Housing Market: Rental Property Market
The US rental property market is growing but unfortunately not keep up with growing demand.
Although the issue isn’t an important one for the Federal government, an ailing rental property market and landlords in distress won’t bode well for housing workers, who are expected to begin work again post-pandemic. And if wages don’t rise, they’ll be stressed to pay the going rate for a limited supply of rental houses and apartments.
And rental income units are an increasingly important part of the US housing market. The return on expenditure in the property market is much better than many economic sectors. If the public knew more about the real estate markets, they might encourage policies and actions needed to end the needless suffering of homeless Americans.
Infrastructure Money to the Rescue?
If the bipartisan infrastructure deal goes through, the rental property market will heat up. Both Federal and state governments are recommending renter bailout packages for renters. That bailout will help US landlords and rental property investors considerably as rent in arrears had reportedly passed $70 Billion.
In California, Gavin Newsom has announced a state plan regarding paying renters rent in arrears. The Federal eviction moratorium has been extended to July 31st, yet extensions may be less likely going forward. Without government aid, the end of the moratorium would create a crisis in all states.
With stimulus, the threat of the debt/eviction crisis is significantly less, and this may draw a lot of interest from real estate investors. With construction picking up, and inflation rising, it’s going to be a busy summer and fall. A lack of rent debt (due to stimulus checks and stimulus funding payments for pandemic debt) means American renters can move forward and bid higher on their future rental accommodations.
Why the Huge Demand for Rentals and Why are Prices Rising?
Zumper’s June rent report shows rent prices are rising, and they’re rising faster in big, expensive cities. Rent prices have risen 5% in San Francisco, Austin, Fort Lauderdale, and St Petes. With stimulus checks and a return of economic activity as states reopen, demand for rentals, especially in apartments that were abandoned last year, will grow.
The forces that caused landlords to drop their prices and suffer vacancies have eased. The rise in rents for the rest of 2021 and 2022 might be surprising to some.
While renter are asking if rent prices will fall, it appears they are ready to rise much further. The US rental property market is characterized by severe shortages, heightened demand, high property prices, and significant wealth for those who can rent. This is driving the investment into the higher priced segment and not into the affordable segment.
As home prices skyrocket, a good portion of the population cannot compete for a home or condo purchase. This is where the rental market was born, and today it is a fast growing and dynamic industry. You’ll find more on what’s driving demand for rental property and why rent prices will not fall, but rise further as we leave the pandemic era.
This 2021 rental housing market report reveals market trends, demographics, business challenges, rent yields/returns, and where the opportunities might be for investors and landlords. Info is draw from numerous credible sources including Zumper, Harvard University, Freddie Mac, Apartmentlist, Attom Data, PWC, Urban Land Institute, Census.gov and others.
While research and survey sources vary in their estimates you can round off the figures and come to some reasonable conclusions for you particular use.
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Small Landlords Still the Backbone of the Residential Property Industry
When the rental housing market failed last May, the government leaned heavily on all landlords to pay the bills while tenants and mortgage banks trembled in fear. We all discovered how important local landlords are to communities and local economies.
While big real estate corporations received infusions of stimulus cash, small landlords found rent default was a problem and receiving stimulus funds themselves to be difficult. Many of them reported selling condos, apartments etc., at a discount to to cash rich buyers.
Despite an unfair playing field, it is likely small real estate investors and small business landlords will find a way to buy rental income properties and flourish in 2021, 2022 and the next 5 years. We’ve learned that for some, being rental landlords is a business not a hobby and new solutions will help.
the market is forecast grow at a CAGR of 8% from 2021 to reach $2216.2 billion in 2023
What is the Size of US Rental Property Market?
According to Researchandmarkets, the global real estate rental market was expected to grow from $1759.8 billion in 2019 to $1787.8 billion in 2020 at a compound annual growth rate (CAGR) of 1.6%. This estimate was affected by the Covid 19 pandemic. They believe the market will recover to grow at a CAGR of 8% from 2021 and reach $2216.2 billion in 2023.
The vacation rental market is a component of the greater residential market. It is expected to reach USD 113.9 billion by 2027, expanding at a CAGR of 3.4% over the forecast period according to a 2020 report by Grand View Research, Inc.
Yet this recovering US rental housing market faces some perils. Government regulations, construction costs, unaffordable rent prices, homelessness, the end of pandemic stimulus payouts, rent default, and eviction moratoriums poses risks for investors.
Multifamily and apartment sectors were hit very hard during the recession and are just now beginning to fill vacancies created during the pandemic.
Key Questions for Rental Property Pros
⦁ what properties should I buy or sell?
⦁ is this a good time to enter the rental property business?
⦁ is it a good time to launch a property management business?
⦁ which demographic should I target?
⦁ why are rents high and will they fall soon?
⦁ are urban apartments too risky an investment?
⦁ should I consider single family houses only?
⦁ which cities are going to see the best price growth and higher rent yields?
⦁ is rental income property the investment for the next 5 years?
The 2021 PWC/Urban Land Institute report makes these recommendations about which types of properties to buy or sell, in the graphic below.
Student rental housing was hit hard by the pandemic with school and border closures. The belief is that schools will return to in person classes. However, the glory days for student housing may have passed with virtual remote learning seeing more use and international education slowing. Demand for luxury level student housing for wealthy foreigners may not be similarly impacted.
And those landlords who improve their amenities and services, to create the best renter experience possible, will see their rentals in higher demand and likely enjoying higher rent prices.
Single family and moderate income apartments are where the big demand is and accordingly, recommendations are to buy or hold those properties. High density apartments are seeing lower vacancy rates as vaccinations increase and workers return to the cities to work.
After viewing these stats you might question whether the housing market is a golden egg or a ticking time bomb. If you choose your properties well and manage them professionally, the question is a moot point. Those who are aware of market pressures, and political and economic trends, present good value to renters, will adjust their portfolios when needed.
Adopting a modern property management software or landlord software is the best way to automate, control risk, and optimize profit margins. To those points, technology is impacting the rental housing market creating new revenue opportunities for landlords and help keep pace with changing renter demands.
Smart property investors are highly tuned into macroeconomic outlooks, political changes, and other forecasts.
The rental housing market has been steadier over time and has been less likely to collapse, as when homeowners lose their homes in a recession, they move into the rental market and become long term tenants. Recession resistant investments are attractive for long term investors, or those needing a short term haven.
The Rental Property Report
For your convenience, this completely revised 2021 rental housing market report has been divided up into digestible components:
- General State of the Rental Market
- Rental Market Statistics & Rent Prices
- Supply and Development Constraints Continue
- Rent Yields remain high
- Rental Market Statistics
- Top Drivers of the Rental Property Market
- Top Cities for Rent Growth
- Pandemic drives demand for more room
- Apartment and House Rent Prices Forecast for 2021?
- Multifamily outlook
- Harvard University Study Findings
- What are the Challenges for Rental Property Owners?
- Rental Property Types
- Are Renters are Getting Squeezed Too Hard?
- Should I Buy Rental Property as an Investment?
- US Housing Construction Forecast
1. General State of the Rental Market
The pandemic definitely altered views and statistics for 2020 and 2021. As the Covid 19 pandemic passes we are seeing rises in prices, i.e, the airbnb short term rental market is seeing rapid recovery. Most may feel it will take years to recover, yet Fed stimulus, return to work routines, and a demand for vacation rentals will buoy the industry faster than expected.
This stat from Zumper shows rents are on the rise, and that rental apartments are increasing in availability yet still near record lows.
This recession is unusual as vacancy rates are normally high during economic downturns.
See more about the current population survey at Census.gov.
The rental property and property management sectors are huge and growing given more people will be forced to rent. The 2019 forecasts couldn’t foresee the impact of the pandemic and so the predictions of the last 2 years have been way off. Forecasts for 2022 and the next 5 years have been withdrawn.
3. Supply and Development Constraints Continue
We wonder if the market is splitting to serve the haves vs the have nots. The haves do not appear to be stopped by constrained supply. In fact, the luxury market is well served and new construction of luxury units may not be as affected by anti-development regulators.
Although stimulus money may be flowing to state and city governments, regulations may prevent them building multifamily residences. The costs and logistics of such building projects are a big issue.
The key issue with the housing and rental markets is the inability of different levels of government to agree to permit building. High construction costs, rising demand, regulations, and few investors willing to risk their money for huge, speculative projects in the rent control era, means it’s more likely rents will rise.
Some question whether increased supply and high density will solve anything. There’s a point to be made that even if you build more affordable units in California, New York, or Miami, more people will move there and fill them up. Prices therefore may not fall given there is continuous demand.
4. Rental Yields Still High
Those investors in the rental market have done well, with yields (above 30% a couple of years ago in some cities), and even now some still reporting solid rental yields. Pandemic destination cities where urban residents have fled to during the pandemic fared very well however with the end of the pandemic, questions are being raised about the outlook of those cities going forward.
Will work from home employees be forced back into cities, or will they lose their jobs? It depends on political decisions made this year. Current landlords, burned by rent default losses and illegal occupation of their units are hoping 2022 will finally see things back to normal where they can run their businesses profitably.
Attom Data reports that the average annual gross rental yield (annualized gross rent income divided by median purchase price of single-family homes) in the US fell to 7.7% in 2021, down from an average of 8.4% last year.
It’s believed rising rates and rising home prices, along with flat rent prices are eating away at yields. They report the US counties with the highest potential annual gross rental yields for 2021 include:
- Schuylkill County, PA, (26.1%)
- Bibb County, GA, (18.1%)
- Baltimore City/County, MD (16.2 percent)
- La Salle County, IL, (14.1%)
- Chautauqua County, NY (13.7%)
And the top major metros with the best rental yields were:
- Cuyahoga County (Cleveland), OH (9.9%)
- Dallas County, TX (8%)
- Tarrant County (Fort Worth), TX, (8%)
- Franklin County (Columbus), OH (7.9%)
- Bexar County (San Antonio), TX (7.9%).
Of course, as the recovery continues and rent and eviction moratoriums are lifted, these numbers will greatly inflate. A new of high rent yield cities will emerge in 2022.
5. Rental Market Statistics
If you’re one who needs statistics to weigh your investments and prices, let’s take a look at some stats that might predict markets in future.
IBIS World published a report recently that reflect the effect of Covid 19 pandemic on high density and high rise apartments. Prior to 2020 the apartment market was rising quickly nearing $192 Billion in the US market and is currently believed to be $174 billion.
Considering the recovery, and growth of rent prices and demand for apartments and condos returning this spring, plus stimulus money rolling into the US, the outlook may push it beyond US$200 Billion by 2023.
The apartment rental sector is huge. It employs over 852,000 people, yet only an average of 1.4 people per business. That reflects the industry is still a small business dominated industry, yet large corporations are buying up more properties and using technology to manage them efficiently.
Renter households are typically younger, less affluent, and more racially diverse than those who own their own homes. Statista reports that half of renters are under 30 years of age and 36% of those renters are in arrears. 38% of renters cannot afford to buy their own home.
However, wealthier renters make a much bigger piece of the pie of late.
It is the second tier of working class renters (earning up to $30k per year) who are finding it increasingly difficult to live on what they have left after paying their rent. Obviously, this consistent trend has to come to an end.
Rather the pouring money into alternative investments, investors might be encouraged to find a way to invest in rental housing.
6. Top Drivers of the Rental Property Market
These 15 factors may influence the rental housing market, priced drops, and which cities will be best to invest in.
- buyer market is young and unable to finance the purchase of a home
- not enough single detached homes available to buy
- risks in buying are high with high prices, rising mortgage rates and housing market uncertainty
- millennials are career-minded and not necessarily willing to buy now
- bank of mom and dad may be running out of money
- home and condo prices too high to purchase
- buyers won’t buy due to mortgage finance restrictions and long term worries over a recession
- cost of living rising
- millennial preference for older urban neighborhoods with walkability
- rents rising too fast compared to cost of buying a home
- cap rates not sufficiently better than other investment options
- immigration into the US is still strong
- retiring baby boomers having tough time places to move to
- more good condos and apartments available because regulations are decreasing and construction techniques are better
- number and share of cost-burdened renters – those paying more than 30 percent of their income rose
If rental properties are even a quarter of the $36 Trillion US real estate market, we can say with confidence that it has major economic impact. The growth in rental apartment, rental condos, and home rentals is creating a lot of jobs including property managers, landlords, and the kind of passive income many investors need.
Cities where investment and development will grow opportunities.
7. Top Cities for Rent Growth
This list of best rent price growth performers from Apartmentlist shows (from March to now) how strong these markets are. Home price values mean improving equity plus tax advantages provides a significant profit opportunity.
Opportunity Shifted Outside Major Metros
Although inner-city apartment and condo rent prices may be falling, in the US, Australia and the UK capital cities, the migration to suburbs and outlying towns is forcing rent prices up in those areas. With lower property prices in those regions and new rising demand from homebuyers and renters, the rent revenue outlook is good.
Charlotte, San Antonio, Milwaukee, and Denver draw interested migrants. Chart courtesy of Zumper.com
If we project beyond summer of 2021, post Corona Virus, if the economy holds out, property rental prices should increase, and inner city apartment occupancy rate may rise again. This might be the basis of property manager’s positive outlook.
8. Pandemic Drives Demand for more Room
The demand for single-family house rentals has grown more intense. And in some cities (in charts below) rent prices are rocketing upward. Opportunities for property investors and property managers have therefore changed.
On a national basis, the rental migration shift to the suburbs and small towns isn’t such a bad thing. It’s resulted in new construction and new jobs in regions in the UK and US that have struggled for decades. And it’s created new opportunities for profitable rental housing investment. New opportunities offer business possibilities for new property management startup companies.
9. Apartment and House Rent Prices Forecast for 2022 and Next 5 Years?
Tenants are wondering if rent prices will fall in 2021? And landlords are wondering about rent and eviction moratoriums, and how they’ll survive without adequate revenue and cash flow.
For most cities, single family house rental prices may continue to rise as they have this year.
And property investors are wondering if rental income and 2021 tax rules will keep the rental housing sector an acceptable market for business. Avoiding big tax losses might be the issue for investors.
What about apartment purchase prices?
10. Multifamily Outlook
Freddie Mac reports that demand for multifamily housing is well down from 2019 levels, -60% in 2020 compared with 2019. Multifamily construction completions in 2020 are expected to nearly match 2019 levels, despite being slowed during the spring and summer of 2020.
They reported that investment activity declined sharply in the first half of 2020 but rebounded significantly during the second half of the year. They expect the multifamily vacancy rate to increase to 5.8%, while rents are predicted to fall -0.2%, leading to an estimated overall decline in gross income of -0.5%. They warn cities such as San Francisco, New York, Washington DC, and Miami will be troubled for some time.
Freddie Mac also forecasts the 2021 vacancy rate will rise 30 bps to 5.8%, while multifamily rent prices will fall 0.2%,
yet that is an improvement on 2020’s price drop of -2.9%.
Class C properties with downscale apartment rental tenants has been a troubled sector for landlords in 2020. The single family housing sector outside of dense inner cities has done well in 2020 and is the focus for investors in 2021.
The 2021/2022 outlook is stronger for single family due to demand for more space from all buyers including millennials starting families.
Screenshot above courtesy of Freddie Mac Multifamily 2021 Outlook Report. Learn more on multifamily in the Freddie Mac report.
For property investors, net operating incomes were growing strongly in the 3rd quarter of 2019 and investors were really stepping up investments. According to CoStar, the dollar volume of multifamily transactions rose 9% year over year, to $94 billion, through the first three quarters of 2019.
- new construction units are focused on higher-priced units
- air conditioning and in-suite laundry have grown strongly
- construction costs are rising
- apartment prices have doubled since 2010
- low rent apartments are increasingly unavailable
- actual renter market has been shrinking
- middle-income renters are increasingly cost-burdened
11. Harvard University Findings
Harvard produces a report each year on the rental market entitled: America’s Rental Housing. In it is a wide variety of stats that reflect the condition of properties and renters across the US. (See the German, UK and Australian reports). It isn’t up the Covid 19 era however.
Renters are wealthier as more of them are earning above $75,000 per year, but they are renting vs buying a home. Those at the bottom of the renter pool are earning less and renting less. The 2020 Harvard report didn’t specify what has happened to the lower-income group, but notes that homelessness is rising.
12. What are the Challenges for Rental Property Owners?
High rents and low costs are not a given. Markets change, and your renters may not be able to keep up with higher rents and young renters expect different services.
For landlords who resist change and technology, pressures and responsibilities are mounting.
Landlords’ biggest challenges is in daily property management including maintenance, bookkeeping, tenant management, and meeting their budget. Keeping up with advancements in technology is another challenge that pressures many. In fact, a trend to migrate from old software solutions to more modern platforms is underway.
Landlords must learn new ways of doing business.
Landlords are faced with these top challenges:
- earning a profit
- finding a good property management company
- finding a good online property management software
- meeting tenants demands for instant service, self-service, extra amenities, and online payments
- managing the expense and risk of modernizing old rental properties
- finding affordable prices
- managing irate tenants who can’t afford their rising rents
- late rent payments, rent defaults, and rising rate of evictions
- selling then buying better properties with sustainable ROI
- working long hours, handling too many tasks and getting them all completed
- meeting government regulations
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13. Rental Property Types
There’s no shortage of rental property types. From student housing and seniors housing, to fix and rent single family, to beachfront vacation rentals, and from studio apartments to luxury condos.
According to Rentcafe, the most searched for apartments were 2 bedrooms (45%), 1 bedrooms (27%), 3 bedrooms (16%), and Studios (12%).
|Bedroom Type||Average Rent||Change M-o-M||Change Y-o-Y|
National Data Courtesy of Rentcafe.com
14. Are Renters are Getting Squeezed Too Hard?
One controversial, IMHO, is that rental housing is not being created or marketed to low-income earners. The lower-income segment simply isn’t being served. It might be said however, that governments could free up land, provide tax relief, and assist developers in building appropriate low-income housing solutions.
Such an effort may be well beyond the means of the private sector rental housing investment community in terms of cost and risk. Governments can if they choose, make it profitable for such housing to be built.
According to the Harvard report, 10.9 million renters spent more than half of their incomes on housing in 2018. In that year, the number of severely burdened households increased 155,000, reducing the total improvement since the 2014 peak to just 483,000. Cost burdened renters rose again in 2018, rising by 261,000 to 20.8 million.
They found that 72% of renters earning less than $15,000 annually were severely burdened, along with 43% who earned $15,000–29,999.
15. Should I Buy Rental Property as an Investment?
In their report, PWC/ULI believe property prices will fall as buyer incomes fall in 2021 and 2022. Their survey revealed those who foresee good/excellent prospects has dropped this year.
Rents keep rising in 92% of cities, and will 2021 see the same positive circumstance for rental property investment.
From Florida to California to Hawaii, the rental market remains constrained. Although prices have flattened or fallen in many areas, the revenue potential for builders and property owners is positive.
The US rental property market is a growing chunk of the now estimated $127 Trillion global real estate market which accounts for 60% of all mainstream assets.
The rental property market is less than half of the $36+ Trillion US Real estate market, yet for small property investors, it’s a fertile paradise.
Immigrants are a big component of rental demand and the US rental market is expected to focus more on immigrant buyers in the next 12 years.
16. US Housing Construction Forecast
The housing construction market is brisk and expected to continue rising. Single-family detached and low rise condominiums are the most desired properties. The housing market needs 1.4 million new homes each year and this could increase in 2021 due to immigration.
“Though the multifamily sector is performing much better than nonresidential construction, developers are facing stiff headwinds in 2021,” said NAHB Chief Economist Robert Dietz. “Shortages and delays in obtaining building materials, rising lumber and OSB prices, labor shortages and a more ominous regulatory climate will aggravate affordability woes and delay delivery times.”
NAHB analysis of Census data reveals that 34% of total multifamily construction occurred in lower density, lower cost markets in 2020. “These areas have outpaced higher density markets over the past four quarters and we anticipate this trend will continue this year,” said Dietz in an NAHB report.
A recent report from RentCafe suggests that multi-unit construction is up 60,000 more units in January.
The US property rental market is a wonderful opportunity to earn passive income or ramp up earnings with active property management. Make sure you are utilizing the best property management software to ease your workload and create efficiencies and create sustainable cash flow.
Take a test drive of ManageCasa the best property management solution for landlords, property investors and property management companies. You’ll understand why a simple, online, cloud-based property software solution is the way to go.
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