Make no mistake: RealPage Market Analytics is not forecasting a recession or downturn in the multifamily housing industry as of now. But that doesn’t mean industry professionals shouldn’t exercise more prudence as risk becomes more and more prevalent. Here are five risks to monitor as record high rent growth eases in mid-2022. While the list isn’t fully comprehensive, it still serves as a well-rounded set of indicators to observe through the coming few months.
Will Inflationary Pressures Continue to Mount?
Inflation concerns are arguably the biggest question mark surrounding the near-to-mid-term economic outlook. These concerns are real and have very tangible impact on broader economic performance.
Rents (among other things) run downstream from inflationary pressures. Inflation is certainly one of the reasons today’s marketplace is experiencing all-time high rent growth. The good news for apartment owners remains. Thus far, rising rents and rising inflationary pressure haven’t caused a precipitable drop in the ratio of renters paying rent. And across Class A and Class B product types in particular, the pace of rent growth (even on lease renewals) is continuing to trend ahead of the reported CPI rate.
Nevertheless, with rising inflation comes the risk of fewer collected payments. While recent inflation measures such as CPI suggest that the pace of inflation is levelling off as the Federal Reserve works to wrangle in generationally large inflation rates, it can’t be overstated just how important it is to continue watch those inflation measures.
If Wage Growth Slows, Then What?
Income growth has been healthy throughout the pandemic era, according to RealPage data tracking resident incomes (based on reported resident income at time of signed new lease agreement). Resident incomes, indexed to January 2020, are up more than 24% through June 2022. Meanwhile, asking rents are up a nearly identical rate (also 24%) during that period. Thus, it doesn’t appear that rent increases over the past two years have resulted in a shift toward high rent-to-income burdens.
Still, wage growth presents a risk. In short, should wage growth slow – or in a worst-case stagflation scenario, totally stall – that would have implications for the housing market. That isn’t expected at this time.
Affordability and rent to income ratios will be a huge topic of conversation at our RealWorld 2022 conference.
Will Consumer Confidence Erode?
Consumer confidence is less tangible than inflation and wage growth, but can still have an impact on the apartment market. As consumer confidence declines, so does discretionary spending, which feeds into a broader economic slowdown.
One indicator of waning consumer confidence in the multifamily housing market is marked by roommate households doubling up. During periods of higher risk and/or lower consumer confidence, renters may take on roommates to offset costs. On a large scale, this doubling up of renter households would result in declining occupancy rates which would, in turn, likely impact rent growth.
Should a multifamily performance downturn materialize, this risk of doubling up would be lower stakes than in previous downturns. The sharp increase of employees working from home has resulted in a lot of single-occupancy renters leasing two-bedroom units. That trend doesn’t appear to be reverting anytime soon.
Employment Market Indicators: Strong, Weak, or Somewhere in Between?
The employment market is a pivotal indicator for broader economic trends, and with good reason. What happens with employment is, in many ways, inextricable with what happens with broader economic movement. Thankfully, data providers such as the Bureau of Labor Statistics keep a close eye on national and local employment data.
Should the employment market slow down (with a significant slowdown in job creation), that bleeds over into the multifamily housing market. The once-touted jobs-to-permits ratio (meaning every X number of jobs created translates to Y housing units filled) is less effective today than it was historically due in part to remote workers. After all, a job created in San Francisco could be for a person leasing an apartment in Denver.
Still, examining year-over-year job growth and job openings and labor turnover (or JOLTs) data can give an idea of overall economic health. Any considerable slack in the jobs market could translate to slowing housing demand. A slowing tech sector could impact select tech-heavy metros, though it will be worth watching to see of the job market’s relationship to multifamily housing performance is as tightly correlated today as it was pre-pandemic.
Correlation vs. Causation: Indicators that Can Precede (But Don’t Necessarily Cause) Downturns
Every economist knows correlation does not equal causation. That said, a few variables could signal a downturn while not directly causing said downturn.
A yield curve inversion has been a long-standing signal of movement in the bond market and is oftentimes a solid predictor of a recession. To finance its debt, the U.S. government issues treasuries. Under favorable economic conditions, long-term treasuries pay higher interest than short-term ones. However, as investors become more pessimistic about the future of the economy, they tend to invest more in long term treasuries, as they don’t see better long-term alternatives. Consequently, as the demand for long-term treasuries increases, the government doesn’t have to pay high interest on those instruments to lure investors anymore. Therefore, the interest on the long-term treasuries decreases, but the yield on the short-term bills increases. The government would now have to pay higher interest on those instruments to attract buyers. If this trend persists, the phenomenon of the inverted yield curve occurs: the yield on short-term treasuries rises above that of the long-term ones.
Other indices such as the ISM Manufacturing Index (sometimes called the Purchasing Managers’ Index) is a good proxy indicator for business-to-business order volume. If ordering activity declines sharply and rapidly enough, it can signal that manufacturing and affiliated order volumes are slowing. That can be a leading indicator for less capital flowing through the economy.
Lastly, probably the single most-watched recession indicator is the stock market. But it’s important to remember that the stock market is not representative of the overall economy, as evidenced in spades through the first half of 2022. The stock market got off to one of its worst starts on record, but the broader economy keeps growing.
Some of the biggest stock market pullbacks have come from the tech sector in 2022, and we are hearing more and more news of layoffs in the tech industry. As a result, markets with a tech-heavy profile (such as the Bay Area and Austin) should be monitored more closely. For now, impacts appear to be isolated to local tech industries.
