With rent growth flattening, some parts of the country are seeing a rise in rent concessions.

The march back toward normalcy in the rental housing industry includes owner-operators offering new residents rent concessions. According to data released by Zillow in May, 27% of the rentals being offered on the site offered at least one concession as compared to 21% at the same time last year. The most popular incentives are free rent or parking. By comparison, concessions were featured on 33% of listings in April 2021 as the country began pulling out of the pandemic.   

Larry Jacobson, President, Jacobson Equities, which is based in the perennially hot Los Angeles real estate market, sees the signs pointing to stabilization and slight improvements in rent growth. “It’s not the 10% to 13% recorded in 2022 and 2021,” he says. “But, after more than three years of roller-coaster-like swings, we hopefully are returning to a more normalized market. Concessions are generally limited to micro-locations where new product may be impacting leasing.”   

Brennen Degner, CEO of Denver-based DB Capital, is also employing limited and strategic concessions. “The most common we’re seeing portfolio-wide is a two- to three-week concession tied to immediate move-ins,” he says. “A lot of the rental demand is for 60-plus days out. We are actively building strategies to try to incentivize quick move-ins that positively impact occupancy faster.” 

Degner’s winter in the Denver market was marked by a drop in leasing velocity but traffic has since picked up speed. “Most of our concessions are geared towards backfilling from the slowdown that increased vacancy from December to early April,” he says.   

Geography Plays a Role 

As usual, migration patterns and geography play a major role in what’s being offered. Zillow’s numbers indicate that concessions are more common this year in 46 of the 50 biggest U.S. metro areas.

The leaders include Washington, D.C.; San Jose, Calif.; Salt Lake City; Nashville, Tenn.; and Seattle. Even in the big metros, the trend is not universal, with less than half the listings offering a move-in special. The cities with the lowest number of listed concessions include New Orleans, Milwaukee, Miami and Oklahoma City.   

The Sun Belt remains warm but not as hot as it used to be. Jacobson has properties in Texas, California, Colorado and Florida, all key market bellwethers. “We’ve seen solid performance from our properties in each location,” he says. “I think a large factor in any asset’s performance is going to be local economic conditions and supply and demand factors in the micro-location. The economy is still growing, albeit slowing down. Job growth and population growth are still major drivers of rental demand and are being reported in most regions where we have assets.” 

The challenge of attracting residents to new buildings remains a ripe spot for concessions. “In Denver, we own some workforce assets that have a waiting list, and we are constantly leased in the high 90s,” said Degner. “At the same time, we have a newer asset close to downtown Denver where we are seeing three to six weeks of free rent as a market concession.” While similar assets in the same city require different marketing approaches, national averages indicate small fluctuations in rent growth. 

According to a Yardi Matrix report published in April, rents have increased two months in a row but by only $5 between March and April. The year-over-year growth decelerated to 3.2%, down 80 basis points for the same period. Yardi also reports that the affordability factor is starting to even out across the country. 

Per the report: “Rent growth is broadly positive nationally, but regional differences are emerging. High-demand Sun Belt metros are feeling the impact of reduced affordability and robust deliveries, while primary metros have less supply growth and some benefit from rebounding immigration.” 

The Brookings Institution crunched numbers from the U.S. Census Bureau and revealed that 11 of the 15 largest metro areas including D.C., New York City, San Francisco and Seattle gained residents or lost fewer people compared with the previous year. 

Class Differential 

Yardi also tracks trends broken down into types of renters including lifestyle – renters by choice as opposed to those renting by necessity (RBN). The report indicates that 22 of the top 30 metros they tracked recorded gains in RBN rents, while 20 saw increases in lifestyle rents. Numbers from the Sun Belt show that demand is concentrated in more affordable product in Dallas, Seattle and Las Vegas. 

DB Capital backs up the assessment. “We have a few assets in markets that are seeing short-term absorption softness that I expect to hold concessions steady,” says Degner. “Most of our portfolio is workforce to moderate income, and we haven’t seen softness in this tranche of the rental market. Most of the softness has been in assets we own that I would qualify as B+ to A-. This is where the shock of oversupply has had the greatest impact and resulted in driving concessions.”   

Jacobson believes staying focused on good property management can help keep all the market segments stabilized. “We’re in workforce, luxury lifestyle and student housing segments,” he says. “All asset types are performing well for us right now, but that is because we are obsessively focused on the management of our properties. If a recession is in the offing, it will positively impact student housing—as more people will choose to stay in school or return. There is a shortage of workforce, so I don’t consider it likely we will see it there. Our Class A assets may experience short-term weakness if we go into recession, but that hasn’t been the case yet.” 

Renewals 

High renewal rates help negate the need for offering prospective new residents special deals to sign up. Yardi’s numbers show renewal rates off a bit but still high overall. As of February 2023, the nationwide rate was 64%. The peak was attained in October 2022 at 66.6%, only two points higher. Markets with the highest rates include Philadelphia at 79.1%, Miami showing 70.2% and Kansas City at 69.1%. 

“Given the continued likelihood of higher interest rates and high home prices, I don’t think renters are going to be moving into home ownership en masse,” says Jacobson. “Because of the slowdown in new construction due to high interest rates and increased construction costs for new buildings, the demand for apartments should not abate. Renewals may be impacted if we go into recession, but not drastically.” 

DB Capital isn’t quite so optimistic about the renewal situation. “With short-term softness we’ve seen over the last two quarters, we have taken a much less aggressive approach to renewals,” says Degner. “I expect most [residents] to be in the driver’s seat now as we negotiate renewal rates. I think the days of double-digit average rental increases have come to an end for now.” 

Outlook 

There’s plenty of market angst about a coming office space implosion as leases signed before the pandemic start to age out. Yardi is pointing to a similar iceberg heading for multifamily. According to the report, “roughly 15% of the $2 trillion of multifamily loans outstanding are maturing between now and the end of 2025 and more than half are maturing by 2030. Delinquency rates are 2% for commercial mortgage-backed security (CMBS) and less than 1% for other lender types, but an increase is likely coming.”   

DB Capital sees the same thing on the horizon. “I expect to see a continuation of the current trend fundamentals on the rent side of the equation,” says Degner. “My expectation is that we will continue to see intermittent softness caused by heavy supply deliveries. The bigger issue that will negatively impact the multifamily industry over the next 12 to 24 months will be problems in the capital markets.” 

Jacobson is eyeing upcoming moves by the Federal Reserve while hoping interest rates have peaked. “Though vacancy rates were creeping up to 6.4% for the first quarter, up from 5.8%, vacancy rates are some of the lowest we have seen in 40 years,” he says. “It’s unclear if the Fed will push the economy into recession or what extent that will impact occupancy. Though supply is up, multifamily is still undersupplied nationally. Increased vacancy will obviously encourage concessions, but we aren’t there yet.”   

Macroeconomic trends also favor a “steady-as-she-goes” approach in multifamily. According to Yardi, “Given multifamily’s strong recent performance and having the benefit of government-sponsored enterprises that lend in downturns, distress in the sector is likely to be concentrated in pockets.” 

Jacobson sees headwinds for areas that may be overbuilt including Phoenix, Las Vegas and Tampa, but he remains optimistic. “Occupancy rates nationally may trend lower, but demographic and economic trends will keep multifamily rentals very full,” he says. “These residents need a place to live. Household formations are strong and new construction is being impacted by inflation and higher interest rates. Single-family homes are still extremely expensive, especially for first- time home buyers, so they are more likely to continue to rent.”   

   

Scott Sowers is a frequent contributor to units.