As single-family mortgage rates hover near 7%, many multifamily sponsors are confidently forecasting a surge in rental housing demand. On the surface, this logic appears sound—higher mortgage costs should drive more households toward renting. But as is often the case in real estate, the truth is more nuanced.
In reality, rental housing demand depends on a complex set of variables. While financing conditions play a role, job growth remains the true catalyst. In this post, we unpack what the latest data reveals and why some assumptions in today’s market are being challenged.
Job Growth: The Core Driver of Rental Housing Demand
Demand fundamentals for both for-sale and for-rent housing stem from job growth and the resulting household formation. When job markets are strong, consumer confidence rises. This fuels household formation and increases demand across all housing types—including rentals.
However, during periods of economic instability, household formation tends to stall. Renters may stay in place longer, double up with roommates, or move in with family. In essence, uncertainty delays new housing commitments.
According to Morgan Stanley, a sharp slowdown in job creation is expected in 2023. The firm warns of hiring cutbacks across most sectors as consumer demand softens. With the Fed implementing the fastest credit tightening cycle in modern history and the war in Ukraine, fears of recession remain elevated.
Rental Housing Demand Weakness Is Emerging in the Data
While higher single-family mortgage rates have clearly cooled the homebuying market, they have not triggered a corresponding surge in apartment demand.
Rental data for August, September and October is also indicating that the Fed’s actions are creating weakness in apartment rental demand as well. In fact, multiple data points now suggest the opposite:
- August to October 2022: National rent growth slowed dramatically.
- RealPage reports that October rent cuts were the third deepest since the 2008 crisis.
- By November, national rents had dropped for a third consecutive month—a pattern not seen since the early pandemic.
This isn’t just anecdotal. It’s a clear signal that rental housing demand is softening.
As the below data shows, rental demand in Cincinnati was extremely robust from September 2021 to September 2022. While we are still seeing relatively strong rent growth in this market, demand did in fact cool from August 2022 to September 2022 as the Federal Reserve rate hikes took effect:
Nationally, October data from Real Page shows that apartment rent cuts in October were the third deepest since the global financial crisis in 2010:
Now, 2022 year end data is out, and this data confirmed that apartment rents dropped nationally for the third consecutive month. In addition, the data shows that rent declines in November continued the October trend with the largest decline since 2010. The only two months that posted larger declines were April and May of 2020, during the onset of the COVID pandemic.
Why It Matters: Rethinking Investor Narratives
Some investment sponsors continue to pitch the idea that higher mortgage rates will “force” more renters into the market. But that view oversimplifies reality. It ignores the cyclical nature of housing and overlooks how job growth—not just housing affordability—drives demand.
We do not believe the bottom will fall out. There remains a structural housing shortage across the U.S. However, it’s misleading to suggest that higher rates are a tailwind for rental demand in the short term. Instead, investors should expect softness until employment trends stabilize.
Strategic Takeaway for Investors
Private real estate is a cyclical business. The best operators understand those cycles and position accordingly. At Piping Rock, we embrace the opportunity that cycles create—but we remain anchored in the fundamentals.
- Stay focused on job growth trends
- Be wary of sponsor narratives not backed by data
- Understand your market at the subregional level
When the data challenges the narrative, trust the data. Want to learn more about our investment strategy?
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