Multifamily owners and investors see today an unusual situation: Abundant leasing activity but a slackening in rates. It’s not obviously a supply problem as new deliveries are slowing down. This year will see 431,000 units delivered, compared to 2024 deliveries of 577,000 units. While some, including Parsons, suggest this recent, unexpected weakness in rents might be noise or lagging data, recent research points to a different potential underlying driver.

A new study - a collaboration between industry and academics - studied the impact on rent growth from new apartment supply and from real median household income growth, specifically middle-class incomes.² The researchers looked at changes in supply and changes in income as a horse race: Which has more influence on rents? The clear answer was income growth, which turns out to be more than twice as influential on rental rates as deliveries. This finding reframes the current paradox and can explain why rent growth has stalled in tandem with stagnant post-pandemic household incomes (chart below).

The study determined that one standard deviation increase in income growth corresponds to a 1.17% increase in effective rents. That’s substantial when you consider average effective rent growth in the sample was 2.6%. Why might this be the case? The authors speculate that rising household incomes obviously allow residents to pay more rent, but also indicate the local economy is healthy and likely to see strong “consumer demand, job creation, and a broad base of commercial activity that indirectly supports higher effective rents over time.”

Backing up a little, multifamily is often framed as a refreshingly transparent asset class. It is seen as simple supply and demand, both of which are generally easy to parse, and market participants expect rents to move predictably as new deliveries lease up and as the renter population expands or contracts. But rent changes do not always stick to this conventional wisdom, as the last few months indicate.

Expanding on that, if real income growth drives rent growth more than supply, you would expect some high-supply markets to perform well, and vice-versa. That’s exactly what the data shows. MSAs like Salt Lake City and Raleigh “experienced both strong construction and strong rent growth during our sample period.” Conversely, New York and Pittsburgh saw little supply growth and little rent growth, highlighting income, not supply, as the real lever.

Across 25 major MSAs from 2006 to 2023, the study found limited correlation between new supply and rent growth. Cities with low construction often posted weak rent growth trends. In contrast, income growth exhibited a consistent, positive relationship with rent performance across cycles and geographies. The above chart is interesting because most of the purple cities (with low supply growth) saw low rent growth. The analysis applied several different models weighing the importance of new deliveries against the importance of middle-class income growth on rental rate trends.

For institutional investors, few variables shape valuation more than forward rent growth—and yet, it remains one of the least rigorously forecasted assumptions. Many underwriting models simply default to flat annual growth rates. Three percent annually, anyone? Investors should take a more sophisticated approach and this research points the way: rent growth assumptions should be aligned with income-growth forecasts, not to the supply pipeline or just to some standard modeling convention.

Another investor takeaway: Don’t skip over high-supply markets without checking middle class real income growth. In fact, risks of “oversupply” may be a good reason to look deeper. The three best-performing markets for rent growth during the study period had both high income growth and low supply growth, which makes sense, but the next five best cities for rent growth saw average or above-average deliveries during the period.

As a secondary insight, the authors found that Class B assets exhibited similar rent volatility to Class A but a higher long-term average rent growth vs. Class A, 2.7% vs 2.0% annually, affirming what prior research has shown. We’ll likely write about that in the coming weeks. Regardless of property class, income growth explained much more of the rent growth trend than new supply.

Bringing it back to today and Parson’s quote above, have a look at real income levels. Notably the Federal Reserve publishes income data annually, so instead we looked at a private monthly estimate (below), which shows with more recent estimates what the Fed shows through 2023: little movement in real household earnings. Income levels are flat. Rent growth is flat. Hmm.

Who: Unwritten Capital

What: A capital source for technology-first real estate sponsors.

The Sparkle: The real estate investment world is pretty well divided between VCs that focus on operating companies (e.g. proptech) and actual real estate investors that put money into sticks-and-bricks. Those skill sets rarely meet in one firm, which is why Unwritten is unusual. A Twitter-famous founder and investments in hundreds of companies gives them a unique view into the technology that’s truly adding value for landlords. They just started their own newsletter that, knowing those guys, will be entertaining.

Harsh environments demand resiliency, and resiliency comes from strong roots. And some good genes.

Meet Old Tjikko—a 9,550 year-old spruce on Fulufjället mountain in Dalarna, Sweden. Discovered in 2004 by geologist Leif Kullman, the tree is so old it was sprouting when humans were still sketching in caves.

Clonal trees like Old Tjikko survive not by growing one long‑lived trunk, but by continual self‑renewal—when a trunk dies, the root system lives on and sprouts a new one, making the organism’s lineage effectively immortal through millennia.

Link: https://www.thevintagenews.com/2017/02/15/old-tjikko-the-norwegian-spruce-is-dated-at-9550-years-old/

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