prices, is doing its part to push inflation to a 40-year high and there’s little sign of it letting up. Rent inflation rose at a seasonally adjusted annual rate of 4.2% (highest since 2007) and an increase of 0.6% month-on-month (highest level since 1987), according to the Bureau of Labor Statistics' Consumer Price Index (CPI).

Much of the gain was fueled by four Sun Belt cities — Miami, Dallas, Denver and Phoenix — that experienced a surge of inbound migration during the COVID-19 pandemic as people who could work remotely sought more space in lower cost, less dense U.S. metropolitan areas.

The CPI rent print is a lagging market indicator (it doesn't measure rent for new lease activity), but recent reports from the likes of Apartment List and CoreLogic reveal there’s more upside. Even in major cities like New York, where rents tanked at the height of the pandemic as a result of a mass exodus of residents, rent prices have soared to new highs and staged a comeback to tenants’ dismay. In March, median rents in New York stand at $2,045 for a one-bedroom and $2,152 for a two-bedroom.

Single-family rent extended record growth for the 10th straight month in January, up 12.6% from a year ago, according to new data to be released by CoreLogic this morning. Sun Belt cities, led by Miami with a nearly 40% annual increase, registered the largest gains. The results echo Apartment List’s most recent report for February, which revealed annual rent growth was 17.6% for all housing types and a 0.6% monthly increase that still exceeds pre-pandemic levels. Apartment List’s vacancy index sits at 4.5%, well below the 6% pre-pandemic norm.

“Vacancy rates are at their lowest level in a generation … Landlords and property managers are seeing their costs go up,” said Frank Nothaft, chief economist at CoreLogic, adding that landlords will be passing those higher expenses on to consumers. “Rents will go up.”

Sarah House, senior economist at Wells Fargo & Co., told Bloomberg she doesn’t expect rent prices “to peak until maybe the third quarter of this year.”

Fueling the rental demand are historically low number of homes for sale and skyrocketing home sale prices. A lot of consumers are simply "priced out of the for-sale housing market and will have to continue renting," Marcus & Millichap CEO Hessam Nadji recently told Yahoo Finance Live.