February 10, 2021

JF2353: 25 Markets Expected To Have The Highest Rent Growth In 2021| Syndication School With Theo Hicks

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In today’s Syndication School episode, Theo Hicks shares a list of markets that experienced the highest rent growth in 2020. These markets performed well because of the migration trends we discussed several episodes ago. Due to Coronavirus and the increased possibilities that remote work allows nowadays, many young professionals are moving from expensive big cities to smaller towns and suburban areas that allow a lower cost of living.

Theo also shares a list of 25 markets that are projected to have the highest rent growth in 2021. This list is based on the 2021 Multifamily National Report prepared by Yardi Matrix

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To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.


Theo Hicks: Hello Best Ever listeners and welcome back to another edition of the Syndication School Series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host Theo Hicks. Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. And for a lot of these episodes, especially the earlier episodes, we give away free resources, free documents. These are Excel template calculators, these are PowerPoint presentation templates, PDF how-to guides, something to help you along your apartment syndication journey. So make sure you check out the past Syndication School episodes so you can listen to those, but also to collect those free documents. All those are available at syndicationschool.com.

And today, we are going to talk about rents, or specifically, we’re going to talk about some of the markets that are expected to see the greatest increase in rents in 2021. So we’ve talked in the past about similar topics, about trends going in 2020 and beyond, as well as analysis of what happened to multi-family and what’s continuing to happen to multi-family due to the onset of the pandemic. And one of the things that’s relevant today is going to be migration trends. We did do an episode a few weeks ago about 2020 migration trends, but something that was occurring before the pandemic was a lot of people, specifically the millennial generation, who were beginning to start families, started to transition from the major urban high-cost gateway markets –the San Francisco’s, the New York’s– into secondary, tertiary markets, as well as the suburbs. And this is one of the trends that has accelerated since the onset of the pandemic.

We did do another episode on that, specifically about the number of people who left the urban areas for the suburbs. And one of the main drivers of this, obviously, is Coronavirus, but more specifically, is that people are working from home more. So rather than being stuck in a tiny urban apartment in the city, with everything closed around you… I think they’re opening up back now, but during 2020 things were closed, you couldn’t go to work, you probably didn’t have a car, because you live in the city… So you’re stuck in your tiny apartment, paying a bunch of rent. And these people would much rather move out of the cities to the suburban areas, or at least move to smaller cities in order to have more space, for less money. That way, they could have more space to work, maybe they move closer to family… So those are some of the reasons why this trend occurred. We kind of went into more detail on that in that urban to suburban episode.

Now, the reason why this is relevant is because whenever people are moving to an area that quickly, in a year’s span, the supply in that market is not going to increase in the same proportion. Typically, the supply is going to lag. So when a bunch of them move to a market, then investors say, “Oh, wow. A lot of people moved to this market this year, let’s go there and invest and build.” But until that happens, rents are going to start going up and up and up. And so a lot of these suburban and tertiary markets benefited from this quick migration trend during 2020 due to the pandemic. It’s a lot of really random cities, that no one really predicted, performed really well in 2020.

Some of the cities at the top of this list, some of them are obviously well known – this is just for 2020 – was Sacramento, at 6.1% growth in rent. The Inland Empire, which is also in California, at 7.3%. Phoenix at 4.6%. Tampa, 3.9%. And  Las Vegas at 3.8%. And then the ones that no one predicted, I would say, would be Boise, which was the highest, at almost 10% rent growth, and then Scranton in Pennsylvania at 7.8%.

So now that we’re in 2021, what are the experts predicting for rent and growth? What cities are expected to grow the most in 2021, based off of a year’s worth of data collected on how real estate is being impacted by the pandemic? So I wanted to go over the list with you guys today, and go over the top 10 cities where rents will rise the most in 2021. And then maybe I’ll go into some honorable mentions that are on the top 25 or so. Now, this data comes from Yardi Matrix, which is kind of like CoStar. They have a massive database of commercial real estate transactions and sales. So based off of their massive database of historical data, they come up with these predictions.

Now, the reason why this is important is because, first of all, when you’re underwriting deals in one of these markets, you don’t want to assume that “Okay, well, Theo said that Boise grew by 9.5% in 2020, so I’m going to underwrite a deal in Boise due to the 9.5% market-driven rent growth.” So you still want to be conservative with your rent growth assumptions, and you still want to make sure that you are basing any rental premiums you’re going to demand if you’re doing a value-add play on your rental comp analysis. So make sure you check out our episode on how to perform your own rental comp analysis – we have a blog post on it as well – to make sure that you’re not falling into the trap of assuming that rents are just going to continue to naturally appreciate.

We need to be able to focus on value add appreciation, which means that we go in there and forcefully increase the rents by doing some sort of renovations. But it is good to invest in a market that is far exceeding the national average for rent growth.

In 2020, rents actually went down nationally by -0.8%. So ideally, you beat that. And in 2021 the national assumption forecast is 2%. So when you’re underwriting deals, you want to do your traditional 2% to 3%, probably closer to 2% now, since rent growth has slowed down. But just because you’re in a market that is forecasted to grow by more than 2%, you still want to keep that 2%. So you find that market that performs really well, and then anything above that 2% is just icing on the cake for you. Whereas if it doesn’t happen, if rents were to decrease like they did in 2020, you’re impacted much less.

Let’s say you bought a deal in 2019 and you assumed rents were going to naturally increase by 7%. And we talk about this all the time in this podcast; it’s actually interesting that what we talked about actually came to fruition. So we talked about how you want to make sure you’re making these 2% to 3% conservative annual revenue increases, even if the experts claim that rent growth is going to be 5%, 6%, 7%, 8% in 2020, even if the previous five years rents have grown by 10% each year. That doesn’t matter because, at some point in the future, rents are not going to continue to grow at those crazy rates. So the higher your assumption when you’re underwriting the deal, the more you’re going to pay. And then once the music stops, in a sense, and rents are no longer growing at that rate like it did in 2020, they went down 0.8%, obviously everyone was impacted by that, because no one predicted –at least not that I’m aware of– a negative rate and growth in 2020. But the closer you were to zero, basically, the less trouble you face. So the person who had that 7%, 8%, 9%, 10% assumption was in a different situation during the last 12 months than a person who did the 2%, or the 3%, or even the 1% revenue growth.

So that’s really a long way of saying that unless you’re forecasting less than 2%, then why are you investing there. But if you look at one of these markets I’ve talked about today, and you say “I’m going to invest in Boise because of the rent growth”, make sure that you’re still being conservative. And that’s just like a selling point, or as I said, the icing on the cake with a cherry on top, that “Okay, I’m assuming 2%, but the experts are saying it’s going to grow 8% in 2021.” So we’re being super conservative, and that way, if it doesn’t come to fruition, we’re still fine. But if it does grow that much, here’s how much more the property is going to be in value, or here’s how much more cash flow you’re going to make. Here’s a best-case scenario, baseline scenario, worst-case scenario, sensitivity analysis.

So that point is very, very important… And it might not have been as obvious when I said this a year ago, but now obviously it makes a lot more sense, since rents decrease nationally in 2020. Obviously, some are way worse according to this Yardi Matrix report. I think they said that rents dropped by 13.7% in San Jose, 9.4% in San Francisco, and then 3% in Los Angeles. Whereas on the flip side, Boise is in 9%.

So what are the top markets for 2021? We’re going to go through the list of 10 or so, and then maybe mention some honorable mentions. So coming in at number 10, Cincinnati, Ohio. So the prediction here is 3.3% rent growth. Now, what’s interesting here is that these rent growth assumptions that they’re coming up with are very, very conservative. I’m not sure exactly what it was for the past five years, but 3% compared to some of the places – 5%, 6%, 7%, being the top 10 at 3.3% is kind of showing you that rents overall are slowing down. But Cincinnati, 3.3% in 2021, compared to 2.2% in 2020.

Number nine is Sacramento, which I mentioned earlier, had a really big jump in rent in 2020, of 6.1%. And Yardi Matrix is predicting a conservative 3.4% in 2021. Birmingham, Alabama, which is one of the most interesting ones in the top 10. Coming in at number eight, they’re predicting that rents will grow by 3.4% in 2021, compared to 2.8% in 2020. Next on the list is New Orleans, which I don’t think I’ve seen in a top list before. It’s probably the biggest city on this list that I’ve not seen in a top market list, at least in the past few years. Rents grew by only 0.6% in 2020, but Yardi Matrix is predicting a 3.5% rent growth in 2021.

Another small location on this list is number six, Winston Salem. I think it’s in North Carolina, actually. I remember saying, “Oh, is that in Pennsylvania? Salem, Pennsylvania?” No, I think this is actually in North Carolina. And that’s number six, at 3.6% rent growth predicted in 2021, because of the 6.6% rent growth in 2020.

These next ones are pretty obvious, but I think Winston Salem, New Orleans, Birmingham, Sacramento, and Cincinnati – those were interesting to me. But the top five are [unintelligible [00:14:54] of course. Number five is Phoenix, 3.7% in 2021, 4.6% in 2020. Number four is Indianapolis at 3.9% in 2021, 3.5% in 2020. Number three is Austin, Texas, 3.9% in 2021, -3.6% this year, which I’d be curious to see how they got that prediction, because that’s number three with a pretty big reduction in rents. But they’re predicting a big turnaround in Austin this year. So that’s another highlight of this list. Number two is Salt Lake City, 4.3% in 2021, compared to 3.8% in 2020. The number one on the list is Las Vegas. So rents in Las Vegas grew by 3.8% in 2020, and that prediction is 4.8% in 2021.

So the reason why I kind of say these are conservative because there’s probably going to be a market in 2020 that grows by more than 4.8%; being the highest, I’m sure some market will grow by 6% or 7%. What that market is, I don’t know. Will it be Las Vegas? Will it be another one on this top 10 list? Will it be one that Yardi Matrix predicted as a negative. It’s impossible to tell. That’s why it’s important to also reiterate that forecasts are never perfect. No one, I would imagine, predicted that the market that would experience the greatest rent growth in 2020 would be Boise, Idaho at nearly 10%. I know Boise is slowing down now, which is why it’s not on this top list, but it had a really big jump in rent starting in April through, I believe, the fall, August, October, November timeframe; I can’t remember exactly when it was. But huge jump. No one could have predicted that. So that’s why you don’t want to rely only on rent growth forecast data to select your target market. You don’t want to listen to this podcast and if I say that “They’re predicting 4.8% rent growth in Las Vegas, so I’m going to go buy in Las Vegas this year.” And then just blindly start doing deals in Las Vegas. Obviously, you have to be more sophisticated than that.

But the point here is how do you use this type of information? What’s the purpose of this? On the one end, you don’t want to completely ignore it and say “They’re forecasting a -5% rent growth, but I’ll figure it out.” You also don’t want to go on the other end of the spectrum, which is “Oh, they’re predicting a 5% rent growth, so I’m going to invest here.” You need to look at these types of reports as guides. So if you’re already investing in a market, then it could reinforce your reason for investing. If you’re on the search for a new market, then you can use these types of lists to say “Okay, well they claim that rents are supposed to grow by 5% in 2021, so let’s do some more digging on this market. Let’s take a look at some other economic data. Let’s take a look at supply data, unemployment data, population growth data, job diversity data.” All the things we talked about on this show about how to analyze the market. And then we can decide based off of that whether or not we want to invest.

Then once we make a decision, we want to do a more detailed, submarket, neighborhood-level analysis, to see, of the market average, which one’s going to perform above the average? Because it’s an average. Some places – Las Vegas, for example, is going to grow less than 4.8%. Some places are going to grow more than 4.8% in 2021, assuming that this forecast is accurate. So these are just guides. These are just guides, they’re reinforcing something you already know, another data point that you can add to your stack of data that shows this is a good market or a bad market. And then you also want to make sure you’re performing that deeper-dive analysis.

So before we wrap up, let’s go over some of the other ones for 2021. So all these are basically between 0.5% – so I’m not going to read the percentage points – all the way to the top is 3.3%. The bottom is 2.8%. We’ve got Atlanta, and then Columbus, Louisville, Raleigh, Richmond, Memphis, Tuscan, Nashville, Tampa, and Houston. So those are 11 through 20. And then, I guess we’ll add in the last five, which is Tacoma, Charlotte, Denver, Detroit, and Philadelphia, which are all either 2.8% and 2.7% rent growth.

So what are the big takeaways? Number one, when you’re assuming revenue growth this year, you’re probably going to want to be closer to 2%, maybe even 1%, and maybe assuming rents aren’t going to grow at all in 2021 when you are buying deals. That way it’s just a cherry on the top. Because the average nationally for the forecast is 2.0%. The highest is 4.3%. And Tuscan and Nashville are the last ones at 3%, which are in the top 20. So they’re assuming that only 20 markets or so are going to grow by more than 3%. So when you’re underwriting deals, making a 3% revenue  assumption probably is not the best idea.

If you want more data – because this is just one of one snapshot, one page of the Yardie Matrix report… The US multifamily outlook winter 2021 pandemic prompts rise and rent concessions – ou can check that out; we’ll put a link in the show notes of this episode.

So that’s all I have for today. I hope this was helpful. Let me know if you like these episodes where we dive into timely market data. Just email me theo@joefairless.com and say, “Yeah, Theo I love this.” Or “Hey Theo, I don’t like this. Let’s do something else.” We always appreciate your feedback. Make sure you check out some of the other Syndication School episodes we have, as well as those free documents, at syndicationschool.com.

Until next time. Have a Best Ever day and we’ll talk to you tomorrow.

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