Rent Gains Signal a Storm?

“You, my friend, are a victim of disorganized thinking.” —L. Frank Baum, Author, Wizard of Oz, (c) MGM 1939

Rent gains have become the darling of the economy. Executives and investors are showing up at cocktail parties, clinking glasses in joyous abandon as talk turns to happy days are here again as pricing gains are now heralding renter nation. If I’ve learned anything it’s that once just about everyone agrees on a trend in the multifamily industry, they get it wrong. I’ve been forecasting rent results for a lot of years now, but this is the first time I’ve seen the public get completely carried away with the concept that the United States is turning into a culture of renters. While it’s true that the economy is substantially better than it was before, renters now have choices that make me really worry.

A recent press report from the Federal Housing Finance Authority opened the way for investment groups to buy single-family homes in bulk. The FHFA will be seeking qualification statements and will accept bids on roughly 2,500 properties in Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and Florida. Now, on the surface of it, it represents a small number of equivalent units, but in reality, this is just the beginning.

There is hardly a county anywhere in the nation that isn’t affected in some way by unsold homes listed on the FHFA website, and that doesn’t even include the huge number of foreclosures being added to the rolls every day. If this trend continues, it will develop into meaningful competition for professionally managed apartment properties with one notable exception. When someone rents an apartment, frequently they move to a different unit, a different location or accept a job transfer that sends them to a different metropolitan area entirely. The renter in effect gets recycled. Those renting REO properties are most typically families with children and are wishing to stay in the same neighborhood or area. The increase in REO activity on the rental side generates a greater number of available units, including foreclosures that will ultimately attract apartment residents with the appurtenant impact of less pricing power.

I’m happy about the rent increases we’ve seen in most markets because it really is justified based on increased taxes, carrying costs and site expenses. I haven’t seen any instances where owners push rents beyond reasoned limits, and even in high value markets like San Francisco and New York, rent increases haven’t strayed even close to some high peak averages. What worries me is that this fanatical coverage by the mainstream broadcast media is making a normal rental revert to the mean cycle look like property owners are taking advantage of an unsuspecting public.

Years ago I wrote about the real reason Dorothy left the land of Oz (high rents), and from what I understand the Munchkins are at it again, raising taxes and pushing the Emerald City to annex Munchkinland and build more condos. When you think about it for a while, all this really does sound eerily familiar. Yellow Brick Road or not, the path to increased rental competition is out there and pretty soon the renters are going to figure it out.

Jack Kern is the research editor for Commercial Property Executive and Multi-Housing News and an occasional lecturer at Oz University, where the latest controversy is whether or not houses falling out of the sky can be considered condemnation proceedings for the act of taking or simply urban renewal with a greater purpose. He can be reached at or 301.601.1900.