Westland Fast Five - Volume 1, May 2023

May 4, 2023

A newsletter from Westland Investors examing industry trends impacting real estate.


1. Rental Vacancies Rise Slightly, but Median Rental Rates Remain High

The Census Bureau’s Residential Vacancies and Homeownership Report shows rental vacancies remain relatively low, while asking rents remain high. The Q1 2023 report showed that the national rental vacancy rate increased to 6.4%, up from 5.8% in Q4. From their peak in 2008, rental vacancy rates have been on a mostly long steady decline and their current levels are near that of vacancy rates experienced in the 1970s and early 80s (see graph). The rental vacancy rates were higher in the South (8.3%) and Midwest (7.5%) than in the West (4.3%) and Northeast (4.1%).


The Census report also includes data about asking rents –  which surged following the early stages of the pandemic, and were up 9.5%  year-over-year in Q4 2022. After dropping slightly (0.9%) in Q4 2022, they rose again to a median asking rental rate of $1,462.  

Westland’s Take: Low vacancies and high asking rents are ideal conditions for multifamily real estate investors. However, even when vacancies increase and rents decrease, they do so only marginally compared to the NASDAQ (down 33% in 2022) and the S&P500 (down 19%).

>> For more economic data impacting real estate,  check out the Calculated Risk blog here.

2. Bar Keeps Rising for Homebuyers in Pacific NW

According to a recent National Association of Realtors  (NAR) survey, salary averages are significantly higher in the Pacific Northwest (Portland area: $110,000 and Seattle area: $126,000) than the national salary average of $95,000. When you factor in inflation rates and higher mortgage rates of today, the bar to own a home has grown significantly higher. These economic factors are pricing many first time homebuyers out of the market, keeping them in apartments and multifamily housing for longer.


Westland’s Take: We've noticed that demand for multifamily housing continues to hold steady — our market vacancy has stayed flat for the past 6 months, even with economic turmoil. This is because people still need a place to live! And the more expensive it is to buy a house, the more affordable it is to stay in rental housing.
 >> For more information from NAR, read here.


3. Clean Water Legislation Under Fire from NMHC

The Clean Water Act (CWA) protects the quality of the nation’s waterways and regulates pollution. While the apartment industry strongly supports protecting our water resources, the EPA has proposed a number of onerous regulations that would significantly restrict both new apartment construction and redevelopment activities. These constraints would exacerbate the nation’s struggle to meet growing rental demand and do not reflect feedback from the National Multifamily Housing Council (NMHC). So, the NMHC recently joined 16 other housing groups, infrastructure and an organization to file a legal challenge to the new rule.


Westland’s Take: Existing apartment owners (like Westland) could potentially benefit from the EPA’s stance since it would restrict new supply and competition, driving up the value of our properties. However, we recognize the dire need for more housing, and agree with the NMHC’s stance that the ruling amounts to over regulation and contributes to an imbalanced market.

>> For more information on NMHC’s perspective and thelawsuit, read here.


4. All Eyes on the Labor Market

As inflation seems to be waning, all eyes are on the labor market to determine future mortgage rates.

According to Freddie Mac’s chief economist, Sam Khater,  “While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.” Mortgage rates tend to move with the bond market, and it has been ahead of the Fed, said Logan Mohtashami, lead analyst at Housing Wire.  Motsashami continued, “The inflation growth rate has been falling slowly, but the Fed does not want financial conditions to ease until they get their job loss recession.” Mohtashami said the labor market data is now “very key” for 2023. Unemployment numbers for March 2023 remain around 3.5% and mortgage rates fell slightly. According to Motsashami, “The Federal Reserve wants wage growth to cool down more and more and believes a higher labor force growth will help them.”


Westland’s Take: We have seen workforce reduction in the Pacific Northwest, which perhaps signaled the “bottom,” thus the easing of mortgage rates can begin. One encouraging sign that we’re seeing is an uptick in construction employment opportunities. We expect rental rates to hold steady through these economic pressures.

>> For more information on these economic moves  from HousingWire, read here.


5. Suburbanization Trends Impacting Lower Income Families

Post-pandemic trends offer opportunities in stagnant markets but put pressure on overheated areas.


Recent research from the Brookings Institution: “The decoupling of workplace location and residential preferences suggests that home buyers may prefer homes in smaller and less dense counties that offer lower living costs and larger living spaces during and even after the pandemic. On the one hand, [this] signals opportunities for the local economy—especially in Rust Belt urban centers that have seen decades of population loss—seeking to capitalize on newly increased housing demand. On the other hand, however, they become a crisis for existing residents in the overheated areas—especially potential first-time home buyers as well as renters. Given that rising housing prices outpace wage growth, the housing market inflation in previously (relatively) affordable neighborhoods would make these areas less- or unaffordable, especially for lower-income families.”


Westland’s take: These post-pandemic demographic trends further reinforce the need for suburban workforce housing  – an area we have long focused on in the Pacific Northwest. All signs point to the need for continued investment in affordable multifamily housing in suburban areas.


>> Further reading from the Brookings Institution  research here.

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