According to a December report from Apartment List, rents ended 2020 1.5% down nationally year over year. While that number contains wide regional variations and seasonal fluctuations through the year, it points to an overall weakness in America’s rental markets. Hardest hit, of course, were multifamily rentals in major urban centers. Most resilient, meanwhile, are single family rentals in smaller cities and suburbs. But with the overall picture still bleak, is there any reason to hope for a rental recovery in 2021?
Rob Warnock, research associate at Apartment List, explained the report and its implications for the US rental market in 2021. He contextualized December’s drop in a wider seasonal trend and highlighted some of the markets that have further to go before they recover to pre-pandemic levels. He laid out, too, why there may be cause for hope this year across the country and in hard-hit markets, and that a recovery in major cities may not necessarily mean the growth we’ve seen in smaller cities will be reversed. It’s his view that the spring and the beginning of moving season will tell the story of rental recovery in 2021.
“We’re very anxiously awaiting the spring,” Warnock said. “For the last 10 years the economy has grown pretty steadily and even throughout that rents go down in the winter and they come back in the spring - even when things are normal this is the shape the curve takes. I don’t think there’s any reason that the curve would look any different this year.”
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For a real recovery to take place, though, that spring uptick will need to be far faster than normal. Warnock said that, as of now, major employers don’t look set to bring back their workforces as soon as in spring, which could put a damper on an immediate rental recovery, especially in major cities.
At the same time, the beginnings of the vaccine rollout do point, in Warnock’s view, to an improved epidemiological situation and a more optimistic tone among employers at some point later in 2021 which ought to impact these key rental markets. Not only will reopened offices and new job creation in cities make them more attractive, the reopening of restaurants, entertainment, and ordinary city life ought to start attracting renters to these hard-hit places again.
Warnock’s other cause for hope lies in vacancy rates, which have largely plateaued or even started falling in major cities since the end of Q3 last year. While rents are falling, it appears that enough people have moved back into cities, or at least elected to stay, despite the pandemic. However, a new spate of lockdowns and hundreds of thousands of temporary layoffs in the service sector in December could do new damage to that somewhat hopeful vacancy rate.
While the story in major cities has been mixed, rental markets in smaller cities have caught on fire. Boise, Idaho, Chesapeake, Virginia, and Fresno, California, have all seen nearly double digit rent growth since March of 2020. If the rental markets in major cities do recover, Warnock doesn’t believe the growth we’ve seen in these cities will be reversed. There is simply too much housing demand and too little supply.
“There are enough people that can leave San Francisco and go to Boise such that San Francisco will remain expensive and Boise will get expensive,” Warnock said.
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Economic uncertainty persists in both large and small rental markets, however. Warnock explained that the recent jobs report and news of a stagnating recovery, at least on the employment front, could cause serious difficulties for all these markets. However, we simply don’t know if the big-city migrants moving to rent in cities like Fresno are doing so because of job insecurity, or if they simply want to get more bang for their buck while they telecommute.
Given the uncertainty and mixed signals we are currently seeing in the rental market, Warnock believes it’s crucial for mortgage professionals to focus on the drivers of consumer demand.
“Mortgage professionals need to look at the lifestyle changes that people are making right now,” Warnock said. “There’s such a premium now on having an extra bedroom or an extra amenity that lets you work from home. It seems like even when the economy comes back to where it was before, those are the premiums that people are going to have spend a year enjoying and I have a hard time imagining that some micro condo is going to bounce back suddenly. There’s going to be pretty lasting changes in renter preference that the multifamily industry will need to adapt to.”