What residential rent inflation means for Crowdfunding

Though rent has been consistently increasing in nearly every state over the past few years, September 2021 witnessed the largest hike in single-family rental properties since at least 2005. In fact, according to the CoreLogic Single-Family Rent Index (SFRI)—one of the most widely cited rent metrics within the real estate industry—rents are up by a whopping 10.2 percent (year over year) as of the end of September.

Naturally, this sudden spike in single-family rents will directly affect renters. But it will also affect property owners, including syndication investors and others with active portfolios within the real estate investment community. While a rise in rent might create some new opportunities for investors to increase their expected ROI, it can also create some challenges, especially if it is unclear whether the spike in rent will continue in the future.

So, from a real estate syndication investor’s perspective, should this jump in rent be considered a good thing or a bad thing?

Well, as seems to almost always be the case, the answer is it depends. Let’s take a closer look.

The Current State of the Single-Family Rental Market

The SFRI, which has been used since 2005, is a metric used to gauge year-over-year changes within the single-family rental market. Other than the housing crisis of 2007-2009, the index—which does not account for inflation or changes in spending power—has consistently been positive. It has also, at least up until the last year, consistently remained around 4 percent.

Naturally, the sudden 10.2 percent jump in year-over-year rent has been a bit of a shock to the broader industry. In fact, since the index was first introduced in 2005, the year-over-year increase has never even topped 6 percent—and that was all the way back in March of 2006.

The increase in multi-family rents has occurred across every tier of rentals—low-tier properties have increased by an estimated 8.4 percent while high tier properties experienced an even higher 11 percent jump.

The increase in single-family rent has occurred in nearly every part of the country but the spike has been particularly pronounced in the Sun Belt, where the population has also been growing the fastest. High-tier rental properties in Miami, Phoenix, Las Vegas, and Austin have all increased by more than 14 percent, year-over-year, which makes sense because, according to the most recently published census, these are some of the fastest-growing and supply-constrained metro areas in the nation.

Why Has Rent Been Increasing?

The recent spike in single-family rentals has been unusual, though that can certainly be said about most macroeconomic trends occurring at this time. In addition to the market-wide volatility that has resulted from the COVID-19 outbreak, there are likely quite a few reasons why rent has been increasing in 98 of the nation’s 100 largest cities:

• Relatively high inflation and decreased spending power per dollar—the current year-over-year inflation rate is 6.2 percent, which is the highest it has been since November 1990 and also higher than most economists forecasted.
• Limited housing supply, which has been constrained by notable shortages in building materials, qualified laborers, and other resources needed for development.
• A return to living in major urban areas as confidence in the job market picks back and the economy shifts back to a “new normal.”
• The end of eviction moratoriums, which are no likely being “made up for” through a broader increase in monthly rents.
• Increased expectations from real estate investors, both individual and institutional.
• High volatility across the economic system (according to the volatility index, the past 12 months have been among the most volatile in history.)

Naturally, the rate that any one of these trends affects a given area—or even a given property—will vary wildly. Nevertheless, each of these trends has been broadly affecting the national market for single-family housing.

How a Rise in Multi-Family Rent Might Affect Real Estate Crowdfunding

Rental properties—both multi-family and single-family—play a critical role in the real estate crowdfunding industry as so many projects that have been financing by crowdfunding are in this asset class. With rent currently increasing (and expected to increase into the foreseeable future), real estate syndicates that have been able to act quickly and keep occupancy rates high can expect to see even higher rates of return than the originally anticipated. However, these increases may be overexaggerated, due to the fact that these industry-wide spikes have been measured in nominal, rather than real, dollars.

Single-family rental properties have increased at a notably higher rate than multi-family properties, which will likely result in an increase in demand for the latter option, which is generally more affordable. Due to the fact that, compared to their single-family counterparts, multi-family properties are more likely to be managed through syndication, a disproportionate rent spike could eventually direct more capital to this ever-growing market.

Similarly, because high tier properties have been experiencing a larger rent spike than low tier properties—bucking the trend that existed from 2014 to 2020—luxury rentals and other more expensive properties will likely receive additional attention from investors.

Of course, much of these future changes will depend on where a particular real estate syndicate chooses to invest and the type of properties that they choose to invest in. For example, while high-tier rentals have skyrocketed in Miami by 25 percent, year-over-year, low-tier rentals in Boston have actually experienced a 2 percent decrease—one of the very few asset classes that reported doing so.

Conclusion

The increase in single-family rents, while potentially problematic for investors should rents begin to hit affordability thresholds, represents a wide range of opportunities for real estate syndicates and other real estate investors. With a diversified portfolio, a deep analysis of the specific properties being purchased, and a generally dynamic real estate investment strategy, there will undoubtedly be plenty of chances for risk-tolerant investors to achieve an even higher ROI.