The Rental Market Gets Raucous

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For two years now, the housing market has endured one of the most insane buying cycles on record. As Covid-19 and the shutdowns reshaped… well… everything… and $5 trillion was injected into the economy, millions of Americans rushed into the real estate market.

Now, after months of record-high home prices, bidding wars, and inventory shortages, even the rental market is feeling the effects.

Cities like New York and Chicago might have suffered in the beginning in that regard. But that’s no more. And hot housing market conditions have trickled into the rental realm.

The Wall Street Journal reports:

“Bidding wars have long been a staple of hot housing markets, where buyers compete with offers above the seller’s listing price. Now these contests are becoming more commonplace in the rental market. Real-estate agents from New York to Chicago and Atlanta say they see more people than ever making offers above asking to lease homes and apartments that they will never own.

“An increasing number of white-collar professionals – some of whom recently sold homes – are reluctant to buy because of record-high home prices, rising mortgage rates, and limited supply. They are renting instead, helping to drive a frenzy for leased properties of all kinds and helping fuel the trend of offering above asking rents, real-estate agents said.”

Alrighty then!

With so much demand in the rental realm, landlords are actually finding it difficult to keep up. They’re petitioning for higher rates even in areas with rent control.

Just last week, a panel in New York City passed a rental increase of 3.25% for next year – the highest hike in nearly a decade.

Mark my words: If it hasn’t started happening already, areas unprotected by stabilization policies will see rental prices skyrocket. And even with unprecedented increases, the bidding wars are expected to continue.

According to data from real estate resource Redfin, average rental prices have exceeded $2,000 for the first time ever… rising 15% over the past year. Which might be just the beginning.

As the Fed continues its campaign to increase interest rates, construction companies will likely build fewer homes. Because fewer people can afford a new home when borrowing rates balloon.

Again, this all means gains for landlords, but that’s only guaranteed in the short term. The looming long-term effects are unknown since we have to wonder about sustainability.

How long can the American consumer endure these incredibly high rates? Will they be just one more factor that pushes us into a recession?

In which case, join the club.

More Non-REIT News to Know About 

There are so many strange aspects of this economy that it’s sometimes hard to keep up with it all.

For instance, remember how earnings reports from top retail giants suggested that American consumer strength was weakening? Well, new data is out to indicate otherwise.

According to the Commerce Department, orders for durable goods rose significantly last month. And according to the National Association of Realtors, the number of houses under contract rose significantly too.

This signal continued to demand even in a slow-growing economy.

Orders for discretionary items rose 0.7% last month, driven by big-ticket items like cars and computers. So did the pending home sales index, a gauge of contract signings.

All put together, it seems the Fed’s efforts to curb demand have had little effect so far. This could mean we’re in store for even more aggressive action on its part.

Then again, as I said earlier, there are so many strange aspects of this economy. It’s going to play out how it plays out, and to a large degree, we’re just along for the ride.

The World According to REITs 

Going back to the on-fire rental market, let’s discuss some apartment real estate investment trusts (REITs) today.

I’m absolutely not saying to frontload your portfolio with them just because they’re in such a sweet spot right now. But there are a couple of picks with strong fundamentals, growth, and balance sheets.

As always, just make sure that they work for you and that you purchase them at attractive entry points.

Independence Realty Trust (IRT) specializes in older or non-luxury Class B apartments in secondary and suburban submarkets. Last year, it more than doubled its portfolio and extended exposure to the ever-growing Sunbelt region by acquiring Steadfast Apartments.

Because of its focus, it’s not exactly at the forefront of the rental wars. But it does boast a 95% occupancy with 12% year-over-year growth for lease renewals.

By serving middle-class suburbanites in some of the country’s fastest-growing regions, IRT benefits from consistency, steady growth, and reliable renters. So it could be a lucrative long-term pick for more conservative portfolios.

Take a drive through any growing city or suburb, and you’re going to see a Camden complex at some point. Camden Property Trust (CPT) is one of the most iconic multifamily REITs the world has to offer.

The company owns 171 apartment communities with 58,588 apartment homes in the U.S. It’s been in operation since the early ‘80s and is ranked eighth by Fortune on its list of “Best Companies to Work For.”

This blue-chip REIT also diversifies across both big cities and small towns alike. And it does it well too.

With 11% year-over-year growth in the first quarter, it seems like it has what it takes to thrive in any environment. At least in the environments we’ve seen so far.

Brad Thomas is the Editor of the Forbes Real Estate Investor.

Disclaimer: This article is intended to provide information to interested parties. ...

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