And while nothing close to an apocalypse has occurred, retail did take another turn in its long journey. Staples of 20th-century shopping such as Sears and Bed, Bath & Beyond have largely shuttered their doors. Others, like JCPenney, are doing whatever they can to stay afloat. Many malls have permanently closed, with others on the chopping block. And even some power centers and neighborhood centers have either closed or sit half empty.

When we look at the long-term national-level performance and development data, it is hard to find many bright spots. Construction of retail property has been anemic, with less than 100 million square feet of space added over the past decade, or less than 5% of total U.S. inventory, Moody’s Analytics found. For context, office-sector inventory grew by about 10% during the same period. As for rent growth, retail assets have fallen well short of inflation, even prior to the recent run-up in consumer prices.

But all of that is in the past, and while the retail sector will continue to see changes, we do see a new equilibrium on the horizon. The industry has somewhat rightsized itself, finding ways to appeal to consumers who desire the more social aspects of shopping and entertainment while also providing “showrooms” and customized spaces to enhance the online experience.

How have the performance metrics fared recently? As the accompanying chart illustrates, the U.S. retail vacancy rate has stabilized at a shade over 10%, while effective rent growth has picked up. This data shows that the sector still has plenty of room for further growth, but the aggregate statistics also mask some interesting pockets of positive activity.

One of the most startling statistics is rent by vintage. In the majority of metros around the country, there is a rent premium of 50% to 100% for properties built in the past decade — and recent rent growth has followed suit. Metro-level differences are also noteworthy. The areas of the country that have not seen large population or income gains tend to have elevated vacancy rates, often due to the disproportionate amount of older properties that are tied to a lack of development funding.

Some of the clearest examples of this trend include Indianapolis; New Orleans; New Haven, Connecticut; and Syracuse, New York, each of which have retail vacancy rates of more than 15%. Creative, modern developments in these metros may have great potential given the older stock.

Where does this ever-evolving property type head from here? Well, e-commerce is likely to continue growing. The online share of all retail sales has been trending around 15% for a while, and Moody’s Analytics expects it to jump to 20% by the end of the decade. Along with continued shifts in population and consumer preferences, this will sustain some of the same nuances for sector.

The national-level metrics will stay similar to where they are now, while older inventory will make way for trendy developments that incorporate more of the experiential and omnichannel needs of modern society. As always with commercial real estate (and maybe most importantly with retail), a close inspection of the asset, the tenants and the location are vital for a successful investment endeavor. ●

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Another 500 bps of rate hikes later, it’s fair to say that the Fed has been able to get a handle on inflation while the labor market has remained surprisingly resilient. This brief backdrop is important for understanding the highly rate-sensitive nature of the real estate industry.

With the 10-year Treasury yield hitting 4.98% in October 2023 — and the average 30-year fixed mortgage rate briefly topping 7.75% that same month — higher financing costs coupled with a scarcity of available housing inventory has led to a significant slowdown across the residential real estate sector. Additionally, after more than a decade of ultra-loose monetary policy, sellers don’t want to give up their low mortgage rates, which has only exacerbated the already adverse housing supply conditions.

Consequently, these factors have provided an uplift to the multifamily housing sector as potential buyers are priced out of the purchase market and funneled into the rental market. Unfortunately, this is a lose-lose scenario for many households. On one hand, a median-income household that made a 20% downpayment on a median-priced home in the U.S. in third-quarter 2023 had a mortgage-to-income ratio of 35%, according to Attom. On the other hand, Moody’s data found that the national median rent-to-income ratio of 30% was only slightly better at that time, illustrating how discretionary budgets are being constrained on both fronts.

Renters can be thankful that multifamily supply conditions are not nearly as bad as they are in the owner-occupied market. For instance, as the chart on this page shows, Moody’s expects that 2023 will be a banner year for multifamily completions at nearly 250,000 units, which will help to keep annualized growth for asking rents from exceeding 1%.

Strong capital flows into the multifamily sector are a good omen for those stuck waiting in the rental market as the incremental supply created by developers eventually tends to place downward pressure on rents. In summation, while many potential homebuyers may be unhappy with their current living arrangements, it would behoove them to remain patient and continue saving for a larger downpayment. They’ll be better positioned to capitalize when the right homeownership opportunity presents itself. ●

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In the third quarter of this year, net absorption across the sector was strongly negative, with the total amount of leased square footage declining by 12.4 million square feet at the national level. This was the largest decline in the Moody’s Analytics dataset since early 2021. Furthermore, as the chart on this page shows, the current vacancy rate has reached 19.2%, the highest level since the tail end of the savings and loan crisis in the early 1990s. We expect this bumpy ride to result in another increase of 20 to 40 basis points (bps) over the next 12 to 18 months.

On the surface, this is a sour story, with data and anecdotes likely to confirm many pundits’ expectations of an apocalypse for the office sector. And while it’s easy to concede this as one of the most challenging moments in the history of the office property type, it’s also important to recognize the depth and nuance of a story that actually began many years prior to the start of the COVID-19 pandemic.

What is this story? Well, it’s more of an epic than a tale, with an overarching theme of obsolescence and change. The pandemic served to accelerate the demand shift toward newer and more flexible spaces for the country’s massive and growing knowledge-based economy, but this evolution actually started long ago.

There are a few facts to ponder. First, the decline in leased office space in third-quarter 2023 (the aforementioned 12.4 million square feet) is only about one-third the amount of the worst quarterly decline recorded during the financial crisis of the late 2000s. Second, as shown on the chart above, the vacancy delta during the Great Recession was a massive 500 bps, whereas the post-pandemic change is about 200 bps.

Third, the most intriguing and telling fact may be that during the expansionary period of 2010 to 2019, the national office vacancy rate retreated by only 130 bps from its peak before floundering at a level above its long-run average of 16% — until the pandemic arrived. Given that construction activity during this expansion was modest at best, this is evidence of an attitude shift and evolution for the office market that began long ago.

Languishing national-level property values confirm this market sluggishness. Gains in office values from 2010 to 2019 amounted to about 50% of the commercial real estate market as a whole during this decade. But it’s also worth noting that not all properties are faring equally.

Akin to the retail sector of the past three decades, we are seeing successful office properties built between 1960 and 2000 make way for a modern standard in urban or suburban locations that have become more en vogue. Well-placed new construction has leased up reasonably well as tenants have been willing and able to move into these spaces for more than a decade.

The current flux in the office market is simply serving to update the timeline for changes that have been in the works for quite a while. This is not an end to the office, but it is a fundamental change in the locations of power and buildings within each city.

It’s expected that successful office buildings of the future will be those in mixed-use areas that much more closely resemble “24-hour neighborhoods” rather than the “9-to-5 neighborhoods” of the 1980s. Distinct zones of office activity are quickly dying and are being replaced by areas where office, retail, residential and public spaces can mingle and thrive together. Employees will come back to the office, but it will take both a high-quality building and a high-quality location to do that. ●

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First, let’s be clear that the good times being referred to should be viewed through the lens of leisure and hospitality operators, since consumers will undoubtedly have a thing or two to say about the price of their last hotel stay. But the reality is, higher prices for accommodations have been a wide-spread consequence of the post-pandemic recovery and consumers are justified in voicing their concerns. (After all, try speaking with a potential homebuyer who missed the boat on sub-3% mortgage rates and has seen property values only continue to climb.)

Nevertheless, inflation has remained above the Federal Reserve’s 2% target since November 2019. And while the Consumer Price Index has fallen considerably from its peak of 8.9% in June 2022, the headline increase this past August was still above target at 3.7%. There are several other concerns on the horizon that have the propensity to adversely impact consumers, with the most imminent being the recent resumption of student loan interest accruals and repayments.

Additionally, gasoline prices have increased by nearly 20% during the first eight months of this year, and a somewhat weaker dollar has tended to dampen international travel (albeit the conversions to euros or pounds are still more favorable than in 2019, while the dollar-to-yen exchange rate is near a multidecade high). These factors have resulted in U.S. consumers seeing their budgets squeezed as their excess savings continue to fall.

Consequently, as consumers reevaluate their discretionary budgets, a pullback in travel demand should be anticipated. This is especially true for leisure travel rather than business travel, as the price elasticity of demand for business travel is usually lower.

So, back to the question at hand: How long does Moody’s Analytics expect the good times to last for the U.S. hotel sector? While performance was exceptional in the first half of 2023, we expect a deceleration to occur in the latter half of the year. Specifically, national RevPAR increased by approximately 20% in the first six months of the year and is projected to rise an additional 7% by year’s end — hence, we forecast an annualized increase of roughly 27% relative to 2022.

Looking ahead to 2024, which becomes even less clear, we estimate an additional bump in RevPAR of about 6%. For perspective, the average year-over-year increase in RevPAR from 2001 to 2019, based on Moody’s Analytics data, was about 2%. Importantly, this long-term average omits the immediate post-pandemic data, given the extreme fluctuations experienced in 2020 and 2021 (which included a 65% decline and a 123% increase in RevPAR, respectively).

Visibility beyond 2024 in terms of financial and economic conditions is even more cloudy, but our current projections fall short of the aforementioned 2% long-term average. In summary, growth has already started to decelerate and it’s possible that the cyclical nature of the hotel industry moves in the other direction within the next 18 months.

It’s best to wait and see, but as illustrated on the accompanying chart, hospitality property owners can let the good times roll. RevPAR is projected to end this year 11.3% higher than its pre-pandemic level after three straight years below this threshold. ●

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Domestic migration, however, was upended in early 2020 when workers and students abruptly went to fully remote status. Coupled with an inability to spend money on recreational activities due to pandemic-induced lockdowns and social distancing, this meant people spent their excess personal savings and stimulus payments on goods instead.

Between more flexible moving seasons and the accumulation of items that might not have otherwise been purchased, households began to scoop up self-storage space in record numbers. The sector shined as a result. Nationwide absorption peaked at just shy of 200,000 units in second-quarter 2021, as did annualized asking rent growth for 10×10 climate-controlled units (4.9%) and non-climate-controlled units of the same size (3.9%).

Today, however, self storage (like so many other pandemic-era superstar property types) is returning to earth. Slower growth and declines are happening across the country, which indicate that consumer spending patterns have shifted away from goods and back to services and entertainment. High inflation also cut into excess household savings, causing consumers to tighten the purse strings on discretionary purchases. This includes self-storage units that they may no longer want or need.

This confluence of factors is directly affecting performance metrics in the self-storage sector. The magnitude and direction of expected outcomes — patterns that have held relatively steady over the history of Moody’s data series — have shifted as the sector deals with new supply-and-demand expectations and moves toward a new state of stability.

For example, from 2012 to 2022, completions during the second quarter of the year averaged about 47,500 units. In second-quarter 2023, however, completions dipped to approximately 12,600 units. The same pattern held true in Q4 2022 and Q1 2023. In addition to demand-side headwinds that suppressed developer appetite for bringing new product to market, new supply has also been constrained over the past two years by surging costs for land and raw materials, as well as a tight labor market and higher project financing costs.

Although it’s partially unintentional, the sharp decline in the delivery of new supply has proven beneficial for sustained performance metrics, despite the slowing demand across the sector. Net absorption, while still positive in Q2 2023 at about 46,000 units, finished well below the long-term second-quarter average of approximately 159,000 units.

But an opposing trend occurred in Q1 2023. With 64,000 units leased during the three-month period, demand was 60% higher than the long-run first-quarter average of 40,000 units leased from 2012 to 2022. And while absorption was negative in Q4 2022, which was consistent with historical trends, the amount of space shed (107,000 units) far exceeded the average amount of space shed during the fourth quarter of previous years (38,500 units).

So, is the self-storage sector’s traditional seasonality coming to an end? Not quite. While there is a major recalibration underway for owners and operators in their ability to easily predict the magnitude and directionality of key performance metrics (including rents and vacancies), it is temporary.

It also appears that, especially on the demand side, unexpected weakness in some quarters is being supplanted — at least in part — by unexpected strength in other quarters. The drastic and unexpected external shocks that led to stratospheric growth in this sector have receded. Self storage is on a path to a new equilibrium and is poised for stabilization in the coming years. ●

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Furthermore, net absorption for both property subtypes has plummeted since mid-2022. The question now being asked is, where do we go from here? Mortgage lenders and borrowers are looking to determine whether the sector is simply regressing toward a new equilibrium after a positive demand shock, or if there is significant stress forthcoming for this highly favored asset class.

Before we dig into the Moody’s Analytics outlook for the sector as a whole, one interesting development of note is the divergent net-absorption paths within the industrial subtypes. As mentioned, declining lease activity has been observed for both warehouse and flex spaces in recent quarters, but the latter category is facing a much stiffer test of its resilience in today’s market.

Since mid-2022, the level of occupied square footage for flex and R&D spaces has actually declined for the nation as a whole. As the chart on this page shows, it’s true that occupied stock is still above the level recorded at the start of 2022, but a period of nearly a year without any net expansion of space usage is worrisome. As for warehouse and distribution space, it is clearer that there is a moderation in the pace of growth, rather than the growth hitting a wall.

The rationale for the divergence in fortunes stems from the nuances within the subtype uses and their relationships with the national and global economies. Flex and R&D space often has elements of the office sector (and even light manufacturing). With changes to the workplace related to hybrid and remote policies, owners of flex spaces are — and likely will continue — feeling at least some of the pain of their more specifically tailored office-space counterparts.

On the manufacturing front, the past year has been a tough one for this economic sector as a whole.  Various measurements of manufacturing activity and sentiment have been pointing toward a less-than-favorable environment. After a period of rapid growth in 2021 and early 2022, a combination of headwinds has brought current and future space needs into question for flex and R&D spaces.

In contrast, the tailwinds for the warehouse and distribution sector are considerably stronger and much less uncertain than those of the flex segment. E-commerce continues to grow. Meanwhile, accelerated migratory patterns, as well as fixes to the logistics network weaknesses that were exposed early in the COVID-19 pandemic, promote greater confidence in this subsector for lenders, developers and investors.

As for a more specific outlook for the industrial sector, Moody’s maintains a positive view for this property type. Warehouse and distribution spaces should continue their upward trajectory, while the flex/R&D segment is expected to regain its footing. A new and higher growth path has been established as companies reshore or nearshore their manufacturing activities, which will lessen supply chain pressures over the long term and allow the growth of e-commerce to endure.

Lofty construction expenses for manufacturing facilities are serving as a leading indicator of this path. Additionally, innovative shipping methods and the push to ship many goods in less time requires a larger and more spread-out footprint of warehouse and distribution facilities. The construction pipeline indicates that many of the projects started during the height of growth in this sector will come online in 2023, meaning that new supply will likely exceed net absorption for the first time in several years.

Nonetheless, relatively constant vacancy rates in the 4% to 5% range are poised to keep effective rent growth rates in the region of 6% per year. This is still well above the historic yearly averages prior to 2020. ●

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The COVID-19 pandemic hit this sector disproportionately hard due to the initial lack of preventive health measures, the severity of infections and persistent staffing shortages. The sectorwide vacancy rate jumped from 10% in 2019 to 17% in early 2021 before vaccines became widely available among residents and staff. But as COVID concerns gradually faded, other emerging macroeconomic factors (geopolitical conflicts, persistent labor shortages, and higher costs for labor and building materials) continued to shake up the sector’s fundamentals.

Moody’s data shows that senior housing construction deliveries in 2021 were down to less than 60% of their pre-pandemic average while starts fell to a five-year low. Last year, as the cost of capital shot up and credit availability tightened, deliveries were only 10% of their 2021 level. While senior housing construction activity slowed, demand rose steadily as confidence in the safety of these facilities gradually returned amid robust need from the U.S. senior population.

Census data shows that the number of Americans who are 65 or older reached 55.8 million — or 16.8% of the nation’s population — in 2020. The rapid growth of this demographic since 2010 is being driven by aging baby boomers, who began turning 65 in 2011. This combination of persistent demand and reduced supply growth caused the senior housing vacancy rate to decline for eight straight quarters, by a total of 390 basis points (bps), to reach 13.2% in Q1 2023.

Across the four senior housing types, memory care facilities were under the most pressure during the pandemic due to their need for specialized living designs and trained staff members. Memory care lagged the other three subsectors with the highest level and steepest increase of vacancy rate during the pandemic era. At the other end of the spectrum, independent living facilities — which are the most affordable of the senior housing types — have been the most resilient.

Need-based demand and weak construction activity have continued to cause excessive supply to be absorbed. Across the board, vacancy rates dropped during the year ending this past March, led by memory care (-240 bps) and assisted living facilities (-200 bps). Independent living (-190 bps) and skilled nursing facilities (-150 bps) weren’t far behind.

The senior housing sector usually registers its largest rent increases in the first quarter, when repricing occurs as regulatory and budgetary considerations take effect. In Q1 2023, rents for the four subsectors jumped by 3.5% to 3.7%, the highest annualized growth in Moody’s 10-year tracking history. Strong demand tightened market conditions and justified rapid rent growth.

Moreover, rising inflation and elevated interest rates have forced the adjustment of rent to account for higher operational and capital expenses. Over the past four years, rents for assisted living and independent living units have grown the most due to their relatively lower rent levels. Cumulative rent growth has reached 10.5% for assisted living, 9.6% for independent living, and 9% for both memory care and skilled nursing facilities.

How long will the boom last? Although the answer may depend on the interplay of factors such as the cost of goods and services, the availability of mortgage credit and the supply of skilled labor, the need for senior community support services will continue to rise as baby boomers retire and age. The passage of the Inflation Reduction Act (which will lower medical expenses for senior citizens) is likely to produce some long-term benefit for the sector’s recovery.

Across various regions, Midwest and Northeast senior housing markets were hit hardest during the pandemic but have been leading the recovery up to present day. A full understanding of the senior population, especially at the local level, will be critical for investors to turn a profit during an approaching economic downturn. ●

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While single-family homes historically were the exclusive purview of owner-occupants with the goal of homeownership, SFRs are becoming an increasingly popular housing option on the demand side due to a plethora of affordability issues. These barriers include house price appreciation that vastly exceeds wage growth and mortgage rates that make renting less expensive than owning. These obstacles plague the millennial generation in particular, many of whom have reached 40 years of age without the ability to climb even the first rung of the property ladder by purchasing a starter home.

Single-family rentals have been around for many years, but their broad commercialization has led to product differentiation. The two main products now available are those in build-to-rent (BTR) communities and those drawn from the existing housing stock that are located in primarily owner-occupied neighborhoods. The former typically involves new (or relatively new) construction with a plethora of amenities that mirror traditional multifamily homes. The latter is usually an older product than a BTR home, and it tends to be better managed and maintained when owned by an institutional investor rather than a small mom-and-pop operation.

Even institutional owners, however, are constantly reevaluating their holdings within the existing housing stock. They frequently dispose of older properties at higher capitalization rates and buy newer properties at lower cap rates, which garner savings by being less costly to maintain in the long run. Properties with lower cap rates are generally newer and in better condition.

Rents are a significant portion of the cap rate calculation, which is derived from the net operating income and the market value of the property. So, how do single-family rents vary by metro area based on a significant presence of institutional investors in the area’s SFR sector? Using quarterly indices from real estate data analytics firm Beekin, we calculated single-family rent growth from first-quarter 2020 through first-quarter 2023.

For context, SFR holdings by real estate investment trusts (REITs) increased by 5.6% from Q4 2019 through Q4 2022. The top-five metros for highest rent growth and a strong presence of institutional ownership (as categorized by the metros in which publicly traded single-family rental REITs operate) posted firm double-digit growth during the three-year period ending in Q1 2023. The Southern California hub of San Bernardino-Riverside led the way with rent growth of 21% for single-family properties.

Meanwhile, metros where institutional owners do not have a strong presence also experienced healthy rent growth, although not as robust. Only Chattanooga, Tennessee, and Hartford, Connecticut, posted double-digit rent increases during these three years. While it may seem that institutional investors are primed to move into these metros due to strong rent performance metrics, they must be able to achieve economies of scale to realize the profit margins they seek. This often entails owning a vast portfolio of at least 1,000 properties in a concentrated area, which is not easy to build up in a short period of time from the existing stock of homes without a strong market shock (e.g., a deep recession). In these metros, it is more likely that investors will look to develop or acquire BTR assets to achieve scale quickly.

Due to the aforementioned reasons related to the quality differential between institutionally owned homes and those owned by small investors, metros that have a strong presence of institutional ownership will likely command higher rents. Additionally, institutional operators are more willing than smaller ones to accept a temporary dip in occupancy to secure a higher rent. This is because the impact on their overall net operating income due to a short-term vacancy is much smaller. ●

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Hotel occupancy rates rebounded and average daily room rates soared as households looked to spread their wings and spend their excess savings. But as we know too well, nothing lasts forever. Stimulus funds have dried up, home price appreciation is stagnant or declining, and equities are currently on their own bumpy ride. And while a national recession is far from guaranteed at this point, an economic softening is upon us.

The overall labor market will remain relatively tight over the next couple of years, given an imbalance in skill and a general shortage of workers, but companies have already been conducting layoffs, particularly in middle-management positions. Elevated uncertainty for these middle-class workers will surely dampen their plans for lavish travel this summer.

This is not to say that the bottom is about to fall out for the hospitality sector, but the reaction of hotel performance metrics to lower leisure demand will be an intriguing summer story. To gauge the impact of economic changes upon the hotel industry, let’s sift through some of the most relevant demand drivers.

Positives: Excess savings is declining but still in the black. As of February 2023, excess savings (or the extra money consumers saved beyond the level they would have without the pandemic) was approximately $1.5 trillion. This is well below the September 2021 peak of $2.5 trillion but is nothing to scoff at. Some cushion remains for those who have lost jobs, or fear a job loss, but these funds will most likely be saved or used for necessities.

Negatives: Retail sales growth has weakened over the past year. March 2023 spending levels were roughly level with their October 2022 reading. Service-sector performance is still outpacing that of goods, but consumers have been tightening their purse strings across the board. In fact, with annualized inflation still running well above normal, spending levels declined throughout much of the winter and spring. It’s likely that this will turn around a bit as lagging tax returns make it into consumers’ hands, but as previously mentioned, fear and uncertainty tend to lead to more conservative spending habits.

Neutrals: The labor market is softening — and will soften further — but it won’t fall off a cliff. This is not the same situation as the Great Recession and its 10% unemployment rates, but rates of 5% to 6% by this time next year are not out of the question. What is a wild card here (and what may keep unemployment down and wage growth positive) is a high ratio of job openings to unemployed persons. Entering the two other recessionary periods of this millennium, this ratio was considerably below 1.0. As of this past February, the ratio was falling but still above 1.5.

Neutral but leaning positive: Corporate and event travel is not part of the “revenge” definition, but it is still quite important to the health of hotels. Placer Labs recently utilized cell phone data to track visits and usage for a variety of locations and transit types. Using measurements such as the timing and frequency of air travel, as well as visits to convention centers, they concluded that business travel is seeing a resurgence but has yet to return to pre-pandemic levels. Will this type of travel fully return? It may not happen in the exact same fashion, but a full recovery is possible in the next few years with a realization that education, networking and sales are more effective in person.

As the chart on this page illustrates, the hotel-sector roller coaster is forecast to come to an end, with occupancy and room rates above pre-pandemic levels. A continued resurgence of business and event travel, along with a resilient labor market, will outweigh a pullback in revenge travel. ●

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Over the course of 2022, Moody’s Analytics found that the multifamily vacancy rate fell by 30 basis points to 4.5%, while asking and effective rents increased on an annualized basis by 9.5% and 9.7%, respectively. But signs from the end of last year suggest that the apartment market has entered a period of adjustment.

As interest rates for home loans lingered on the higher side due to the Federal Reserve’s attempts to tame inflation, households that may have previously sought to exit rental housing via homeownership are likely to remain in the multifamily market. This has helped to sustain demand for more expensive and amenity-loaded Class A apartment units. Demand for Class B and C spaces has also been robust due to tight market conditions, even though affordability was already constrained by inflationary impacts on household budgets.

On the supply side, we anticipate record-level multifamily construction deliveries in 2023 after a slow year in 2022 (as shown on the accompanying chart). The average number of completions across these two years, however, will not deviate much from the sector’s five-year average. It’s also likely that construction financing constraints tied to higher interest rates and continued supply chain issues will delay some new projects and prevent completions from reaching some of the more optimistic forecasts.

In theory, however, exceptional supply growth could put downward pressure on the apartment market’s performance. This is especially true for Class A space, which already experienced more vacancies due to years of oversupply leading up to the COVID-19 pandemic.

As demand softens and completions possibly outpace net absorption in the near term, what does the supply-and-demand seesaw mean for multifamily rent growth? The answer is further deceleration on the horizon. The aforementioned market rent increases for all of 2022 were largely observed in the spring and summer months, with slowing growth and declines occurring in some metro areas to wrap up the year. Moody’s Analytics forecasts 2023 asking rent growth to cool to the 2% to 3% range.

Over the past three years, more than 90% (73 of 79) of the primary metros analyzed by Moody’s have had higher rent burdens than pre-pandemic days due to rents rising much faster than median household incomes. (Rent burden is measured by a rent-to-income ratio or RTI.) Seven of the top 10 metros with the largest disparities between rent and income growth are now found in the South Atlantic region, states that were popular post-pandemic migration destinations.

Metros that have enjoyed exceptional pandemic-related performance boosts, however, could be the first to see rent-growth moderation or declines. In fourth-quarter 2022, six metros had quarterly rent declines of more than 1%. Four of these (Baltimore, Memphis, Atlanta and Palm Beach, Florida) are in the South Atlantic region while the other two are in California (San Bernardino/Riverside and Ventura County).

Although the national average rent burden has reached the 30% RTI threshold, the deceleration of rent growth combined with continued wage increases will be welcome news for renters. But individual households may experience this relief differently. Desirable metros that have attractive demographic and economic factors may see further exacerbation of the rent burden, especially across moderate- and low-income households.

An imbalanced housing market mixed with macroeconomic uncertainty has left the multifamily sector in a precarious situation. While our baseline forecast indicates only slightly below-average performance for 2023, any policy or financial-market missteps have the potential to amplify the sector’s subtle weaknesses. ●

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