“Negative rent growth.”

Multifamily investors never thought they would hear such a thing.

According the a recent report from Apartment List, 67 of the 100 largest cities in the U.S. now have negative year-over-year rent growth. In early 2022, all 100 cities were posting positive year-over-year rent increases.

The first to turn negative were the early “zoom towns'' in states like Arizona, Nevada, and Idaho that surged in popularity in 2020 when much of the nation’s workforce went remote, but saw a pullback in demand as affordable options dissipated and more jobs were called back to city centers.

Since then larger cities have joined the trend, including much of California and the West Coast, Texas, and the Southeast. Currently the sharpest year-over-year decline can be found in Boise, ID, where prices are down 6.9 percent compared to last July.

Underwriting Negative Rent Growth

Depending on which market you are currently investing in, underwriting negative rent growth could be a reality for you now.

Based on the data available, if you had to underwrite to negative rent growth, here’s what you can do:

1. Find a model that allows you to control YoY rent growth.

2. Input a negative input for each negative growth year.

In my Value-Add Multifamily Model, I can control rent growth for each individual year, along with individual expense items. I have not seen this level of detail in many of the mainstream underwriting models, but it’s a critical feature to have.

Secondly, I would input a negative number in each year I predict there to be negative market rent growth. As shown below:

In this example, we are predicting rent to be -5% in Year 1, -1% in Year 2, neutral in Year 3, and 3% every year after.

As you can see below, the base rent will grown at a negative rate for each respective year. Year 1 will be -5% starting from the current in-place rent.

Having these detailed features in your underwriting model will allow you to have the most accurate analysis possible.

Is your underwriting model lacking these features?

These are just a few of the features that will be in our new Value-Add Multifamily Underwriting Model.

📈 After spending over a year building this extensive underwriting model, I am making this Value-Add Multifamily Underwriting Model available to purchase 9/1/23!

NDL readers will be first to know and will receive a massive discount. Stay tuned for more updates!

• How Far is Each Market Past Peak Apartment Construction?

• August Rental Activity Report

• Zumper National Rent Report

• Three Trends Impacting New York City Commercial Real Estate

• Half of Texas Submarkets Logging Apartment Rent Cuts

• Multifamily Development is Definitely Slowing

• Global Real Estate Market Outlook 2023

📈 Chart of The Week

Can U.S. Renters Still Afford to Rent?

Income growth has not kept pace with rent growth since the onset of COVID-19, the median rent-to-income ratio among renters signing a new lease 2023 thus far is still relatively low at 23.1%.

That ratio is about on par with what the nation was seeing in 2011 and is a just few ticks above the 2019 showing closer to 21%.

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