2022 Forecast: More Sun than Rain
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By Michael Miller |

December 28, 2021 |

Updated February 18, 2022

13 minutes

While rent prices and occupancy remain high, so does inflation. The labor market is sparse and resignations continue. Here’s how some industry leaders are managing change.

The rental housing industry continues to endure the effects of the COVID-19 pandemic, and no one—whether living or working in apartments—has escaped its assorted impacts.

Rental housing professionals and their communities have seen a multitude of implications due to the changes happening in the industry and economy and adjusted accordingly—at one point on the fly, but now with strategic planning and processes. These implementations of processes and procedures are intended to address changes in rent prices, inflation, the labor market and technology, to name a few.

“There are so many challenges in front of us right now. Two current issues we face today are the ever-evolving legislative issues as well as delays in the distribution of the ERAP [Emergency Rental Assistance Program] funding, which is meant to assist our residents impacted by COVID,” says Don Brunner, President & CEO of BRG Realty Group and NAA 2022 Chairman of the Board. “We as an association continue to offer ideas to assist in the distribution of the ERAP funding. One such idea would be to allow management companies to apply on behalf of their residents. On the legislative front, our Governmental Affairs team is working hard on behalf of our members keeping us up to date on changes as they occur.”

Ronda Puryear, CAM, CPM, President, Residential Management with Management Services Corporation (MSC) and NAA 2022 Chair-Elect, sees two major challenges going forward: The Great Resignation and affordable housing, both of which she provides solutions for in 2022. Inflation is also another item Puryear hopes to see ease during the next 12 months.

“Inflation is another big concern. Everything is more expensive, which impacts the renter, employee, employer and supplier. We have seen an increase in salaries to help meet those concerns,” she says. “From the owner perspective, when you start a rehab program – there is a supply chain problem which is interrupted with a lot of product sitting in the harbors – you cannot get the product. What product you can get is sometimes much more expensive or takes months longer for delivery than pre-pandemic. The impact of rising prices can also mean increased rents. However, simply due to supply and demand, we have seen rents increase across all markets.”

Rent Prices

While rent growth slowed a bit toward the end of 2021, prices are still well ahead of what was typically seen during pre-pandemic years. The national rent index from Apartment List increased 0.1% in its December National Rent Report, which was the slowest month-over-month increase in 2021. Since January 2021, median rent growth increased nearly 18%. This is compared to 2.6% rent growth, which is what was seen, on average, in the January to November window during 2017-2019.

“What I expect is, at least during the first half of 2022, we’re going to see this robust market continue through June, and I think we’re going to see rents continuing to go up,” says Chris Burns, Senior Vice President with Lincoln Property Company and NAA 2022 Secretary. “We’re going to see pretty good absorption and we’re going to see a lot of transaction volume across the Southeastern market because there’s still a lot of pent-up capital that needs to be invested, and deals are trading at record prices in all markets. Everybody is a seller today and, fortunately, for every seller, there’s a buyer at a good price.”

The high growth numbers seen throughout most of 2021, as a rebound to the early pandemic declines, will continue to slow, while still being ahead of previous years’ data. “2021 was a unique year for a lot of reasons and seeing double-digit rent growth on your lease [can be surprising]. Demand will eventually tail off to the point where you can’t do that, and we’re starting to see that a little bit,” says Warren Rose, CEO of Edward Rose & Sons.

The talk of higher rent prices and the growth that has been seen during the pandemic “feeds into the affordable housing discussion that we are the problem,” Puryear says. “We need to continue to work with legislators, with localities, with national housing institutions to let them know we are here as a partner, to be part of the solution rather than being seen as the problem.”

The need for affordable housing is great, and the industry is being unfairly targeted as the reason behind the lack of affordable housing, Puryear says. She wants to educate Congress and work with local and national housing coalitions to help solve the problem.

“NAA is working hard to provide dependable housing to all who qualify,” says Brunner. “As affordable housing continues to be part of legislators’ agendas at the local, state and national level, it is key that we as an association are present at the table at every level. Too many times legislators are working on issues affecting our industry without allowing us to be part of the solution.”

Says Burns, “The other thing on the rent growth is with the inflation and prices of everything going up, at some point, the customer just can’t keep writing that bigger and bigger check, and that’s going to stymie the rent growth in some markets at some point.”

Inflation

In October 2021, inflation in the U.S. rose 6.2% during the previous 12 months, a 30-year high. According to a December 2021 Gallup poll, 45% of American households report inflation has caused them hardship—35% moderate hardship and 10% severe hardship.

The impact of inflation on rent prices is nothing but astounding. It has hindered AMLI Residential employees from living at the communities at which they work. “In an effort to continue to attract and retain great service associates, we began offering additional housing allowances for all communities under 400 units,” says Traci Hall, President – West Region with AMLI Residential. “We had typically only offered one per property for service associates, and now we are offering two. No one can argue it is valuable to have our team live onsite.”

Renters will see inflation in their rents like consumers are seeing at the gas station or in the grocery store. “The fact is, it’s costing us more today to turn units,” Burns says. “It’s costing us more for utilities, it’s costing us more for insurance, taxes are going up, so all those things are going up on the expense side, which forces our hands to cover those increases. Unfortunately, that renter and consumer is paying more at the leasing office, just like they’re paying more at the pump. This inflationary pressure of course works against addressing the critical need for more affordable housing throughout all markets.

“The only way to keep from losing value with increased costs is to keep pushing the revenues up to cover those, and that’s where I think later in 2022 gets to be a little more of a crunch because if the cost of goods keeps rising and services keep going up, but the renter gets to that point where their income is not going up enough to pay that, then that’s going to put some headwinds out for us to be able to keep pushing the rents to keep up with the inflationary costs,” Burns says. “That’s where some of the transaction volume and things like that will start to slow down if that negative impact starts to happen on pricing.”

Labor Shortage

According to the Beige Book from the Federal Reserve, labor shortages across the nation and sectors has hindered economic activity, consumer spending and manufacturing. In the latest data from the Bureau of Labor Statistics, 4.2 million people quit in October 2021, down from roughly 4.4 million in September 2021, but up from 3.4 million in October 2020. The real estate and rental and leasing industry saw 48,000 quits in October 2021, 11,000 more than the previous month and roughly unchanged from October 2020.

“Recruiting and retaining in our industry is our biggest challenge,” says Hall. “There is incredible pressure on compensation, and I truly believe that if you provide the right culture and engagement for your team, they will stay and continue to thrive and create value. After a moderate year of turnover in [2020], 2021 will likely see the highest turnover of employees in five years.”

Puryear believes the Great Resignation is a real challenge for the industry. There are people that don’t want to come back to the office or retired, and people are leaving the industry altogether. Like many, Puryear sees this especially challenging in the maintenance field, where she can’t find employees because people aren’t going into that trade like before. She is reaching out locally, personally, to help fill these vacancies. They are increasing pay to match the competitive market and have become an even more employee-centric company.

At BRG, Brunner says, “we are always trying to provide opportunities for growth and best-in-class benefits for our employees. These efforts have led to numerous employee referrals which is our best opportunity to find new team members. As expected, these referrals traditionally fit well into our culture and perform well, but it’s still not enough. We continue to look for additional options for new talent streams.”

Burns wants to know where all the candidates have gone. “On 62,000 units in the South, I’ve probably got 80 positions open. We could fill the positions if we had candidates, and particularly, the maintenance side is tough. There are just no maintenance candidates to be found. There’s literally just no application volume. There are some applying, but it’s nowhere near what the normal application flow should be for people applying.”

One way Brunner and BRG are working to add to the pool of maintenance candidates is with an internal apprentice program. While not completely off the ground, new employees receive one-on-one training to either improve or provide a skillset which will hopefully provide them with the knowledge for a successful career. “Unfortunately, in our industry today so many new employees start on a Monday morning, fill out their paperwork, and are in the field that afternoon,” he says. “With our program, the goal is to develop technicians potentially either right out of high school or transitioning into our industry.”

Construction

Multifamily construction has outpaced it’s single-family counterpart by a wide margin during the past year. According to RealPage analysis of the latest Census Bureau data, multifamily permits increased 34% between October 2020 and October 2021, while single-family permits were down more than 6%. Multifamily starts jumped nearly 40% year-over-year compared to an almost 11% drop in single-family. However, construction delays have impacted multifamily completions, which are down nearly 32% from October 2020. In contrast, single-family completions are up 3.5%.

“In the Southeast market, there is a huge pipeline in every market and in some cases record units under construction to be delivered, so that product is definitely coming up,” Burns says. “Absorption is going to be pretty strong again early in the year if that starts to soften, then what happens in every development cycle, concessions will go up to try to maintain that velocity if the market softens a little bit.”

“COVID-19 has had a severe impact on the construction supply chain. Not to mention the increase in the cost for some of these materials have gone up dramatically—lumber, steel, drywall, plumbing components and electrical—meaning the pandemic and supply chain and inflation, it’s all having a serious impact right now,” says Rose.

Preparing for an impact to the supply chain can only go so far, but Hall has found it most beneficial. “Elevators and mechanical system parts that are critical to a buildings function are in short supply, as are the labor to install them,” she says. “Ordering in advance and stockpiling, paying for preventative maintenance and frequent inspections will go a long way to mitigating the supply chain issues and challenges.”

Technology

“The one technology that got really expedited with the pandemic was the whole concept of self-guided touring,” Burns says. “While that had come to the market, certainly before the pandemic started, it forced a lot of us to get comfortable quickly with that concept because when we were on lockdown and didn’t really have people or our people were locked in the office and couldn’t interact with customers, the whole self-guided—in order to get people out to physically see units—became a great option in the playbook.”

Hall found virtual learning and meetings to be more effective and efficient—a way to provide a learning platform to larger audiences.

While Zoom, Teams and other digital meeting options proved useful this past year, Puryear mentions there were some things lost by being away from staff. “I think the in-person aspect is important because you lose a lot when you don’t have that ‘water cooler’ collaboration. It’s the conversation that you never knew you were going to have until it happened because you ran into someone. Those are the things that you don’t have on Zoom.” 

The virtual aspect of the industry was around before the pandemic, but it picked up steam as office closures and other shutdowns continued. Prospective residents are now able to visualize their potential new home in a better light, notes Brunner, who added virtual tours have improved during the pandemic.

“It is allowing more residents to make decisions without seeing the actual physical site or units,” he says. “Prospects can go through and ask questions through a virtual assistant about the community or about items around the community or features and benefits—even scheduling appointments without talking to someone is also a benefit today.”

Brunner is excited to see where future technology leads the industry. “Covid has challenged ours as well as other industries to look for additional ways to conduct business virtually or in a remote setting,” he says. “It wasn’t that long ago our industry thought online leasing and renewals were state of the art. Now our industry has advanced to the point of artificial intelligence and bots which interact with our residents during times our teams are unavailable. We are excited to see the future and where it leads.

Puryear and MSC have found prospective residents prefer to go on self-guided tours, renting homes over iPad with FaceTime. They already had this in their student portfolio but have now started seeing that bleed into their more conventional portfolio.

Lessons Learned and Future Hopes

“We learned, and the residents learned in particular they probably want a little more of their own space, particularly outdoor space,” Burns says. Balconies and patios became extremely important for those who had the opportunity to step outside. “We went through a period where balconies weren’t as important and patios weren’t as important, particularly in inner cities. I think those people that were in units without balconies quickly learned that the people in the building across the way that had balconies could at least go out and sit on their balcony during the day and get some fresh air. Having outdoor space and balconies in the common areas; outdoor space where people can get outside; and some amenity space and gathering space to be able to social distance means that residents are still able to live outside the unit to a certain extent.”

From an industry advancement point of view, the pandemic hasn’t been all negative. “There are positives that have come out of the pandemic—new systems that we have in place that won’t go away that I think are much better,” Puryear says. “Things that we’re doing that help people have more time at home with their family, that help people get home earlier in the day or finish their day from their home office, which creates a better mental state for everyone.”

“The industry, in general, is in a good trajectory, better than it has been… so, it appears to be a bright future,” says Rose.

Occupancy

Occupancy in the U.S. is at an all-time high. At 97.5% in November, RealPage states occupancy is bucking the trend seen in previous years when rates typical see a downturn during the winter months.

“Unless there’s something wrong in the submarket, almost every submarket you go to has record occupancy,” Burns says. “People haven’t been moving, not so much because they can’t afford to buy a house, but there hasn’t been any product—because that market has been so tight. So, a lot of those people aren’t moving.”

Residents find their circle of friends and are happy with the management team, services, amenities, commute to work, and the like, so they are staying longer than they previously might have when there were more options available.

“At renewal time, it may even make it challenging for some to continue to keep pace, and then they start to look at other options like doubling up or moving from the city center to the suburbs or some of those natural shifts occur if the pricing dynamic gets upside down,” Burns says.

“There are question marks to what happens in the second half of 2022, but I think it’s still a decent picture for the first part of the year,” says Burns. “When the economy starts to get a little uncertain, people tend to stay put in their situation … and it does keep some people a little more stationary and not so apt to jump around as much. [They’re unsure if] six months from now they’re going to be in the same position or not, so the rental market does kind of benefit from that uncertainty sometimes.”

Michael Miller is Managing Editor for NAA.