Residential Rent Increases Help Drive Inflation

Rent increases in multifamily and single-family rentals are a double-edged sword. They mean more profits for owners and operators. But they also punch above their weight when contributing to inflation and the Fed’s perception that inflation is going to require patience from everyone. That includes some at the Fed who are certain that the baseline rate will increase by at least one full percentage point over today—and that it might have to hit 7%.

And that dovetails into the inflation numbers earlier this month.

“The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in October on a seasonally adjusted basis, the same increase as in September, the U.S. Bureau of Labor Statistics reported today,” the Bureau of Labor Statistics reported on October 10. “Over the last 12 months, the all items index increased 7.7 percent before seasonal adjustment. The index for shelter contributed over half of the monthly all items increase, with the indexes for gasoline and food also increasing.”

That puts multifamily rentals into a tough position as a major driver. “Housing market data shows growth in home prices decelerating significantly, with an indication that such declines in this market will continue into 2023,” wrote Trepp in a piece digging into rent CPI numbers. Leaving rentals as where the big increases are happening.

The big increases are happening in the Sun Belt, according to the Trepp analysis.

“In the October 2022 report, there were six MSAs that posted rent CPI figures in the double digits,” the firm wrote. “The sun belt continues to dominate the top of the ranks, with Phoenix, Miami, and Tampa logging over 15% rent inflation YoY. Atlanta, Dallas, and Denver reported strong rent inflation as well in the low double digits. What’s noteworthy is that these top six metros are generally the areas favored by institutional single-family rental (SFR) investors, particularly Atlanta which is the top exposure for two SFR deals set to close before year-end.”

Lower rental growth or even decline in such metros as St. Louis, New York City, Baltimore, and Washington DC more heavily lean toward traditional multifamily.

But does the rental growth mean unending profits? Probably not.

“Average expense growth in 2021 outstripped revenue growth,” Trepp said. “It’s not a stretch to think that some of the rent growth in the CPI figures is the result of landlords working to offset expense inflation as well as the continued burn-off of pandemic concessions in select areas.”

This may help explain why inflation is dragging on more than many expected. Because leases typically run a year or sometimes more, there is a time lag between higher expenses and when a landlord can finally increase rent to recoup previous financial pressures.