The Trajectory of Rental Rates through 2023
My investments consist of SFR's and a bunch of LP & GP interests in commercial multifamily apartments. In 2021 we have seen quite an acceleration in unit rent rates across our multifamily portfolio. Our prognosis for 2021 was optimistic but cautious. But one of the disadvantages to my personal SFR portfolio has been keeping up with fast-changing rent rates in these Central Texas markets. Our commercial multifamily units turn over on a regular basis, so naturally, we have units that are constantly being reset to keep up with the market. With SFR's it is a different story. Currently, I am on average about $200/month below the market on my SFR's. One property that leases for $1335/month, should now catch $1600 in this particular submarket.
So where is this going? Jerome Powell, Chairman of the Federal Reserve told us in the spring that the inflation we're seeing is 'transitory'. Well, this is flatly untrue. Take a look at the CRB index (an index tracking commodity prices) and you'll see a raging bull market in lumber, soybeans, corn, cotton, oil, natural gas, and so forth.
Does this look transitory to you?
The Dallas branch of the Federal Reserve last month published data showing robust rent growth through 2023! And this also is not transitory. Take a look at the chart below.
The growth in housing prices has traditionally been a leading indicator of growth in rent rates. The lag in rent rates is about 18 months. Given the price moves we have seen in 2021, the indicators suggest further price inflation in rent rates. The Fed models go out through 2023. When you add supply issues in the housing market and projections of an expanding labor market, it's easy to see how inflation will accelerate next year in rental rates. In southern states where migration is expected to continue from places unfriendly to labor and capital, these data would be juiced even more.
The challenge may be managing rent increases for owners of SFR's. Balancing the business, increased taxes, and other costs with the need to be reasonable with tenants will be tough. I feel better about owning multifamily in this climate, to be honest, due to the automated built-in turnover at market rates. In any case, RE investing is looking bright into 2023, but it will not be without its challenges.