Do yourself a favor and skip logging into your retirement accounts this morning. Today's global sell-off may be the clearest signal yet that we're headed into the long-awaited recession.
While there will likely be continued pain in public equities, for real estate, a recession means lower rates and further metering of big opex items, both of which have been on a tear for 30 months.
And we're already starting to see it play out during recent earnings calls for major apartment REITs, almost all of which have completed their quarterly earnings calls.
There were five key themes that stood out to me on the state of the multifamily market, each of which support the case for investing in Midwest multifamily now:
Moderating Expense Growth: Operating expenses for 2024 are expected to increase less than previously projected, with savings seen in insurance, property taxes, and payroll. On-site staffing efficiencies after centralizing some operations have contributed to these savings.
Cooling Insurance Premiums: Insurance premiums, which had doubled in some markets over the past few years, are now seeing a significant decrease. For instance, Elme Communities managed to secure a 10% decrease in premiums after initially expecting a 17.5% increase.
Strong Financial Health of Renters: Market-rate renters in Class A/B apartments are in very strong financial health. Rent-to-income ratios have declined to the low 20% range in 2024, and leasing traffic from qualified renters remains strong.
Persistent Bad Debt in Coastal Markets: Coastal REITs are dealing with unpaid balances among long-term nonpaying residents, particularly in cities like New York, Los Angeles, Oakland, and Atlanta. While there has been progress, the backlog in the court system remains a challenge. Conversely, Sun Belt REITs report low bad debt and high collection rates.
Low Renter Turnover and High Retention: Contrary to expectations, renter turnover is very low in 2024. Even with renewal rent hikes of 3-5%, retention rates have increased, driven by factors such as improved resident services and fewer move-outs to purchase homes. Additionally, the Midwest, especially suburbs, continue to perform well in terms of occupancy and rent growth.
Coincidentally (or not!), we have a suburban deal here in Minnesota that's open to investors for the next few weeks.
The signals have rarely been clearer: reach out or schedule time!
Matt & the EHC team
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