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Renters Complained, States Listened, Owners Freaked

Affordability challenges have become an overarching theme, and perhaps the one dark cloud hanging over the sector. While the growing economy has led to increased wage growth, it has not been enough to cover the rise in rent for most markets. It has reached a tipping point; according to an annual report by the National Low Income Housing Coalition; a full-time minimum-wage employee can not afford to rent a two-bedroom apartment anywhere in the U.S.

Rent Control Legislation Introduced or Passed

In 2019, California, New York, and Oregon enacted rent control and tightened eviction policies while several states have introduced legislation to take similar measures. Some policies are tied to inflation while New York has multiple levels of annual rent increases depending upon the type of rent control a property falls under. It is a confusing situation; however, it presents opportunities for investors.

Recently passed legislation could also affect other markets across the country. For example, once the legislation passed in New York, sales volume and valuation metrics decreased in New York City but we saw the opposite occur across the river in New Jersey. This was likely a knee-jerk reaction; however, we believe secondary and tertiary markets such as but not limited to, Phoenix, Jersey City, Orlando, Raleigh, Austin, and Boise will see increased capital flow.

Workforce & Affordable Housing

Given positive demand drivers, rent growth has been steady but wage growth has not kept up. In addition, many metros, such as NYC, Seattle, SF, and DC have experienced historically high levels of new supply; however, the majority of that supply was concentrated in Luxury and Class A units. As a result, the gap between take-home pay and rent trends has become worrisome and a burden on some. This is not just the case for high-end units; the strong job market has increased demand for entry-level housing across most markets. In turn, workforce housing has delivered steady cash flows and favorable yields. Moderate-Income and Lower-Income households represent a stable and sustainable long-term source of demand for apartments. These households tend to rent out of necessity, rather than by choice.

Multifamily Buy/Hold/Sell Recommendations

Based on responses from the PWC Emerging Trends in Real Estate 2020 survey, the majority lean towards buying & holding affordable housing vs higher-end apartments.

Secondary & Tertiary Markets Emerging

As goes a strong economy, so goes rising construction costs, which leads to feasibility concerns for multifamily developers. To justify costs, they have typically built big or luxurious; however, cap rate spreads between Class A and Class C properties continue to tighten, indicating that many investors are finding opportunities in lower-quality properties and within secondary and tertiary markets.

Multifamily Buy/Hold/Sell Recommendations

Tight labor markets and the extended growth cycle have boosted apartment demand nationwide. workers are forced to flee primary markets due to astronomical rent costs, these high-growth secondary and tertiary markets will experience an even greater demand for workforce housing in the coming years.

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