Rent Concessions Could Mean Trouble for Multifamily Sector

Rents are still rising nationally in the single-family rental sector, but multifamily managers report making an increasing number of concessions in order to remain competitive with tenants. According to Yardi Matrix data, every market that the multifamily data giant tracks is showing a trend of rising renal concessions. The most common concession: free rent.

Managers tend to make concessions in order to improve their vacancy rates. Thanks to rising incentive offerings in many new developments and increasing rental inventory, both single- and multifamily, in metro areas, apartment vacancies specifically are rising above five percent in many cities.

National apartment group Marcus &Millichap head John Sebree observed the rising number of new units in many areas is affecting the vacancy statistics but emphasized that the numbers do not necessarily indicate a crisis. “Demand is continuing,” he said.

Most Common Places for Rental “Giveaways”

If you’re hoping to snag free rent for yourself, then San Antonio and Houston, Texas, are the best place to look. According to Greg Willet, chief economist at property management software provider RealPage Inc., those two cities “product offering concessions” are more than double the national average. About one in 10 properties comes with a discount in those Texas cities, compared to about one in 20 nationwide. Concessions also are most likely to be concentrated in new apartment complexes that are, essentially, starting from zero since they do not have any current residents. RealPage reported the average discount at new developments tends to equate to about five weeks of free rent on a year’s lease.

What Does this Mean for SFR?

As more and more investors, both individual and institutional, purchase single-family homes in order to rent them out, some analysts fear that the concession trends in multifamily housing could spread to the single-family residential (SFR) rental sector as well. With more private equity funds entering the fray, this is a possibility since most funds operate strictly based on metrics and require certain levels of occupancy in order to operate. However, should those levels drop or should rental rates fall significantly, it seems more likely that the funds will begin to liquidate inventory, thereby increasing the availability of affordable homes for sale in a given market and potentially creating a shift from a sellers’ market toward a buyers’ market, rather than offer excessive incentives.

While single-family rental properties may face competition from incentivized multifamily rental properties, the advantages for many households of renting a single-family home are likely to continue to outweigh discounted rent, at least for now.

Do you find concessions are a competitive issue in your local market?

 

  • Bryan Ellis says:

    Why might this be? I’ll tell you 😉 For the last several years, multi-family properties have been a very, very hot commodity… so much so that investors (institutional more than individual, but everyone really) have been willing to pay premium, or even irrational, prices for these assets. Now that the astounding upward zoom of rental prices appears to be slowing or even reversing a bit, what you have is a bunch of folks who fancy themselves as sophisticated investors holding onto properties that are declining in value (because rental property is valued based on income) and they’ve got to do WHATEVER IT TAKES to make the properties work out.

    I think if I was in the market for an apartment right now, I’d just look to see which apartment complex was most recently sold in the part of town where I wanted to live. That’s probably the one that was sold at the highest premium and may now have the most motivated owners 😉

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