We simply witnessed the weakest third quarter for condo leasing within the 30+ years of monitoring the U.S. condo market. Web absorption registered reasonably unfavourable, occupancy ticked down and rents flattened. Is the slowdown as a result of renters hitting an affordability ceiling?
For many of us, our intestine response to that query might be, “Sure.” However what does the information inform us?
If affordability is the most important motive, we must always see three key alerts: 1) Weakening hire collections, 2) a “flight to affordability” – a shift in demand towards cheaper submarkets and the extra reasonably priced Class C asset class, and three) stagnating renter incomes. Let’s look at all three for clues.
- Are Hire Collections Weakening?
Not but. Hire collections – the share of hire due that renters pay every month – truly climbed UP in September. Collections improved 20 bps month-over-month and 60 bps year-over-year to 95.6%. That marked the most effective September for hire collections since 2019.
The traditional patterns held up in September, with collections registering highest in the costliest Class A models (97.2%) catering to higher-income renters in comparison with 96.3% in Class B and 94.1% in Class C. All three asset courses registered enchancment year-over-year, with Class C surprisingly posting the largest acquire (up 80 bps) regardless of the decrease general fee. (Class C renters are likely to have decrease incomes and thus are extra worth delicate than renters in Class A/B).
Inflation impacts us all, and which means for many people, there’s much less discretionary spending energy. However up to now, renters proceed to pay the hire – even with most rental help packages winding down and few native eviction moratoria nonetheless in place.
This might change going ahead, however up to now it’s holding up.
- Is There a “Flight to Affordability?”
Not but. That is maybe the most effective and clearest sign that the drop in leasing visitors and condo demand isn’t merely about worth. If affordability was the No. 1 hurdle, we might see a transparent “flight to affordability” – that means a shift in demand from higher-priced Class A to lower-priced Class C, and from costlier submarkets into cheaper submarkets. However that’s not occurring proper now.
Occupancy nationally peaked in March 2022 and has been steadily lowering since then in all three asset courses and in primarily all markets throughout the nation.
A “flight to affordability” might nonetheless happen, nevertheless it’s not occurring but.
- Are Renter Incomes Stagnating?
Not but, though there are a pair caveats to this one. We observe incomes amongst renter households signing a brand new lease. These numbers have soared within the pandemic period, and that development continued in third quarter 2022 due to a good labor market and low unemployment – an surroundings that has appeared to have particularly benefited younger adults who’re most probably to hire market-rate flats.
Incomes amongst new lease signers jumped 11.6% year-over-year. In fact, the information doesn’t cowl renters renewing leases. (Incomes are sometimes collected solely amongst new lease signers.) However the demand slowdown within the third quarter got here on the brand new lease facet – not renewals. Retention charges skyrocketed within the pandemic period and are actually trending downward, however stay elevated in comparison with pre-pandemic norms. So the information suggests incomes alone don’t clarify the drop in new lease demand.
In fact, there are some caveats to this from the legal guidelines of worth elasticity. Demand can shift as worth modifications. Larger costs will ship some households to the sidelines. Decrease costs will encourage extra households to seek for an condo. Actually greater rents performed some function in decreased leasing visitors this 12 months, however the lack of a “flight to affordability” shift tells us this isn’t the largest issue.
If It’s Not About Affordability, What’s It?
Larger rents play some function, however the three key tell-tale indicators of an affordability ceiling aren’t but displaying up. Moreover, we proceed to see wholesome job progress and low unemployment – which might usually be drivers for sturdy demand. So why did condo demand decelerate?
Right here’s our concept: Inflation is contributing to weakened shopper confidence and heightened uncertainty. When persons are not sure concerning the financial outlook and their private monetary safety, human nature is to enter “wait and see mode.” We see this not solely within the rental demand numbers, but additionally within the anemic for-sale housing numbers.
In different phrases: Individuals have hit the “pause button” on their housing search.
Which means we’re doubtless seeing an abrupt slowdown in family formation, which was the massive driver of the housing demand increase of 2021.
Whereas the official family formation stat is a lagging indicator, internet new housing demand serves as a superb proxy. We noticed enormous internet new housing demand (for all sorts of housing) in 2021, main many housing analysts to conclude that the Census’ official stats on family formation have been doubtless understated. We might see the reverse impact in 2022.
One concept: It seems many Could/June 2022 faculty graduates didn’t flood into the condo market as they usually would. We didn’t see that seasonal bump in demand this summer season. May or not it’s that current faculty grads determined to attend it out at their dad and mom’ home?
Moreover, in intervals of uncertainty, mixed households which may have in any other case decoupled might select to stay it out collectively for a bit longer. Others might even select to start out doubling up – reversing a few of the 2020-21 development. Anecdotally, we’ve heard a few of that occurring in downtown flats amongst younger adults eager to dwell in pricier Class A flats however selecting to now share these prices with a roommate.
One different doubtless issue: COVID and the ensuing work-from-anywhere motion doubtless accelerated some future demand into 2021, “stealing” from 2022 to some extent. This was all the time anticipated going into 2022, though it’s tough to measure its magnitude.
If certainly the “pause button” situation performs out and the job market stays sturdy, we must always see pent-up demand unlocked forward of the spring 2023 leasing season. That’s an enormous “if,” nevertheless it’s tough to think about a special situation absent an enormous bounce in unemployment charges. And even when the job market did flip, we’d nonetheless doubtless see some pent-up demand unleashed amongst staff in much less impacted job sectors.
Bear in mind: On the finish of the day, folks want a spot to dwell. You may work from wherever and store from wherever. However you want a house. That’s a long-term tailwind for housing of every type.
Jay Parsons is VP, Head of Economics & Business for RealPage
