By Douglas Katz – 01/16/2023
Rentals, rental, rentals. Like a juggernaut this market has been growing at an astronomical pace over the past years. Like all good things, the rental train may be slowing and with that, we could see some mayhem.
Long-Term rentals have been the other side of the housing crunch. Many markets had insufficient supply and what supply that they had was over-priced. This helped make many owners maintain decent profitability, which fed more investment at higher prices. If, and likely when, pricing pressure drives rents down, many owners will find that their modeling was too dependent on peak numbers, which we are likely past. For the article, HousingWire referenced a recent Apartment List report which validates the concerns from a slowing market. Per Apartment List, “We estimate that the national median rent fell by 0.8 percent month-over-month in December … the fourth consecutive monthly decline, and the third largest monthly decline in the history of our estimates, which start in January 2017. The preceding two months (October and November 2022) are the only two months with sharper declines.” They added, “… In the most recent four months from August through November, it [the vacancy rate] has increased by 0.8 percentage points, reaching 5.9% this month [December, up from 4.1% in October 2021].”
Short-term rentals are different than their long-term brethren but they also beginning to see some challenges. HousingWire references a recent report by AirDNA, the premier authority on the short-term rental market, for some data on the market conditions. According to the report, in 2023, “the supply of short-term rental units will increase by 9% while demand for rooms is projected to increase at only a 5.5% clip.” They added that the “result is that revenue per available room is expected to decrease in 2023 by 1.6% year over year — compared with a 2.1% year-over-year gain in 2022 and a nearly 28% bump in 2021.” Numbers aside, that means that there are too many short term units and going into a recession demand will likely drop. Per AirDNA, “in 2022, we saw about 20% demand growth. [This] year, we’re expecting [less than] 6%”
This is far from being a Rentpocalypse. but it does mean a few things to consider.
- Current and up-to-date data will be essential to good modeling. Investors should keep abreast of rents as well as prevailing interests rates. Many programs use Debt Service Coverage Ratio (DSCR) calculations and both the aforementioned variables will push ratios higher.
- Pick a good lender. Rates and other components of a deal but ethical dealings, good communication and good execution will be key. There is very little regulation and no licensing requirements for originators, which opens the door for possible issues. This especially true in times when opportunity has dropped and some lenders are starving for deals.
- The next point dovetails on the previous one, but this is about programs and products. Investors need to keep informed on potential changes to programs upon which they have based their assumptions. Leverage levels and other guidelines change. You do not want to fund out about any changes after you find a property. A good lender can also help with this need.
- Inventory will likely increase as some investors find out that they used the best case modeling of a peak market when they should have used the most likely of historical numbers. Many will no doubt find out that they have unprofitable or unsustainable cash flows and they need to refinance or sell. With lower values and higher rates, the former will become more difficult and the latter will be more likely.
Rental properties will never go away, but the landscape could become a bit more inhospitable. Even with this, the market shift is actually good news for the investors who have managed their portfolios well because after the pain, they should see a market with more opportunity and less competition.