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In a recent paper published by head of research at Crow Holdings, Mark Roberts, he discussed several aspects of the current abnormal real estate cycle. Despite rampant inflation and the "higher for longer" interest rate environment, household balance sheets are still in the best shape they have been in the last 40 years, with household net worth being over 5 times greater than GDP. Household debt-to-asset ratios have been on a steady decline since the peak around 20% in the aftermath of the Great Financial Crisis in 2009, down to 11.8% as of the end of 2023. Additionally, the U.S. economy has grown at an average rate of 2.9% over the last 6 quarters, compared to the historical average of 2.1% over the last 20 years. Unemployment has remained low throughout this cycle, with the Bureau of Labor Statistics reporting that there are 8.9 million jobs available, which equals 5.7% of the labor force. Because unemployment is so low, employment growth is expected to slow to .8% - .9% over the next several years, compared to the past 20-year average of 1%, with many Sunbelt submarkets in Texas, Florida, Pheonix, and Denver expected to outperform historical averages.
This is great news for the broader U.S. Economy avoiding a recession and overall household financial situation, but the implications on the commercial real estate industry vary by asset class and submarket. Industrial and retail appear to have the strongest near-term fundamentals, with above average occupancy rates that should lead to above average rent growth over the next few years. For the apartment outlook, it appears that new construction has finally caught up with demand in 2023, and national occupancy rates are expected to bottom out this year and demand is expected to outpace supply again in 2025. This story is different, however, in cities such as Dallas, Houston, Denver, San Jose, and Seattle where there is less than one year of excess supply. In these cities, Roberts expects rents to grow 2%-3% in 2024 and beyond.
These are in line with recent reports from Costar as well as observations within our own portfolio. According to the latest Costar apartment report, "Dallas-Fort Worth still notches consistent, albeit modest, rent gains month-over-month, with rents increasing 0.2% from March to April, the fourth consecutive monthly gain based on CoStar’s Daily Asking Rent Series. Although apartment annual rent growth is still negative in Dallas-Fort Worth, demand is rising and gaining momentum. Through the first quarter, renters filled 4,960 units, making it the highest first quarter since 2019, apart from the supercharged demand levels in 2021. Quarter-end demand also is providing cautious optimism as spring’s busy leasing period begins. So far in the second quarter, renters have filled over 4,000 units. The latest results have allowed Dallas-Fort Worth’s ranking in multifamily demand to rise, placing it second to New York."
In our own SFR portfolio, year-over-year rent growth in Q1 2024 for renewals and new leases averaged 5.09%, significantly outperforming the -1.4% year-over-year apartment average rent growth in DFW, with certain areas achieving double-digit rent growth. Year-over-year bad debt decreased from 1.79% of revenue to 1.7% and occupancy increased by 4.5%, further showing the strength of the average household balance sheet. Please feel free to reach out to learn more about the data we are observing within our portfolio.
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