The Overlooked “Upside” That Will Make Future Landlords Rich

Dave:
The potential for future rent growth is one of the main reasons I believe that investment properties will drive great long-term returns for real estate investors in the coming years, and it’s one of the best upsides investors can consider taking advantage of when buying deals today. Today I’m going to explain why. Hey everyone. I’m Dave Meyer, head of real Estate Investing at BiggerPockets, where we teach you how to achieve financial freedom through real estate investing. Real estate investing is like any other business in that maybe the single most important factor in success is how much revenue you can generate. And for rental property investing, that basically just means how much rental income your properties provide every month. And for a very long time, that number how much rent you could collect and how much it was going to grow was a relatively predictable number to project over the course of 10, 20 year hold period that you might have a rental for.
Rents would rise and fall with the economy or market trends, but on average, they grew about the pace of inflation or about 3% each year, and that is a really critical point that they were growing at least as fast as inflation if not higher. And then covid happened, and from the beginning of the pandemic, rents were soft for a little bit, but we all know it happened from 2020 to 2022 when rents shot up about 20%, and then the pendulum really just swung back in the other direction. And from 2022 to now, rents had been relatively flat or fallen a little bit. And those crazy swings, of course, make it much harder to predict what’s going on with your portfolio and what kind of returns you can project. And this makes it particularly hard to buy or to get into the market right now because if you’re thinking about buying a property, is your rental going to drop another 5% over the next three years or is it going to grow 10% like it used to?
That’s going to make a big difference on your deals and could be make or break on your cashflow. And I’ll just say it upfront, you’ve heard me say it over the last couple of weeks, that I am personally a believer in long-term red growth. It is a big part of my thesis for why real estate is still the best way to pursue financial freedom. I think properties that you buy now with a fixed rate mortgage, so your biggest expense is staying fixed and then your rent grows, makes real estate really attractive over the next 10 plus years. But this is of course, just my opinion and it’s such an important part of our industry that I always want to hear what other experts in the space think as well. So on today’s show, we’re bringing on Chris sdi. He is a senior housing economist at apartment lists where he’s focused on trends in the housing market and rent growth. So I know he is going to have some really good, strong, well-researched opinions on where rent is heading. And I’m really intrigued, honestly, to hear if he agrees with my personal thesis. We’re going to get into why we’ve seen such wild swings in rent over the last several years, how investors should project rent growth going forward, and which individual markets are pointing toward higher rents in the near future. Let’s bring on Chris. Chris, welcome to the BiggerPockets podcast. Thank you for being here today.

Chris:
Hey Dave, thanks for having me on. Happy to be here.

Dave:
I’m excited to have you. Maybe you could start by just telling us a little bit about yourself and your work at Apartment List.

Chris:
Yeah, yeah, absolutely. So I’m senior economist here at Apartment List. I’ve been with the company for about eight years. My role at Apartment List on the economics team is really about tracking what’s going on in the market through all of the really rich data that we collect through our platform. We also look at various public data sets as well and see what other folks are saying out there. But yeah, my role is really kind studying the macro trends of what’s happening in the rental market and putting that data out there in the world to help kind of inform folks about what’s going on.

Dave:
Excellent. Well, we’d love to dig in with you just about what you’re seeing in terms of rent trends and where you think they’re going. But to start, maybe you can tell us in your mind what is a normal level of rent growth?

Chris:
Yeah, I mean I think of kind of a normal level of rent growth as something that’s tracking pretty close to overall inflation. So if we look back, you have to go back now to 20 18, 20 19 as sort of being the last time that we have, which now that we’re getting pretty far back there, which feels kind of crazy, but that’s really the last time when we were seeing what I would describe as kind of a normal equilibrium level of rent growth. In those couple years things were going up two and a half, 3% pretty close to tracking overall inflation. Of course those national numbers always mask a lot of regional variation that we can talk about, but generally speaking, that’s kind of what I’m thinking about as being normal.

Dave:
Okay, so we’ve gone six or seven years now since it’s been normal. I think a lot of our audience probably knows what happens with rent since then, but maybe you could just give us the detailed economist view of what has been the abnormal market since

Chris:
20 18 20 19. Yeah, for sure. So I mean really since we entered the pandemic era, things kind of just started off on this real roller coaster and so 2020, the early phases of the pandemic, what we saw was a lot of folks actually consolidating households, giving up leases, especially younger folks in that shelter in place phase maybe thinking, okay, I’m going to save on rent, give up my lease, go live with the parents for six months or what have you. And so all of that contraction in households meant that rents actually took a bit of a dip. So rent growth was negative in 2020 slightly again, varied a lot where some of the big pricey coastal markets actually saw really significant declines and a lot of more affordable mid-size markets actually saw big increases in 2020. So that’s probably the year where we see the biggest divergence of things going in totally opposite directions depending on where you are. But overall, what that added up to was nationally rents down about 1%, then we get into 2021, things go totally in the opposite direction. All those folks that moved in with their parents realized, okay, that’s not going to work for another year,

Dave:
Don’t want to do this

Chris:
Exactly. And roommates, people that were living grouped up, maybe that’s fine when everyone’s going to work every day, but when you’re all working from home, nobody wants to have four roommates. And so we saw this huge surge in rental demand, lots of new household formation at a time where we were seeing pretty big disruptions to construction pipelines, not a lot of new supply coming online. So rents went through the roof, rent’s up 18% in a single year in 2021, just wildly record breaking rent growth that continued into the first half of 2022, but then we saw things really start to taper off pretty quickly. A lot of that owing to a bunch of new supply coming online, which I’m sure we’ll talk more about. That’s been really a big factor over the past couple of years and also happening at a time when inflation is kind of taking off for non housing goods as well. And so folks budgets getting squeezed at the other end as well, putting a dampening on the demand side at the same time there’s a lot of new supply and so we saw big deceleration and rent growth. Our rent index nationally actually dipped back into negative territory in late 2023 and it’s been there ever since. So right now our national index is showing the national median rent down about half a percent year over year, so modest declines, but we’ve come down off that peak in total about 5% now.

Dave:
Yeah, it feels like the pendulum just keeps swinging back and forth with rent over the last couple of years. Like you said, we had normal, then it was down, then it was up like crazy. Now it’s down. I do want to talk about what you think is going to happen next, but just a couple clarifying questions to help our audience fully get the picture here.

Chris:
Sure.

Dave:
From my understanding, the big reason that rents have slowed down is sort of this multifamily supply glut, and for everyone listening, Chris alluded to this, but during the pandemic developers really started building a ton of multifamily takes a couple of years for those things to come online, and now in 20 24, 20 25, we’re seeing all these apartments hit the market at once. That’s creating an excess of inventory. Landlords and operators have to compete. They compete by lowering prices and so that’s what’s going on on this multifamily side, but maybe Chris, you can help us understand what’s going on in the single family or small multifamily like duplex kind of style. Is it the same trends and if so, are the trends influenced by the bigger apartment buildings even for smaller units?

Chris:
I think that to the extent that that’s largely what we’re capturing our index, our index might be showing things looking a little bit softer than it maybe is in that smaller multifamily space. I think if you look at some of the other data providers out there that have estimates, it is looking like maybe rank growth is a little bit stronger in that smaller multifamily segment. I know CoreLogic has a really good
Single family rent index. I think theirs is up by a couple percent year over year right now. So by no means is it we’re not seeing rents going through the roof for those single family rentals, but certainly it’s a bit stronger than what we’re seeing in large multifamily right now. I think that probably carries through to those two to six unit properties as well, the single family rental space in particular. I think that’s a really interesting one because obviously there’s all these challenges on the four sale side right now, so that’s a segment of the market that’s particularly quite hot right now. But also to say that I think your intuition on that is right. I think there might be a little bit of a difference in trends that are happening in different segments of the rental market.

Dave:
Yeah, I think I saw the same core logic thing you were alluding to and if I recall correctly, I think they had multifamily a little bit higher than you all basically flat still, but single family rents, were at least keeping pace with inflation. I think they’re up something around 3%. So that is an important distinction. This is super helpful, Chris. Thank you for explaining the context here and I want to shift the conversation more towards the future and I want to share with you sort of this theory that I have and get your opinion on it. But first, we do need to take a quick break. We’ll be right back before we go to break. A note that this week’s bigger news segment is brought to you by the Fundrise Flagship Fund. You can invest in private market real estate with the Fundrise flagship fund. Check it out at fundrise.com/pockets to learn more.
Welcome back to the BiggerPockets podcast. I’m here with Chris SDI from apartment list and we just were talking about some historical context, how it’s been six or seven years since we had normal rent growth and have had the pendulum swinging back and forth in rent trends recently. Chris, since the beginning of the year, I’ve been sharing with our audience this theory that I have about the future of rent growth and I’d love to just share it with you and feel free to tell me it’s terrible and I’m wrong or let me know if you agree.
My belief is that we are going to see the pendulum swing back again towards accelerated rent growth and maybe perhaps even above that normal inflation level that you were talking about, and I think it’s for two primary reasons. The first is the supply issue that we’ve documented well already today is that although there was a glut of multifamily supply, the opposite is happening. Very few multifamily construction starts not as many units in construction and there’s all of a sudden going to be a shortage of new multifamily, and so that’s going to shift supply and demand dynamics. The other thing that you sort of touched on just briefly before is that affordability in the housing market is still near 40 year lows. And so a lot of folks who I would imagine would want to normally buy a home are going to stay in or perhaps even return to the rental market, and that I think is going to provide additional demand for rental units. So I’ll just stop there. What do you make of that sort of general hypothesis?

Chris:
Yeah, I mean I think at a high level, I agree with everything you just said. I think the logic is sound there. I think the big question is really around timing of when these factors play out into actually accelerating rank growth and how big that effect is. But certainly, I mean those are the big storylines. Those are the main things that I’m keeping track of as well. The supply story, it looks like we’re already turning the corner on that. It’s looking like Q3 of 2024 was peak supply 2025. There’s still a lot in the pipeline, so 2025 I think we’re still going to see a lot of new units hitting the market, but it’s starting. We’re on the downward slope and then once we get into 2026, I think that’s really going to change. And on the for sale side, those challenges remain really significant.
We’re seeing really low numbers of home sales right now. There’s kind of just this log jam in the market, and so a lot of those folks that I think would like to be first time home buyers are definitely staying in rentals for longer. So that drives stronger rental demand. I mean I think all of that definitely adds up to the pendulum starting to swing back. How much further back it swings, that’s kind of up in the air, but we are starting to see that actually already in our rent index. Like I said, we’re still down slightly year over year, but it’s becoming less negative.

Dave:
A

Chris:
Few months ago we were closer to down 1% year over year. Now it’s about half a percent year over year. So we’re starting to kind of pull out of that negative territory. I think we’ll get back into by our index positive rent growth at some point this year. Whether it gets back to that kind of two to 3% range, I don’t know if that’ll happen this year, but certainly in the medium term, I think that’s the direction that we’re headed for sure.

Dave:
Yeah, I was going to ask you that question. I was actually debating this with a friend who is saying that maybe in 2026 we’d have double digit rent growth. I’m not that bullish. I personally think that we might get it up to two 3% like you said this year and maybe next year we see 5% would be a good year for a lot of people who have been struggling to keep up with their rent growth. But I guess my question to you though is how long does it take once the supply peak hits for rent growth to resume? Because like you said, the wonderful thing about multifamily construction is it’s pretty easy to forecast. You see there’s a lot of good data about it, so we know that we’re going to peak out in terms of new supply, but what we don’t know is how long does that absorption take? How long does it take for all of those excess units to get filled up because we’re not going to see rent growth until that happens and there’s no longer an excess of supply. Do you have any sense of how population trends are changing or household formation trends are changing to help us understand what it’s going to take and how long it might take?

Chris:
Yeah, I mean that’s the big question where you kind of ended off there around household formation really. I mean that’s the key thing that I’m thinking about in terms of rental demand. It’s how many households are there out there that are renting and that growth is driven by not just, you can think of it as population growth more simply, but really the more precise way to think about it is how many folks are kind of striking out and forming new households and some of it just pure population growth, new households are going to need to form, but then there’s also the degree to which households are responding to the macro landscape. Do I feel confident in where the economy’s headed and what my job prospects are and is that cnce going to be enough to translate into me making what is for someone that’s doing this for the first time, starting a new household, that’s a big economic choice to say, okay, I’m no longer going to live with roommates.
I’m going to go out and get my own place. And so I think that’s the big X factor right now is what’s going to happen with the macro landscape and how does that translate into consumer confidence and down the line household formation. I think there’s a lot of question marks there right now, especially with what we’re seeing with the new administration making some pretty big changes in terms of economic policy. We’re already starting to see that show up in shakier consumer confidence. I think a lot of people are just feeling uncertain about what the future is holding as far as macro stuff. And so I think that could translate to people being more cautious in striking out, informing those new households. But that could just be a temporary thing where maybe that rebounds in the near term.

Dave:
I want to explain to our audience to just make sure everyone understands this concept of household formation because a lot of times in the real estate investing world, we talk about population growth and demographics and that’s super important. Those do provide a really important backdrop to any individual market and sort of the whole housing universe as well. But household formation to me is actually the better metric and the difference for everyone out there is just household formation measures how much individual and specific demand for housing there is. And so you can have household formation grow without population growing. As an example, if you have two roommates living together and they decide each to go their own way and to rent a one bedroom apartment, that has not changed the population of a city, but it has added one household essentially that can happen with roommates, it can happen when children leave their parents’ nest.
It can happen with divorce, it can happen with couples breaking up. So there’s all these different reasons. And so if you want to understand demand for rentals, you have to understand household formation. And I think the key thing that Chris said is that it’s not just about demographics, it’s not just about personal preference. That plays a huge role here, but economics actually play a pretty big role in household formation as well. If you’re uncertain about your job or if you’re worried about inflation, you probably are less likely to give up having a roommate, you’re probably going to keep having a roommate for a little bit longer. If you’re super confident about the economy, you might go out and get your own apartment. And so there is more to this than just demographics as Chris was alluding to. And that’s why on the show we are always talking about these macroeconomic trends because they do really impact the demand for housing and for rental units. So Chris, I want to follow up on what you said about normalization because you said eventually it’s going to normalize. What does that mean? Does that mean just a return to where we were in 20 18, 20 19? And I’m talking long term, we don’t know what’s going to happen this year or next year, but is your expectation going forward five years, 10 years, which is the timeframe for a lot of real estate investors, do you expect it to be average out about the pace of inflation?

Chris:
Yeah, it’s a really good question. I mean, I think over the medium nearish term over the next two, three plus years, I’m thinking that we’ll probably average out in that range that we’ll get back to kind of that inflation level two to 3% range. I mean longer term it’s really hard to say when we’re talking about the five to 10 year horizon when we get into there, I think that’s probably where the regional variation just matters a ton. I think there’s going to be markets that will probably be in that two to 3% range over that whole horizon when you add it up. I think there’s probably markets that will be a lot faster than that, maybe some that will be slower than that. But overall, I think the longer term outlook for rental demand is pretty strong. I think we’re seeing that these challenges on the for sale side of the housing market aren’t necessarily going anywhere in the near term.
I think we’re going to see that continue to drive this demand for folks living in rentals for longer, whether that be single family rentals or apartments. The construction side, I think we just talked about a little bit right now. It’s really slowed down a lot from that peak of a couple years ago. And now again, getting into some of these kind of X factors with the new administration, we’re starting to talk about tariffs which could really directly impact multifamily construction and slow things down even further. And so I think there’s reason to believe that with supply kind of coming down off this historic peak and slowing back down and demand poised to be relatively strong, I could definitely make the argument that as we get into that kind of five to 10 year horizon, we’ll see above inflation rent growth over that full period when you look nationally and some markets certainly poised to see much stronger growth than that.

Dave:
Yeah, okay. I totally agree. And as an investor, you never want to bank on some outsized abnormal thing happening, but the way I look at it and underwriting my own deals is that I think we’re going to get back to at least normal inflation adjusted rent growth, which is already good as a real estate investor, especially because your debt is fixed. Remember that’s the important thing, but there’s a case for upside. There’s a case that it might be higher, and as an investor you have to try and get ahead of those things. So thank you for sharing that with us. I want to talk to you a little bit about what you just said about differences in markets, and I also want to talk about differences in property class, like a class B class and how those are performing differently. But we do have to take one more quick break. We’ll be right back.
Hey everyone. We’re back on the BiggerPockets podcast with Chris STI talking about rent growth. We’re just talking about how generally speaking, we think that rents will probably normalize in the next couple of years and there is some upside for additional rent growth. But Chris mentioned before the break that certain markets will see outsized performance. So tell us a little bit about that. What are some of the trends that you’re seeing or perhaps even things that our audience can look for if they want to understand what’s happening or what’s likely to happen in their own investing market?

Chris:
I mean, we’re actually seeing some really interesting regional breakdowns right now. One thing that I think is kind of the big story is a lot of these Sunbelt markets, the places that were really booming a few years ago have actually seen things really get pretty soft very quickly, and it all goes back to that supply story. These are also the markets that are building the fastest. Austin, I think is the prime example. Austin kind of both stands on its own for being quite extreme, but also I think illustrative of a trend that is happening in a lot of these markets throughout the Sunbelt. So Austin has just built a ton far and away across big markets across the country. Austin is seeing the biggest increases in supply right now, and so that’s caused rents to dip. Now year over year, we have rents there down 7%, which is really a meaningful decline.
And a lot of these Sunbelt markets are the ones that are actually seeing the softest declines right now. Raleigh and Charlotte, I think both down three to 4%, a number of the markets in Florida and throughout Texas seeing declines Phoenix down about 3%. So it’s kind of interesting that a lot of these markets that were really booming a couple of years ago are now swinging pretty hard in the opposite direction. Again, that’s not reversing the big rent growth of a couple years ago. It’s kind of just coming down off the peak a little bit going forward. All of these Sunbelt markets that we’re talking about I think are still poised to see strong demand. So the thing that’s kind of interesting is that all these markets that I’m talking about, these are still hot markets in terms of people wanting to live there and moving there. It’s just that we’ve seen this huge surge in supply hitting the market and we know that that is starting to come down off of that peak. So I think if you’re thinking about that five to 10 year horizon, maybe these markets throughout the Sunbelt are potentially a little bit oversaturated for the next couple of years, but I think are still poised to see pretty strong growth over the longer run.

Dave:
So that’s the second part of my hypothesis here that I was alluding to earlier, is that there’s just this interesting dynamic where the best markets with really strong fundamentals are the softest, and we’re talking about rent, but this is true maybe not in Raleigh, but a lot in Texas and in Florida with housing prices as well. And so it creates this interesting investment dynamic in my mind where you might be able to get a decent deal on a property where rents are likely to grow. And so it might not be the most exciting deal today, but the long-term five to 10 year potential of those types of investments I think could be really strong. That’s a big generalization. I’m not saying every single one of these markets, but some of the markets Chris mentioned I think are really good candidates for that sort of dynamic over the next couple of years.

Chris:
One thing I would add too is basically all these markets that we were just talking about, when you’re touching on Austin, Raleigh, Phoenix, what have you, these are all markets that were growing pretty quickly before the pandemic. And so that’s I think something that points to the fundamentals there. These are places that are growing economically and are seeing a strong pull. We also saw some markets that saw these big booms that have kind of been referred to as sort of the zoom towns of people once they had remote work flexibility just going to places that are maybe a little bit more vacation type destinations that are just nice places to live. And so we saw big booms in some of those types of markets that I don’t think have necessarily the same long-term fundamentals, but when we’re talking about these markets that were already growing before the pandemic, and those are the places that I think have the stronger economic fundamentals of being places where people are going to want to live.

Dave:
That’s a great point Chris, and I think this is something that as an investor you can take on for yourself to try and understand these trends of where people are moving, where the quality of life is good, where jobs are going. We’ve talked about that a lot in the show recently, that these are predictors of future population growth. And so you can really, as an investor in not that much time, it’s really not that hard. Figure out sort of these discrepancies for yourself. Is there a place where prices are soft and you’re going to have negotiating power where rents are likely to go up because that is a really exciting dynamic. The last thing Chris, I wanted to ask you about was different classes of properties because overall I’ve seen different trends. We see a lot of class A types of properties being built. Does that mean that’s where rents are going down the most? And do you have any insights going forward as to which property classes you think might recover the fastest or see the best long-term appreciation?

Chris:
Yeah, totally. This kind of goes back a little bit to being a similar dynamic to what we were talking about with just different segments in terms of property size. And I think there’s kind of something similar at play if you think about it in terms of property class, namely that the Class A properties, those are the ones that are seeing the most competition from all of this new supply coming online. And so that’s where the most substitutability is. And so those Class A properties I think are seeing the softest pricing right now because they have this stiff competition where renters that want to live in that class A type inventory just have so many options out there right now. A lot of these properties are having to offer lots of concessions to draw in that demand. So I do think that’s probably where the softest rent growth is right now. And when you think about class B and class C, especially just in the context of all of the broader housing affordability issues that are going on, I think a lot of people are still looking for more affordable inventory and there’s just stiffer competition among renters on that side of the market. And so I think prices have been a little bit more resilient there.

Dave:
Got it. Well, this has been super helpful. I appreciate all your insights and research. Is there anything else you think our audience should know about your research of work at apartment list?

Chris:
All this data that I’m referencing, we make publicly available on our blog apartment list.com/research is where you’ll find all the stuff that my team produces, whether that be reports that we write up or just if you’re the more data savvy type who looks to really get in the weeds, like I said, we make all of that data publicly available for downloads to do your own analysis. So that’s where our stuff is at, and our team can be reached at [email protected] if folks have any clarifying questions about the data. So yeah, check out our stuff there and always happy to chat about this stuff.

Dave:
Well, thank you so much, Chris. We really appreciate you being on.

Chris:
Thanks, Dave, really appreciate it.

Dave:
Alright, another big thanks to Chris for joining us today. And just to sort of follow up on the intro where I was talking about my personal thesis about what rent growth means for real estate investors, I think what Chris said reinforces my general belief that rent growth is one of the big upsides that real estate investors should be considering right now, the basic philosophy or framework I’m using is that try and find deals that are really good long-term assets that at least break even in today’s day and age and then have upside for a lot of growth in the future. And I’ve listed some of those upsides. They are things like buying in the path to progress or zoning upside, but I genuinely think that rent upside is perhaps the best one to shoot for the average rental property investor. As Chris alluded to, and as we discussed in the episode today, he expects that things will at least get back to the pace of inflation and there is potential that rent growth will outpace inflation again in the next couple of years. And again, if you have a fixed rate mortgage that can really grow your returns and increase your cashflow over the lifetime of your investment hold. And so that’s one of the reasons I am looking and focusing so much on rent growth in my deals over the next few years. That’s all we got for you today. Thank you all so much for listening to this episode of the BiggerPockets Podcast. We’ll see you next time.