OT: Rent inflation - what's the cause?
 

There's plenty of talk in the business press (and probably outside it) about how "transitory" the spike in inflation really is. One issue is that of rent. Here's a quote from NY Times article about the topic:

If it's not the pandemic causing rental rates to rise, what is it? Is it possible it's private equity's increased presence in the rental housing market? Here's a quote from another NY Times article in March 2020 (emphasis mine):

I couldn't easily find information about what percentage of the rental housing market is in the hands of private equity (credit my feeble Google-fu), but I don't think it has to command a huge fraction of the units in a tight housing market to drive rents up. Long story short, I wonder how much of the spike in rents is artificial and was really going to happen — pandemic or not — based simply on greed?

Viscous market.

Theres been a few articles here in sweden about blackstone as well. Not possitive..

one of the reasons is because of what you mentioned, REPE (real estate private equity)

They can absorb vacant units until they are filled with people who will pay more. someone like me will not. i have a few units that i own and rent and wouldn’t think of asking more for them, most have been renting at the same
rate since 2016. it is not worth it for little guys like me to lose the tenant and spend longer marketing units.

low interest rate in general has been a disaster for the renting and working class. it allows people with access to large amounts of cheap/free cash to purchase assets like land and real estate and sell them later on for more as purchasing power declines. all the while the working class has been supplying the hard cash for the equity via rent. basically these REPE folks are getting free everything—free debt, free equity, free profit on a long enough timeline.

I don't know if this is true but a buddy told me that he could not throw people out during pandemic and that he lost a lot of money during that time. So, the new renters are being charged higher prices accordingly. Another issue is the difficulty building new homes due to outrageous material costs and lack of appliances to outfit the home. We know a couple who were supposed to move into their new home in June and they still do not have the appliances. They are renting while their completed new home awaits the missing parts to enable them to move in.

^^^ Yep, pretty much all of this. Eviction moratoriums and insane construction costs for new builds.

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It's complicated, for greater New York, a large part of it is the reversal of rent declines from last year.

For other areas, Phoenix, Atlanta, Austin, it may be partly driven by WFH professionals moving from higher cost urban areas, (Los Angeles, San Fran, NYC) with higher paying jobs willing to pay more for a property. The pandemic did speed migration from Urban to Rural, and Rural has much less excess inventory to absorb an increase in demand. You can look at what happened to rents and home prices in Williston , North Dakota because of the influx of demand for housing because of fracking in the bakken from 2010 to 2020. Population went from 14,000 to 32,000 with higher paying fracking jobs driving up rents to become unaffordable to the traditional agriculture jobs..


I think the monopolistic power of someone like Blackstone may be overstated, but overtime, they will be more willing to consistently raise rents.

Zoning and other restrictions are a factor. It will be interesting to see what happens in LA now that SB9/10 are law.

I'm waiting for companies to start adjusting WFH pay depending on local cost of living at some point in the future. Then this gets interesting. Why will a San Fran employer pay a San Fran salary to someone living in Phoenix, or Denver or Salt Lake City?

Lots of factors, but I think who actually owns the units is the least of them. Even the biggest players in real estate generally own only a small share in any given market, so gaining meaningful market power is exceptionally hard and requires more cash than any private equity firms have, unless they have an extremely narrow geographic scope.

Rental markets are reasonably competitive, although both demand and supply are relatively inelastic. So examining supply, the past decade has seen historically low construction of new housing units.

https://fred.stlouisfed.org/graph/fredgraph.png?g=I4ig

On the demand side of things, while population growth has been modest, real disposable personal income spiked in the past year, giving people more money and effectively pushing the demand curve out. Additionally, during the pandemic, people were generally stuck at home, and unable to spend money on various leisure activities (travel, dining out, live events) that previously used some of their disposable income, so they had more money and more interest in investing in where they lived.

https://fred.stlouisfed.org/graph/fredgraph.png?g=IgpN

But because supply is inelastic (particularly in the past year when building materials were in short supply, but also long-term trends due to limited capacity in the construction industry and zoning restrictions), this extra supply pushes prices up more than it induces increased supply.

So, it costs more to live places. If you think it's a good thing to have housing more affordable, we need more housing units. If zoning restrictions don't get in the way, that private equity investment should spur new construction to put downward pressure on prices over time.

Section 8 housing has created a shortage of available units for the folks that make decent salaries but either can't afford a house or aren't ready to buy. I hired a new-grad engineer at $65K and he had a hard time finding an apartment or house to rent because he "makes too much money." Landlords prefer Section 8 because it's guaranteed money.

For rental prices, I rented a house (one of two available) for the first two years after I relocated here from Texas. Last year I bought a nicer house on a bigger lot for five dollars less a month in mortgage than I was paying in rent.

It's also supply and demand, we're 45 minutes from California and seeing a huge influx of people leaving the republic.

Eviction moratoriums were ill-advised political arse-kissing. It would have been better to give cash to people who needed it (via the same tax credit mechanism we used for smaller payouts, or some other means).

Demand from big investors and low interest rates has driven up the price of rental stock in my area up 75%+ over the last 3-4 years, driving rent up for everyone. I spent most of the summer looking into buying a 2-3 unit property, planning to live in one unit and rent the others. However I would have had to charge a pretty drastically unaffordable rent for the area in order for it to make sense financially vs just buying a single family home.

My wife is a real estate executive who has worked at one of the biggest REITs and now works for a smaller private one, I hear about this stuff all day long.

There are a ton of factors but who is buying the units/houses isn't really that big of a deal, none of the investors are or were in it for a charity. Maybe the only difference is the big investors are more professional and don't leave money on the table like Mom and Pop landlords. Small landlords are not likely to be hiring sophisticated analysts, running models, sending employees out to their competitors posing as customers, etc.. the powerful companies are doing that stuff all the time. They have desired turnover figures, % occupancy figures, expected % rent growth figures, etc.. They don't want all the units full and they don't want you staying a long time necessarily.

- Most high cost markets have extensive affordable housing rules & controls that have backfired in some ways. The more units you make affordable the higher the market rate is going to be because you're taking units off the open market. This stuff is pretty out of control in MA. You've got ultra luxury buildings where rents are $3k-5k and then there's piles of affordable units in the building that tons of money is being lost on so they're making everyone else pay for it. Gotta make the building ultra lux to help cover the cost of the affordable units to make the #s work.

- The same markets controlled by progressives are a) crowded b) Have less space to build new units c) have rules/regulations which make it much more costly/difficult to build. All this makes it much harder for non-professionals to get through the process and drives up the cost, so your investors only want to have units at the high end.

- Professionals running this stuff are keenly aware of all these factors and explicitly try to trade up their portfolio into the high cost markets where the government has made it really hard for supply to catch up. They try to shift your portfolio out of the south/midwest into CA/NY/Boston/whatever as your business improves. Markets where the government makes it relatively easy to build new units and there is plenty of land to build them on are not where the best money is made.

- Most big renters didn't raise anyone's rents during Covid, they couldn't evict anyone, they had big covid control costs, and no one was moving during Covid so they had no one coming in the door looking for apartments. Now that's all opening up so everyone is getting their rent renewed at big % increases.

- Big renters are not necessarily in a building/property long term, they're thinking about exiting the building all the time and balancing the operational return vs the capital return when they sell it.

Listening to NPR the other day and it was specifically about CA but applied to East coast high cost markets too.. all the controls always come from the demand side and usually ignore the supply side. CA's new proposed laws are finally an attempt to try and fix things from the supply side.

Around here there are certain classes of landlords/companies that are targeting affordable units in a different business model from the big players. If you're going for market you don't want affordable as it just reduces margins. Specializing in affordable seems to be about a more consistent/reliable lower margin setup.

Perhaps it is your area but section 8 seems almost nonexistent in Scottsdale. Rents have skyrocketed here, some of the highest in the country now, and where I live they increased it by 20% roughly since Covid became a thing….not saying that is why but that is when the increases began, about a year in. If they raise ours that much next year we are screwed and basically have nowhere to move in the area and will be forced to leave the state.

Greed.

And it’s not 0.5%. It’s at least 10% and often more like 20-30% in most west coast markets. Has the carrying cost on the underlying asset changed? Nope. If anything it’s gone down. But landlords can squeeze their renters harder, so that’s what they’re doing.

That 0.5% increase was over one month, so not 10%+ per month, but agree it is that much or more annually right now.

Oregon now has statewide rent control laws. Rent can not be increased during the first year of tenancy. Rent can not be increased without 90-day prior written notice served to the tenant. Rent can not be increased in any 12-month period by more than 7% plus the previous calendar year's increase in the CPI. That last part also applies to increasing rent when changing to a new tenant.