Rent Growth Remains High, Supply Chain Problems Continue – June 2022 Round-Up

Annual rent growth remains high, which is great for many passive investors in multifamily real estate. Still, supply chain problems continue to cause delays, making June 2022’s news a mixed bag. Follow along as Scott Hawksworth and Jimmy Atkinson break down some of the most important stories for multifamily investors right now.

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Episode Highlights

  • The story behind rising rents, and whether or not its sustainable.
  • How student housing is bouncing back in a huge way from COVID disruptions, and where it may go from here.
  • The impact of ongoing supply chain issues on apartment openings and Value-Add multifamily properties.
  • Why Dallas-Fort Worth is leading the nation in multifamily investment, including Jimmy’s perspective as a local.
  • What makes Capital Square’s new $300M development fund unique.

Today’s Guests: Jimmy Atkinson, AltsDb

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

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Show Transcript

Scott: Hi, and welcome to the “Multifamily Investor Podcast.” I’m your host, Scott Hawksworth. And today, I am joined by Jimmy Atkinson, who’s the co-founder of OpportunityDb and AltsDb. And today, we’re going to be doing our first ever official multifamily news round-up for June 2022 and exploring really a mixed bag of good news, some not as good news, some challenges all in the multifamily sector.

So, Jimmy, thanks for joining me here.

Jimmy: Hey, thanks for having me, Scott. This is the first time we’re doing this. We’re going to be doing this every month. Is that the deal?

Scott: Yeah, it’s going to be a monthly episode that we do to really recap the landscape and some of the biggest happenings that we’re seeing both in specific markets, but also broader trends and beyond. So it’s going to be really exciting and I’m excited to really dive into, again, what is a bit of a mixed bag of some events we’ve seen here.

Jimmy: Yeah, no, it should be fun. Scott didn’t really tell me a whole lot about what’s going on today. So I’m kind of in the dark a little bit, but that’s okay. I didn’t even know we were going to be doing this monthly, but that sounds fun, man. I’m game. Scott tells me to jump, I just ask how high. So happy to be here, Scott.

Let’s get going here.

Scott: Yeah, let’s dive in. And first, I got to pull up an article here to sort of kick us all off. I’m going to share this. And really, we want to start with what we have seen from rental increases. We have seen rents rising. In recent episodes, I cited a study that mentioned 11%.

Well, we’ve seen in April as high as 14.3% in terms of rent growth. So the national average asking rent rose by $15 in April up to a new all-time record of $1,659 according to the latest monthly report by the property data and analytics firm, Yardi Matrix.

And year over year rent growth fell back slightly in April, but it still remains high at 14.3%. So, I mean, this is incredible rent growth that we’re seeing and it’s driving a lot of interest. And when folks are underwriting deals, there’s a lot of sponsors that are looking at this and building this into their models.

Jimmy, what’s your perspective on this? Is this the kind of thing that can maintain, are these sustainable? What are your thoughts?

Jimmy: Well, and by the way, I’ve got it pulled up on my computer screen over here too that’s why I’m kind of looking over this way. I think a lot of it’s just inflation, right? I mean, we had CPI print, I think two months in a row now for April and May, I think that was data for March and April that showed 8.5%, 8%, somewhere in that range. So a lot of it is just inflation.

But still beyond that, you know, we’re talking about, this says what, year over year rent growth up 14.3%. I mean, that’s out-stripping the CPI print, just regular inflation. Although I would say that, you know, what goes into that CPI print is oftentimes more art than science.

I don’t know how much housing is incorporated there, and really every single individual in this country and in the world really has his or her own personal inflation rate. The CPI does its best to kind of aggregate those. But yeah, that’s really impressive. So if you’re a renter, you know, CPI inflation might be really undercounting your personal level of inflation. If you have college tuition you have to pay, college tuition’s gone up, up up.

Healthcare has gone up, up, up. You know, that’s probably undercounting your level of inflation as well. That’s my thought there on that one. Oh, in terms of whether it’s sustainable or not, I mean, I think inflation’s probably going to be here with us for…you know, it’s not transitory anymore, right? I don’t think there’s anybody who’s still left at this point.

Scott: Yeah. No one’s buying that.

Jimmy: It won’t be around forever, but I think we’ll probably see fairly high inflation for at least the next 12 to 18 months. We keep printing money at record rates and I think that’s kind of, you know, when you put that much money into the system and put that much liquidity into the system, you know, it’s going to lead to high prices everywhere, but certainly, yeah, I think the moral of the story here is as high as inflation is, housing is even outpacing that.

Scott: Absolutely.

Jimmy: Which is good news, good news for investors, good news for homeowners, but bad news if you’re a renter.

Scott: Right. Exactly. And again, that’s factoring into a lot of the deals we’re seeing. A lot of folks, you know, they have deals and they’re ahead of schedule because these rent rates have risen so much and they’ve seen their income on these properties rise so much. And some depending on what their goals are with their portfolio are even having earlier exits. I had a recent episode I recorded just this week where we were discussing that.

So I think there’s a lot of different impacts with this. I think you always have to exercise caution, like yeah, okay, these rent rates continue to increase right now, but will that be sustainable? Will this be the case, you know, in four years, three years on down the line? Uncertain at this point, but certainly at this market right now, it’s a good sign for investors.

Jimmy, you talked about college tuition. I want to move on to the next article here, which is all about student housing. And looking at student housing, student housing is still top of the class. And this is according to this article, you know, “The global pandemic,” and I’m reading directly here, “which kept international from traveling has not hindered the flow of capital into global student housing. It’s actually far from it. Student accommodation transactions swung back in record numbers in 2021 in key markets, such as in the U.S. and in Europe.”

And a while back, I had an episode where we talked all about student housing and the positive aspects of that from a passive investment standpoint.

Jimmy: And I think I held the camera for that episode if I’m not mistaken.

Scott: You absolutely did hold the camera for that.

Jimmy: That was one of our ADISA episodes, right?

Scott: It was. And really when you’re looking at student housing, the fact is that more and more colleges and universities, they are back to in-person learning, kids are going back to school. I mean, we’re heading into, obviously, the summer months now, but student housing has bounced back in a huge way. It is still very, very important.

And we’re seeing that in the interest there. I’m curious if you have any thoughts on student housing in general there, Jimmy.

Jimmy: Yeah. Well, a couple of thoughts. One is if you scroll down toward the end of this article, this is a long article. I actually kind of skimmed through it a little bit earlier before we came on, Scott. You know, it goes to say that some student housing investors were expecting to maybe scoop up some assets at fire-sale prices.

And that really didn’t happen even after some occupancy rates. And some of these student housing projects dropped to like really low levels, like one example cited here is 10% to 15% in some student housing in Australia. There’s a lot of mention of Australia in this article, and they were a country that locked down much harsher than many other countries around the world, and certainly much more harshly than the United States did.

Even though the occupancy rate dropped that much, you know, from probably in the 90s down to 10% to 15%, everybody kind of held on, everybody rode it out. They kept calm and held on, so to speak. And I think, you know, it’s a little bit of a long-term investment strategy.

What happened in 2020 and 2021 is going to end up being a blip for a lot of these investors who hold for a long period of time because everything’s rebounding now. We did have for a while in 2020, we had colleges shut down, right? They sent their students home or, you know, there was no need to be on campus for a lot of these students.

You know, if they weren’t going to be able to go to class in person, what’s the point of, you know, being at this school and paying this money for this student housing off-campus if I’m not even allowed to like go to there, go to the lunch hall, or if there’s no basketball games or football games to go to, or there’s no class to go to, like, you know, what am I even doing here?

The other thing that happened was our borders shut, right? And not just our borders here in the United States…

Scott: I mean, across the world.

Jimmy: …but Australia shut their borders, a lot of countries. You know, Europe shut their borders. So a lot of international students had to go back home or they couldn’t come back to where they were learning. A lot of Asian students couldn’t come to Australia, as this article cites. You know, that really drove down enrollment for, I don’t know, a period of 12 to 24 months, but I think everything’s coming back now.

And this article, you know, basically just says, hey, student housing was on the up and up before the pandemic, big drop down, and I think we’re seeing a V-shape recovery now where we’re getting back to those trends of college tuition is growing and…sorry, college enrollment is growing. Tuition’s also growing, but enrollment’s growing everywhere. And the demand for housing is very much needed, very high.

Scott: Absolutely. And, you know, Jimmy, one thing I’d add to that, you know, we’ve had a lot of discussion of sort of economic uncertainty, the landscape, some people are thinking, “Hey, is recession on the way?” Let me tell you one thing that…

Jimmy: Or is it already here?

Scott: Or is it already here? Exactly. And let me tell you one thing that performs well in recession and that is colleges and universities. A lot of folks go back to school and want to get more degrees and all of that. So if you’re looking at student housing and maybe there’s a recession happening, well, I don’t think student housing will be impacted and it could be impacted positively.

Jimmy: Yeah. Quite possibly, Scott. I do think I would keep an eye on the rising trend of online coursework, especially we saw throughout the pandemic how much more prevalent that became. But I still think, you know, there’s something to gathering physically in physical spaces for college students and anybody else who wants to go back to school and get their degree or their next degree, or whatever the case may be.

And I think you’re right about typically in past recessions, we’ve seen college be fairly resilient because sometimes you get laid off, you lose your job, you go back to school or…

Scott: Go back to school, change careers.

Jimmy: Yeah. Exactly. Exactly.

Scott: So speaking of just the greater, you know, economic uncertainty and climate we’ve seen, I want to cover this next article here, which talks about supply chain backups. And this is postponing apartment opening. So little less good news when you’re talking about multifamily investment. And the fact is that in February, the apartment completion rate fell to the lowest level since 2016.

And this is according to RealPage, the number of authorized, but not yet started projects though rose 31% year over year in March. And a lot of this article focused on third-party managers, which we’ve spoken about before on this show, but it gives them challenges when they are having supply chain backups. You have construction challenges and you are trying to set those apartments to be filled with residents.

And you’re trying to find, you know, renters and get those occupancy rates up. And so you have this sort of logistical, I guess, labyrinth to navigate. And a lot of this is being driven by these supply chain backups. When you are looking at construction, it is just so timeline-oriented and anything that throws a monkey wrench into such a timeline can really set things back and create challenges, especially when you’re trying to stabilize properties or what have you.

Jimmy, I’m curious to your thoughts on this.

Jimmy: Yeah. Well, it’s a problem that everybody is encountering, right? You go to the supermarket, you can’t find certain items. You go Target, Walmart, Costco, you can’t find certain items. I mean, what’s been in the news every day for the last couple of weeks, baby formula shortages all over this country. It’s crazy. And it’s the results of, you know, overzealous regulation, especially when it comes to baby formulas, but it’s also the results of these COVID mitigation strategies.

And you can debate the merits of those strategies until the cows come home. But the fact of the matter is those COVID mitigation strategies resulted in a lot of people quitting their jobs, not going back to work, a lot of factories and shipping ports being shut down for weeks and months at a time. And we haven’t really seen everything come back online immediately.

When you shut down the economy, like we did in this country and like so many other countries all around the world did in, when was it about, March of 2020. I mean, that was over two years ago, you know, we were able to shut it down fairly quickly, just kind of like pulling a lever down, but flipping the switch back on, it’s not so easy just to flip it back on.

It takes a long time to ramp back up. So I think that’s what we’re seeing now with everything really, and this article, you know, points to several different types of delays. It’s not just lumber all the time, right?

Scott: It’s not just lumber.

Jimmy: It’s not just the building materials, although I’m sure there’s some of that, but some point to, you know, the appliances aren’t ready. You’re going to open up an apartment building that you think is going to be stabilized in the spring, but then you don’t have any washer/dryers for the unit. So you’ve got these big holes in the apartment. You don’t have the ovens or the stoves, ranges, whatever. You don’t have the refrigerators. So then it sends these managers scrambling to like fulfill those orders last-minute because the bulk stuff’s not coming in.

We got windows that are…you know, you can’t get windows. So it doesn’t take much to delay a construction project.

Scott: And Jimmy, to jump in there, I had a podcast episode with Brian Purnell and he was talking about a value-add property that he has in Texas. And they had a huge problem because they, you know, acquired the property and they were going through their renovation process. And one of the things they wanted to do was install wireless routers and, you know, make sure that it was up to the wireless standards that so many renters have these days.

And certainly when we’re talking working from home, etc., etc. All of a sudden their supplier had some issues with getting the supply. And then we talked about inflation. All of a sudden the prices were much higher than originally quoted. And they were saying, well, it’s tougher to get the materials. It’s tougher to get it and it’s going to take longer and it’s going to cost you more. And that impacts these renovation projects, that impacts the value-add timeline.

Now, of course, they’re navigating it, but those are some of the challenges that folks are facing when we talk about the supply chain and inflation and materials.

Jimmy: Yeah. That’s exactly right, Scott. And at the end of the day, all of these delays, whether it’s appliances or windows or other building materials, or in your case, even just the wireless routers, it can delay the time from, you know, start of construction to stabilization and it just, you know, delays that steady cash flow coming in.

Scott: Absolutely. All right. I want to shift gears, Jimmy, and talk about a specific market, a specific metro that you’re quite familiar with, and that is the Dallas-Fort Worth area. And this is some good news for investors, certainly those who have some exposure to this market and Dallas-Fort Worth leads the nation in multifamily investment for the fourth consecutive quarter, which is pretty impressive.

I’m quoting here, “Investors are banking on high-growth markets with accelerating rents,” like we talked about, “and DFW checks both of those boxes. It is expected the population of Dallas-Fort Worth will outpace the nation by about 250% for the next 5 to 7 years. And this is in part due to high levels of in-migration.”

Jimmy, not great news for your commute and general traffic as you’re going around town, but great news if you’ve got some investments in multifamily in Dallas, I’m curious to your perspective.

Jimmy: For sure, Scott. Yeah, I’ll just give you a couple of anecdotes. Well, good news is my commute… I work from a home office now. So I don’t have much of a commute. But I can’t drive in any direction without seeing cranes all over the place. It is kind of crazy the amount of construction that’s happening, the amount of development that’s happening.

And I live in Fort Worth, and if you drive from Fort Worth to Dallas, there’s all of these mid-cities in between. I mean, it’s probably like about a 45-minute drive between those 2 downtowns. And there’s just this huge expansive area in between. That’s actually where Arlington is located, where the Texas Rangers and the Dallas Cowboys play, but then all around all those areas, there’s just so much land that is just ready waiting to be developed.

And for sure, there’s a lot going on in the Dallas-Fort Worth area. You kind of stole my thunder. I was going to mention that 250% metric. I’m looking at this article right now to see if there’s any other little bullet points that come out. Oh, well, I’ve got a question for you actually, Scott.

Scott: Sure.

Jimmy: And my question is, and I guess I’ll preface it by saying this, if you do like a Google search for Dallas-Fort Worth overbuilding, you’ll find articles from this year, last year, the year before that, the year before that, like all the way back to the early 2010s, mid-2010s. About 2014, 2015 is when people first started worrying about are we overinvesting in Fort Worth and Dallas?

Are we overinvesting? Are we overbuilding? Is there an equity rush that’s coming in that’s going to lead to a situation where, hey, wait, if this in-migration slows a little bit, have we overbuilt things? And do you have any theory there or any take on, you know, at what point does it become a concern, all of this multifamily investment equity rushing into the DFW area?

Does that concern you at all about that particular area or any other areas around the country?

Scott: Honestly, at this point, it does not. We still have a clear mismatch with supply and demand really across the U.S., but then when you look at specific metros like Dallas-Fort Worth, it’s just so significant. Even this very article says an imbalance between supply and demand prompted rents in DFW to grow by an average of 18.5% year over year.

So that’s the market right there reflecting that, no, we need more housing. We need this. We need more supply. And again, this reflects a broader trend that I’ve seen. And when I talk to developers and sponsors, they talk about this migration to red states in the Sunbelt and Texas specifically, whether it’s from a cost of living standpoint, a more business-friendly economy, you know, no state income tax there in Texas, or other things like, you know, getting away from maybe some of the COVID restrictions in other states.

Having more ability, now with this rise of work from home, to say, “Hey, I like that big New York City salary, but maybe I can live somewhere where maybe my income goes a little further, and I can also have a little nicer weather so I can keep that BMW top down more months out of the year.” I think those trends are clearly not changing.

We’ve seen folks leaving California and heading to Texas. We’ve seen how Austin is, you know, flexing its muscle as an answer to Silicon Valley. We’ve seen so much of this happen. And to me, yes, there’s a lot of building and a lot of investor capital flowing into these markets in multifamily, and that’s for a reason.

Folks that are quite smart and quite plugged in are still saying, “Look at these numbers, look at the supply, look at the demand, I think this is exactly where we want to be.” And so I don’t look at that changing. That 250% number, that says everything to me when we’re talking about, you know, supply/demand and if it’s sustainable.

And from an investment standpoint, if it’s worth putting your capital towards projects in Dallas-Fort Worth or larger Texas.

Jimmy: Sure. Thanks, Scott. And if I can just add one more point, and I know we need to move on to the next article. I think we got couple of more articles still, one more article still.

Scott: One more article.

Jimmy: You know, you mentioned, you know, rush to red states that are more business-friendly. I would say they’re really investor-friendly too, in particular, multifamily and real estate investor-friendly. We see a lot of other municipalities and jurisdictions around the country that are imposing rent controls or other sorts of regulatory activities that are designed to protect renters, but they harm a lot of investment.

They stifle a lot of investment in multifamily. New York City, pretty classic example of an area that’s looking to do more rent control with some recently proposed legislation. There’s no such thing in Texas. And I hope and I don’t think there ever will be, at least not for the foreseeable future. So it’s just a lot more investor-friendly here.

You don’t have to worry about the government coming in and saying you can only charge X amount under market rate for a particular unit.

Scott: A hundred percent, Jimmy. I think that landlord friendliness is something that many investors and sponsors and developers look to when they are, you know, evaluating the landscape and what markets they want to play in.

Jimmy: And I would even say, you call it landlord-friendly, I would say it’s actually just citizen-friendly. I would say certainly it’s friendly for the landlords and it’s friendly for the investors, but in the long run, I feel like if you make your state investor-friendly and landlord-friendly, that encourages more construction, more investment in that area, which in the long run will benefit everybody, renters included.

Scott: Right. And the proof is in the pudding, Jimmy, when you drive around town and see all those cranes, right?

Jimmy: That’s right.

Scott: Okay. Moving on to our last article here. A bit of just development news…

Jimmy: Capital Square is raising a whole bunch of money, it looks like.

Scott: They’re raising a whole bunch of money. They have launched a $300 million development fund and the fund is planning to invest in the limited partner equity portion of the capital stack and will focus on ground-up multifamily communities in emerging secondary growth markets that aren’t seeing institutional capital investment.

And according to the firm, some of the initial target growth markets include Richmond, Virginia, Charleston, South Carolina, and Knoxville, Tennessee. And I think this is interesting because we were just talking about Dallas-Fort Worth and all the capital flowing into that in terms of development. And you look at Capital Square, and what they’re saying is, “Hey, there are some great secondary growth markets out here that aren’t seeing the same investment.

And that’s what we want to play in. We want to look at, you know, places like Richmond, Charleston, Knoxville,” again, still red states, still a lot of, you know, investor-friendly policies and the like, but not necessarily top of the map like some of these other metros. I’m curious to your perspective here, Jimmy.

Jimmy: Yeah. I think this has been Capital Square’s MO for a while, and full disclosure there, an advertiser with our firm, Scott, they’ve advertised on OpportunityDb in the past and they presented their investment offerings on OZ Pitch Day. And I think maybe they were on Alts Expo a while back. Or if they weren’t, they should have been, and hopefully, they will be coming up here. They’re a very large sponsor of Delaware Statutory Trust product, DSTs, which are fractionalized 1031s. I think you’ve covered that on an earlier episode, or I know we did at AltsDb at least.

And then they also have a handful of Opportunity Zone projects. And they all do seem to be concentrated in that, you know, Southeastern, Mid-Atlantic portion of the United States. That’s where they hail from. That’s the area that they know really well.

Scott: That’s their bread and butter.

Jimmy: Exactly. So, you know, one of the things I really like about Capital Square is that they have these offerings…and I haven’t looked into this particular fund, this multifamily development fund that’s looking to raise equity from institutional investors, but at least to their DST and their OZ products, they’re very tax advantageous for investors.

And that’s why I really like what they’re doing over there. And they have a lot of experience, and I don’t even know how many billions of dollars worth of development projects they have currently and in their pipeline. But they’re a good group of people over there at Capital Square, for sure.

Scott: Absolutely. And one thing I’d add too is, you know, and this is from this article as well, they are bullish on class A multifamily investments due to the sector’s stable cash flow, appreciation potential, and inflation protection.

Jimmy: And in secondary markets, right?

Scott: Yes. And in secondary markets.

Jimmy: Secondary and tertiary markets. Because I think they see… Sorry, I keep cutting you off [inaudible].

Scott: No, go ahead.

Jimmy: Well, I think they see that, you know, there’s plenty of institutional capital in LA, New York, Boston, Bay Area, you know, these huge primary markets that everybody thinks of, but, you know, maybe the opportunity is in a little bit more of an opportunistic type of market. Just looking at the article, like Richmond, like Charleston, like Knoxville, you know, these areas that are, you know, a little bit off the beaten path, but not too much.

I mean, there’s still blossoming cities, so there are still blossoming Metro areas, but certainly not exactly New York City exactly, right?

Scott: Right. And again, we’re talking about class A multifamily properties, which can command those higher rents, do tend to have renters with maybe more stable incomes. And when we’re talking about sort of this new work from home landscape that we see, folks with, you know, well-paying jobs that they can work remotely.

And so then they look at those four walls and their amenities, and they’re thinking, “You know what, I want to move to a friendlier state in terms of business and maybe lower cost of living, but also I still like some amenities and I want to have a nice place where I can have my home office, get my work done, and then I enjoy my beautiful fixtures,” etc., etc. And I think that that is where they’re playing so that you have that stability and then you’re in this market that does still have that growth, which offers just a tremendous amount of potential certainly for investors as well.

Jimmy: I think you nailed it, Scott. I don’t have anything else to add. That was beautiful, man.

Scott: Awesome. Well, Jimmy, this concludes our first ever news round-up June 2022. Honestly, a lot of great news. You know, some challenges, but I think, overall, if I were summing it up, I’m pretty bullish on multifamily. I don’t know about yourself.

Jimmy: Oh, I am as well. And I’m actually bullish on this segment, the monthly news round-up. I hope we don’t get too many negative comments and have to shut it down, but I think we’ll probably do it again in July, don’t you think looking back on June?

Scott: I think that’s the plan. And hey, if you aren’t getting a hater, you’re not doing it right.

Jimmy: That’s true. That’s true. Good point.

Scott: Awesome. Thanks again, Jimmy.

Jimmy: Thanks, Scott.