“The Accidental Economist” with Jack Kern: The 12 Days of Rent Growth

As tempting as it is to author a little tune and a set of lyrics that would be a satire on that holiday standard song, there really is what I like to call the 12 days of rent growth. Most of the time, during the year there is a general acceptance of what drives rent and much to the disappointment of renters it isn’t always a supply and demand issue.

While for now, the imbalance in availability is slightly tilted in favor of owners, some recent government releases have started to alter the trend just a little bit. So what makes rent growth acceptable to residents at the time of renewal? It continues to be the comparison to inflation. Picture this—a resident receives a notice that their new adjusted rent will be raised by 4 percent on a 12-month lease if renewed before the end of the current term. Typically the resident then stops by the leasing center and offers that inflation is only 3.1 percent and asks why they’re being asked to pay 4 percent. In most instances, the leasing center tells the resident that if they’d be willing to accept an increase at 3.1 percent, then they’d be offered a new lease. Many residents accept that offer. Now there are certainly some instances where rents do rise above the published rate of inflation, regardless of what the in-place residents want to offer but generally rent histories over long periods of time usually conform to the changes in the rate of inflation. Even underwriting standards at most firms typically only show changes above in place rents around the long run average change in inflation for their hold periods.

So once a month, when the Consumer Price Index is released, it’s good to take notice of the overall change in the CPI because it will not only affect the likely change in rents in most places in a normal market, which we are heading towards now, but also gives some indication of the direction of operating costs. We also always refer to the CPI-U (Consumer Price Index for All Urban Consumers), but there are other measures available, and at varying degrees they better reflect local market conditions. While we follow experimental chain weighted indices, they’re not widely used and so we don’t report on them very much. What we’d like to see is a CPI-C, which would measure commuter costs, a CPI-SP, which would measure real cost changes for single parents and a CPI-R, which could be specifically renter focused.

In the most recent release, the CPI remained pretty well under control, and for November some interesting things happened. (I suppose I’m the only person you know that thinks CPI releases are interesting, which might explain the lack of invitations to holiday parties and fear in the hearts of people who see me approach them to initiative a conversation!)

To start with, the CPI was mostly unchanged from October to November, which could mean the economy is either decelerating or we’ve reached an equilibrium point where manufacturing and service fundamentals are in balance. The CPI itself has grown at a 0.8 percent annualized rate over the last 90 days, and energy prices fell to a rate similar to March, with food prices finally slowing to a 2.2 percent annualized rate. Other than producer prices (PPI not CPI, and I have the t-shirt), which rose slightly, most pricing at various stages of production and processing remained very weak.

While this is a shorter-term view of what we’d ordinarily look at, it isn’t likely going into the winter season we’re going to see much of a change in CPI, so the concerns about hyper-inflation or even deflation seem to be unfounded right now. Ultimately the end result is lower rent growth in 2012 for many metropolitan areas and a little less pricing power for ownership.

Jack Kern is the research editor for Commercial Property Executive and Multi-Housing News and a frequent reader of government news releases, some of which contain hilarious misquotes and observations about American life. Usually the word logical and government don’t typically appear in news releases, leaving one to wonder, what do they do all day in Washington? You can reach Jack at [email protected] or by calling 301-601-1900.