Rental Demand Could “Catch Up” in These Struggling Markets

Dave:
Right now in the US there is a shortage of somewhere between three and 7 million homes or housing units depending on who you ask. And this constrained housing supply is one of the biggest hurdles for investors and everyday home buyers alike. But supply is slowly starting to change, and today we’re going to dig on where supply is growing and what it means for investors. Hey everyone, it’s Dave. Welcome to On the Market, and I’m super excited to be honest about today’s episode because our guest is Austin Wolf, who is a BiggerPockets employee. We work on the same team together. He is our new market intelligence analyst and his job at BiggerPockets is to study the housing market to look at what’s going on in different markets and bring them to our audience in different formats. He has contributed to the Market Finder tool. He is a regular blog author for the first time he’s coming on the market to share some original research that he did into housing supply, what’s going on in various markets and how it’s impacting rental performance, vacancy rates across the entire country. It’s super cool research. I think you’re going to learn a lot. First and foremost, I’ll provide a little bit of background about housing supply and how we got where we are. Then we’ll talk about where supply is increasing across the us and of course we’ll send our conversation around how investors might use current market conditions and the research that we’re sharing to benefit your own portfolio. So let’s bring on Austin and dig in.

Dave:
Austin Wolff, welcome to On the Market. Thanks so much for being here today.

Austin:
Thank you. Happy to be here.

Dave:
Well, this is a thrill for me. I’m very excited to have you. As I said in the intro, Austin is an analyst here at BiggerPockets, and this is something we’ve been talking about and dreaming about for a while, having a great analyst who could dive deep into research topics and bring them to us here on the market and other parts of the BiggerPockets content world. And today is the manifestation of all of that planning and thinking. Austin, maybe you could just give everyone a quick intro, a personal background before we dive into today’s episode.

Austin:
Yeah, absolutely. When I was just coming out of high school, that’s when I started listening to BiggerPockets around 2018, and I absolutely loved the show and eventually I found myself in a career as a data scientist as well as an analyst. And the number one piece of data that I loved analyzing was real estate markets. And so me coming on to BiggerPockets as the market intelligence analyst is probably the absolute best fit for me and my skills and my career. So I am very happy to be here and I’m very happy to look at and talk about markets all day long.

Dave:
Great. I mean, as you could probably tell, Austin and I are kindred spirits in this regard, but Austin, can I actually put you on the spot? Are you willing to tell everyone your story about your first deal?

Austin:
Yeah, sure. Okay. So I’ve been living in Los Angeles and when I first started listening to BiggerPockets, that’s when I was just leaving high school. So I didn’t quite have the savings to invest in my first deal. And then I started to save because I wanted to do a house hack in Los Angeles. I didn’t want to leave. And then interest rates went through the roof and house hacking in Los Angeles became almost infinitely harder. And so what I wanted to do was look at all of the markets, all of the data, population growth, job growth prices, went to price ratio, all of that good data, and look at what are the best markets for a beginner like myself to either invest out of state or possibly move into a house hack. And so out of all this research, I found some great markets. The market that I picked was Fayetteville, Arkansas,

Dave:
Shout out to Henry

Austin:
And spoken about a lot on this show and I finally understand why. So last month I flew there and I went around, this is just a subjective opinion, but it reminds me of Phoenix 2016. I actually grew up in Phoenix and I go there a lot. It reminds me of the growth that happened in Phoenix 2016 with almost Phoenix 2016 prices. So that looks very similar to me. It’s booming over there for its size, and I put an offer on a new construction house that I’ll be moving to and house hacking and yeah, we just signed yesterday, so

Dave:
Yesterday, right? Yes. It’s so exciting. I love this story so much that Austin joined BiggerPockets. He had been working on this for a while, but did some research into markets and different markets and went out and just bought his first house hack within a couple of weeks of being a BiggerPockets employee. Super excited for you, Austin. I love that you’re just living, you’re walking the walk here with your research too, which is super cool. Thank you for that background. Sorry to put you on the spot, but it’s so cool. I wanted to share, but let’s get into today’s topic, which if you’ve forgotten by now is we’re talking about housing supply. And just before we get into Austin’s research, I just wanted to give a quick recap to where we are in terms of housing supply. So first and foremost, we use the supply word supply in real estate in two ways that can get a little confusing.

Dave:
One is the overall total supply of houses in the United States, so how many physical structures, how many housing units exist across the entire country. Then oftentimes we talk about inventory as supply because when you’re looking at the marketplace of real estate and you’re trying to measure current demand versus the current supply, you want to look at what’s actually for sale right now. And so that’s why inventory can often be called supply. But from my understanding, your research we’re going to talk about here today, Austin is really sort of the first one, right? We’re talking about housing units, the total number of housing units that exist in the United States.

Austin:
Yes, yes. So supply has been increasing over the years if no one has noticed the amount of new construction that has been added into the marketplace across the entire United States on a per metro basis, an MSA is a metropolitan statistical area on a per metro basis. On average, each metro has been adding about 4% of its total supply per year every single year. That being said, there are certain areas that are adding much more than that, and that’s something that we can get into and how that impacts rents.

Dave:
Okay, great. So this is sort of the theme of the conversation and we definitely will be getting into individual markets, and I’m really excited to hear about what it’s going to do to rent, but I just wanted to remind people that the context of this, because we’re going to be talking a lot today about supply growth, and sorry to spoil a little bit how some markets, there’s a lot of supply coming online, but the important context here is that the United States by pretty much every measurement is in some sort of supply shortage. Now, depending on who you ask, that shortage could be one and a half million. It could be 3 million, it could be 7 million, but pretty much everyone agrees that there aren’t enough housing units to meet total overall demand for housing. And we’ve talked about this on the show before, but just as a quick reminder as to some of the reasons for that, a lot of it goes back to the great recession.

Dave:
A lot of building companies went out of business, it was just not very appealing for many years to build homes when prices were in the gutter. And so for many years, from about 2008 to the mid 2010s, we were underbuilding. And even though construction levels have sort of picked up since then, it created a deficit. Now, fast forward construction’s picked up, but construction’s just one of these things for at least for single family homes that it doesn’t scale so high because it takes time for houses to get built. It’s also just the way the construction industry works. A builder doesn’t want to sell a hundred units in one zip code all the same time because there’s probably enough demand in that moment for that supply. And so they spread it out. It takes time. There are zoning restrictions, cost of labor and material up, all those reasons, we are probably in a housing shortage. So that is the situation. Now let’s turn our conversation to what’s going on today. And Austin, maybe you can just help all of us understand why is this important in the first place? Why are we even talking about total housing supply? Why should real estate investors care?

Austin:
So as supply is added into the market, an easy example to pick on is Austin, Texas. I love that town, but it’s currently experiencing large rent declines because of a high number of vacancies in these apartment buildings. And why do apartment buildings now suddenly have a lot of vacancies? Well, it’s because there are new apartment units that existed before. So when supply is added into a market, the owners of these buildings have to fill these units. And when there is a large number of these buildings going up all at once, all at the same time, there’s a large number of vacancies in these new apartments, and they essentially might have to lower the rents that they’re charging in order to get tenants into these buildings because tenants now have more options between all of these new apartment buildings that have gone up. So the more supply that gets added into the market, it puts downward pressure on rent growth and can even drive rents lower than they were before in order to get these apartment units filled up, so to speak. So long story short, new supply can put downward pressure on rents, which is good for renters, can be not so good for investors. And then in a minute we’ll talk about why that still might be a good thing for investors, but we’ll get to that.

Dave:
We have to take a quick break to hear from our sponsors, but stick with us because Austin is going to break down his research including where supply is increasing right after this. Welcome back to On the Market, I’m here with analyst Austin Wolfe. Can you give me an overview then of what you started to look into? What questions were you trying to answer about housing supply when you started this research you’re going to share with us?

Austin:
I had a hunch that looking at supply would give me insight into which markets are currently seeing the most rent declines and will likely continue seeing either rent declines or just stagnant rent growth. So rent’s not growing, rent’s not declining because of the new supply. I started there. First I wanted to get a picture of where are rents at right now? Are they growing on a national level? Are they shrinking? What metros are currently experiencing rent declines? What I found was nationally rents are up in the past year by almost 2%. That’s on average across all markets, but as we alluded to, there are certain markets where rents are declining. Fort Myers for example, has added a lot of new supply they have. They’re seeing a rent decline of about 5%, 5.7% over the past year. Dallas, Texas, 1.6% rent declines, Phoenix, Arizona, almost two and a half percent rent declines.

Austin:
So that alone was very interesting, but in my opinion, it’s not enough to look at just rent declines over the past year. I also wanted to understand, okay, do vacancies have anything to do with this? Yes, they do is what I found. National vacancy rate is about 7.6% across all metros on average. So the national is 7%, right? Fort Myers has a vacancy of 15%, basically double the national rate. And as I said before, Fort Myers is experiencing a 5% rent decline, Dallas, Texas, 10% vacancy, Phoenix, Arizona, 11% vacancy, and the list goes on. I can do this all day, but it’s my favorite thing. But after I looked at vacancies, that’s when I also wanted to bring in supply into the equation. We have rent declines, we have vacancies. Now let’s just look at the amount of new supply that’s being added into this market and see how that is driving rents down or putting downward pressure on rents. Hope that makes sense.

Dave:
Yeah, it absolutely does make sense. And I just want to clarify, this is all multifamily supply, right? We’re talking about multifamily construction,

Austin:
Correct.

Dave:
And I think it’s important because obviously it’s a different asset class than residential construction, but there is a correlation and important relationship between multifamily rents and single family rents. And so even if you’re not a multifamily investor, I know just my experience living investing in Denver, we don’t have a lot of construction for single family homes. We have a lot of multifamily construction, but that is impacting rents for single family or small multifamily operators as well. But just to sort of summarize, I think what you’re saying here, Austin, is the cities where we are having the most supply, it stands to reason vacancies are going up. And when vacancies go up, rents go down because operators are competing for tenants. And so the way people compete for tenants is by lowering prices and that’s why rents go down. But I’m interested because some of the markets that you were talking about were or are some of the markets that have the strongest population growth, and so is it just that supply is coming on faster than even booming? Cities like Austin are growing?

Austin:
So the way that I like to think of supply is a lagging indicator of demand. Builders will build supply because they foresee growth in the near future or they see growth right now and they want to capitalize on that. So in these places that were essentially the pandemic Boone towns mostly across the Sunbelt, you’re right, there was large population growth, there still is good job growth in these places. I think that there is going to be a catch-up period. Essentially, all of these units came online, I don’t want to say at once, but over the long run, they came online at once. And because all of these new apartments are essentially sitting vacant with hundreds of units all at once, it’s going to take a while for the market, so to speak, to reach equilibrium. So I don’t think that rents are going to go down forever as new units are added, that will not happen. I just think that it’s going to take some time for the market to catch up, so to speak, with all of the new supply that’s being added.

Dave:
To me, this sort of was a pretty confusing part of market dynamics for a while, but it’s becoming more clear because I can imagine ever listening I felt the same way. You’re sort of like, okay, we’re at a housing shortage. We just talked about it. We have three to 7 million units short of what we need. How are you saying that there’s an oversupply, and I was actually talking to someone recently who compared it to a flood and obviously not in a good way. Floods are terrible things, but it’s like you can be in a drought and then experienced a ton of rain all at once, and that could be really damaging to the entire ecosystem. But at the end of the flood you could still be in a drought. And that’s sort of how the multifamily market seems to be right. We don’t have enough units.

Dave:
People just started building crazy three or four years ago and they’re all coming online. We’re getting the flood of units and it will take for those apartments a while to get absorbed. And I’m going to butcher this analogy, just like it takes a while for the floodwater to get absorbed back into the water table. Is that sort of what you mean? Austin is like rents aren’t going to go down to ever. We’re just in this period right now where not everyone moves at one point. Not everyone wants an apartment the minute all this stuff comes online, so it’s just going to take some time to sort itself out.

Austin:
That’s a great analogy. And just because Austin, Texas adds 20,000 units within the span of a few months doesn’t mean that there are 20,000 people ready to move into these units within those three months. You’re absolutely right. I really like that analogy. That’s clear enough for me.

Dave:
Alright, good. Well, I stole it from a guest on the BiggerPockets real estate show, so don’t give me any credit, but I like it and I butchered it. Okay, so when you were doing this research, you mentioned a couple of markets that were having negative growth. What about the markets that have little to no supply? Because I invest personally in a Midwest market where they just don’t build multifamily. And I am curious if that’s common and what’s happening in those types of markets?

Austin:
In those types of markets where they generally don’t build multifamily. Single family rents are going up. I don’t have an exact number in front of me, but they are positive and they are growing faster than multifamily. Personally in the market that I have chosen Fayetteville, there are a number of cities within the northwest Arkansas area. Bentonville is where the Walmart HQ is, and they are building many, many apartment buildings in that specific area. However, in Fayetteville where the college is south of Bentonville, there are no apartment buildings under construction currently, none at all. There are only a few multifamily buildings up already and everything else is single family and those rents have been going up. So there hasn’t been as much downward pressure on single family as there has multifamily.

Dave:
Alright, so you were talking about your research and sort of talking about you looked at rents, vacancies and how they were related. Where did you go from there?

Austin:
Okay, now that we know that rents are declining in certain markets, vacancies are high in those markets. What does the supply look like in these? Going back to the Fort Myers example, they’ve added 11% of its total supply over the past year. So just as a example, if a market has a thousand apartment units, let’s say 10% of that would be adding an additional a hundred units, right? So Fort Myers added an additional 11% of its total supply in the past year, which is God massive. Yes. And it has over 22% more supply currently under construction. So this is massive and that’s probably why it’s currently experiencing a 15% vacancy doubled the national average. Just a few more examples, Raleigh, North Carolina, I know that was experienced a relatively good boom during the pandemic. They’ve added 8% of its total supply over the past year, and they have 9% more under construction, and they currently have an 11% vacancy rate, so not as high as Fort Myers, but they’re still experiencing about a 3% rent decline. So what I wanted to do from there was, okay, I have these examples that I’m looking at with my eyes. What does the math tell me? Is there a way to mathematically measure the relationship between supply growth and rent decline?

Dave:
Yes.

Austin:
Turns out there is yes. Yeah, the answer is yes. And it uses, I’m going to get a little geeky. It uses this measure in statistics called the correlation coefficient. What does that mean? It’s just the measure of the relationship between, we’ll say two variables, and that’s measured between negative one and positive one. And the closer that relationship measure is to positive one, the more they have a, let’s say, positive relationship. If one goes up, the other goes up, the more the correlation coefficient is closer to negative one, they have an inverse relationship. If one goes up, the other goes down. You can see where I’m headed with this. In the past three years in which I measured this from 2021 to 2024, many of the biggest markets had a correlation close to negative one between supply and rents. Supply is going up, it puts downward pressure on rents.

Austin:
Now, no market has a perfect negative one correlation. That would just mean that anytime you add supply rents go down. That’s not realistic. These markets had anywhere between negative 40% to negative 70%. So a strong relationship but not a one-to-one. So as supply increases for many of these markets, it puts downward pressure on rents. And that correlation coefficient is essentially how we can measure and describe how strong that relationship is for each market. And each market is different. Not all markets have the exact same relationship. What did the data say? Well, New York actually had the largest negative relationship between supply and rents. They’re very highly correlated. They had a correlation of about negative 70%. So again, not perfect negative correlation at negative a hundred percent, but essentially what that tells me is if supply is added in New York, it puts downward pressure on rents more so than any other market in the nation right now.

Austin:
Why is that? In my opinion, it’s because rents there are already so high, they already have such a huge housing shortage that any additional supply can help alleviate a little bit how much of those rents have risen. And again, rents are very expensive in New York, so maybe any little bit helps. Another one was Washington, DC and Phoenix, they had about negative 69% correlation. So as units are added there, rents can go down. Fort Myers, that big example that I keep going back to, they actually only had a negative 40% relationship and Dallas had a negative 44% relationship. So again, these measures aren’t exactly one-to-one, but to me they’re a good ballpark of seeing, okay, which markets, if we add more supply, are rents likely going to go down or at least stay stagnant or have downward pressure on them? And that’s something that we’ve actually published on the blog, which maybe we can link to in the show notes. We analyze the largest rental markets and then I’ve sort of listed all of the correlations for these biggest markets between that time period. Again, you don’t really need to know this data. I just think it’s fun to see, oh, that’s interesting, Phoenix, the units we had in Phoenix, the more likely it is rents are going to go down.

Dave:
Just to summarize for everyone, there are different markets. We talk about supply coming online, but it’s not the same in every single market. In some places if you add supply, it doesn’t really matter all that much. In other places like New York or Phoenix, it’s going to have a huge implication for rent and it’s going to have a negative impact. Now, I think it’s important to remember though, when we’re talking about correlations that just because something has a strong correlation doesn’t tell us anything about the severity of the decline, right? So just because new supply pushes down rent doesn’t mean that New York is going to experience a bigger rent drop than another market that is not part of the correlation coefficient metric and what it’s telling us. So from there, I’m curious because the coefficient tells us something about what’s happened in the past, it’s looking at historical trends, but can we use it to look forward about where rent is likely to grow or decline?

Austin:
All the numbers I just said, were looking at the data between 2021 and 2024. That is a three year period. You could use that number as a forecast to forecast maybe the next year or the year after that. It’s going to be a very poor forecast with a large margin of error. So before answering the question, I wanted to look at what did the correlation coefficient look like between the years 2020 24? What did it look like on a longer time period? In my opinion, that would give us a better way to answer that question of what this might look like in the future. And what’s interesting is between the years 2020, 24, a 24 year period, most of these markets that I just said that had a negative correlation between 2021 and 2024 in the past three years, over the past 24 years, they had a positive relationship. As supply came online, as new supplies added into a market, it was highly correlated with rent increases. Now, before I go forward, I just want to give a disclaimer. Correlation does not equal causation. Just because supply units are coming online does not mean it directly causes rents to go up over that 24 year period. Does not mean it directly causes rents to decline in the three year period that we looked at. It’s possible that it could have a causation, but correlation does not equal causation. Just wanted to throw that disclaimer out there.

Dave:
That’s a good point because to me it’s sort of a chicken in the egg problem, or not question I guess not problem. But yeah, so supply comes online and in the short run it might negatively impact rents. But over the long run, I would imagine supply is coming online because that area is booming, right? Builders aren’t dumb. They’re seeing something that’s causing them to build supply. So it kind of makes sense to me that over the long run, supply growth is a positive thing.

Austin:
The amount of supply that’s being added into the market is a lagging indicator of growth. Builders and investors foresee growth either happening right now or in the future and they’re going out and they’re capitalizing on that. So like we see of the correlation coefficient between 2020 24, most of these markets have a very strong positive relationship in that 24 year time. It’s likely because those areas grew a lot. Builders saw that growth, they add a new supply into the market. It hurt in the short term maybe, but in the long term, all it is is a reflection of the growth that’s happening in that market.

Dave:
All right, time for one last short break. We’ll be right back with more discussion on what this data means for investors and what you could do with this opportunity right after this. Hey, investors, welcome back to on the market. What should people do with this information? Austin, if you’re an investor listening to this saying, Hey, supply short term could negatively impact grants. It could be great. I have a market where let’s just say supply is growing or whatever it is. How would you use this information

Austin:
To answer that? I have one more piece of data to throw in there and then I can finally answer this question. In 2022, we had about 1 million units on our construction. In 2023, we had about 1.1 million units under construction this year we have about only 800,000 units under construction. So the amount of units under construction is decreasing. The supply that will be coming online will also be decreasing in these coming years. And so it’s possible that rents will either continue to decline in these markets by a very, very small amount, or they’ll stagnate or their growth will be very small. So if you’re an investor, I think it would depend on the type of asset that you’re buying. Single family is going to be a little bit different from multifamily. We’ve been talking about multifamily almost exclusively this entire show. And all the data I’ve spoken to at this point has been multifamily data. So if you’re a person that’s looking to buy or invest or own single family rentals, the multifamily market is going to impact you a little bit. But there are renters out there that want to rent a house and not an apartment unit, and that’s likely why we haven’t seen rents decline in single family markets as much as we have in the multifamily markets. There’s just not as much of them out there.

Austin:
They have things that apartments don’t like front yard, backyard. I know town homes are a little different, but we’re talking about apartment buildings right now. So if you own a single family rental, I think you’re fine. Things are going to be okay for you. That’s good. Yeah, I don’t think this impacts you that much if you own multifamily buildings, five units or more. I think that in the short term, and by short term I mean two to three years as this new supply continues to come online, I would doubt that there’s going to be rent growth in these major markets. However, rents can’t decline forever. It’s just not going to happen. So I think that if you currently own an asset, I think if you hold onto it as long as you cashflow, I think you’re going to be just fine in the next coming years. I think after a three year period is when we’ll start to see rent growth that is attractive. Again, I don’t think it’s going to be attractive for the next three years,

Dave:
Really. Three years

Austin:
20, 26 to 2027 is sort of my forecast. And again, this is an educated guess.

Dave:
No, but if you’re coming on the show, I make everyone make predictions and we record it, and that’s just part of being on the show is you have to go on the record to make a prediction. So here’s your

Austin:
Prediction. I’m kind of sweating right now. This is intense. Well, yeah. The only reason I have this prediction is because in 2022, again, we have a million units on our construction. In 2023, we have 1.1 million units on our construction, and then it starts to dive from there. Right now, we only have 800,000 units under construction, so it has decreased and it can take up to a few years to get this supply online. So we’re still going to see that supply coming online from projects that were started in 2022 and 2023. But again, the amount of supply that’s going to be added is going to taper off, and I think that the population growth and job growth that is currently happening in these areas will eventually catch up to this flood of supply, so to speak. So I’m putting it out there, 20 26, 20 27, that’s when we’re finally going to see attractive rent growths again. Again, rents can still grow in that time, but I don’t think they’ll grow as much as they will probably in the next three, five years.

Dave:
All right, makes sense. All right, we’re going to hold you to it and we’ll find out if Austin’s right. Austin, my last question for you is if people want to look for this research on their own or look up your research, where should they do this?

Austin:
So there are a few different sources that are public. There’s one source that I use that is not public, but the sources that I use that are public price information, rent growth, you can get from Zillow. And again, Zillow has a free page on their website where you can just download this data into a CSV. It’s very easy to do. Population growth comes from the census. Their website is not as user-friendly as Zillow, but it’s still free.

Dave:
It is certainly not. But they have really good data.

Austin:
They do, and they have a lot of it,

Dave:
Yes,

Austin:
Job growth you can get from a place called the Bureau of Labor Statistics. For example, if you wanted to look at job growth in Phoenix, all you have to do is into Google, type in Phoenix BLS for Bureau of Labor Statistics Economy or job Growth, and then a page will come up or it’ll say Economy at a Glance for Phoenix, Arizona. And so if you just have a few markets in mind that you want to compare or you just want to look at your market, that is a great place to start. And then there are more advanced options for advanced data analytics. You can use data from a subscription from CoStar, but again, I don’t think you need to do that if you’re just looking at a few markets or one market.

Dave:
Awesome. Well, thank you Austin, for telling us all about this and great job on this research. It’s super helpful. Austin also wrote a blog about this. If you want to see what’s going on in individual markets, you could check that on biggerpockets.com/blog. Of course. And if you want to connect with Austin, do that on BiggerPockets. And I’m just going to blow you up, Austin, I’m sorry. But I want to know what sorts of research projects you want Austin to work on in the future? Do you have ideas on new economic market-based research that Austin and myself should be working on? Send them to Austin Wolf on BiggerPockets, and we are going to prioritize them. We’re going to start working on them so you can get more data, more information that impacts your investing portfolio. It’s going to be a lot of fun. I’m super excited about it. And if you are listening on Spotify, we have a fancy new poll you can check out and you can vote on what you want the next research project from Austin to be. I’m very curious what it’s going to be. Austin, thanks again for being here, and congrats on your first deal, man. It’s really exciting.

Austin:
Thank you. I appreciate it.

Dave:
Thank you all for listening. I’m Dave Meyer for BiggerPockets. We’ll see you soon for another episode of On The Market.

Dave:
On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.