The Monthly Multiple: October 2021

November 3, 2021

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Quick Stats:

  • Multifamily rents grew over 10% year-over-year in August (national average).
  • Single-family home prices have grown by over 15% since March 2020 in most major markets.
  • Wages for the bottom quartile of American workers are growing 70% faster than for those in the top quartile.

Real Wages Finally Move

Real wages stagnated for the better part of 60 years. They were stagnant through the Oil Crisis and Stagflation, when economic conditions and prices went in opposite directions. Wages were largely stagnant during the recovery from the financial collapse, when austerity measures and cautious central bankers stymied broad-based economic gains while institutional investors and the hyper-wealthy capitalized most on the recovery cycle.

Wages in the developed world — including the U.S. — are now growing at well above pre-pandemic rates. This phenomenon is not confined to the creative class: the wages of the least-paid quartile of American workers are growing 70% faster than those in the top quartile.

This could mean one or both of two things: labor’s share of economic output is increasing, and/or workers and employers are responding to inflationary pressures. The reality is probably a bit of both. Employers big and small need to lure reluctant workers to keep up with pent-up demand as Americans start to shop, go out, and travel more. If real wages grow over a sustained period, real estate developers and investors stand to gain. Rising real wages may coax younger workers out of their parents’ basements and prompt middle-income renters to seek more space, potentially sending positive ripples through multifamily rental markets.

Multifamily Stands to Benefit

Indeed, rents surged 10.3% year-over-year in August for the multifamily sector. Occupancy grew almost 1% year-over-year in August to nearly 96% nationwide.

Single-family home values are also impacting multifamily rental markets. The pandemic spurred a rapid surge in selling prices of SFHs that shows no signs of slowing — in June, home prices were up 23.4% YoY, a record high. This trend is pricing would-be owners out of the market and putting upward pressure on rents for both single-family rentals (SFRs) and apartment units.

After a robust fiscal policy response to the pandemic and consistently improving demand throughout the economy, the unemployment rate continues to close in on pre-pandemic levels; the unemployment rate fell another 0.4% to 4.8% nationwide in September. As offices and cultural hubs continue to reopen, younger renters are being drawn back into cities.

YoY Rent Growth

“Return to office,” surging single-family home prices, and preexisting migratory patterns to tier II metros combine to form strong tailwinds for a broad range of multifamily markets. All top 30 U.S. metros now exhibit positive YoY rent growth for the first time since the pandemic started. A few that EquityMultiple is currently targeting:

  • Chicago — 8.9% rent growth forecasted for year-end 2021
  • Sacramento — 12% rent growth forecasted
  • Orlando — 11.6% rent growth forecasted
  • Philadelphia — 6.3% rent growth forecasted
  • Houston — 6.4% rent growth forecasted, and still benefiting from consistently strong in-migration.

What About Other Sectors?

Continued improvement in economic fundamentals should put all CRE sectors on strong footing for the foreseeable future. Student housing should enjoy a renaissance as more students return to in-person learning. Hotels in the right markets can be acquired at an attractive basis while benefiting from resumption of business and leisure travel. With sustained inflation likely, we are only cautiously approaching business plans with longer, more static leasing models. As expected, the pandemic has catalyzed opportunities for innovative new business models and niche asset classes. One intriguing model is “ghost kitchens” — industrial food prep facilities that serve delivery-only restaurants, tapping into increased demand for rapidly delivered, restaurant-quality meals.

Further Reading

Bureau of Labor Statistics – The Employment Situation
The Economist – Wages Are Surging Across the Rich World
Wall Street Journal – Soaring Rents Make It a Great Time to Own an Apartment

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“Where possible, focus on shorter leases; focus on sectors with shorter lease terms such as hotels, (US) apartments and self-storage. During periods of higher inflation, this allows for rents to mark-to-market more often, thus benefitting the investor.”

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