The Arlast View – Short-Term Pain but Long-Term Upside
Short-term softness
Arlast Capital seeks market-neutral opportunities that do not depend on the market cycle, but we recognize and account for macroeconomic trends in our underwriting. In 2024, we are projecting rents to be flat after years of growth, primarily due to strong headwinds from new supply. However, we do believe this new supply is a temporary concern as new starts plummeted in 2023. Accordingly, we expect deliveries to taper off by the second half of 2025 and continue to decline into 2026.
We do see occupancy and rents declining in 2023-24 due to a 50-year high in supply. There is a clear relationship between submarket-level supply and rents:
- Rents are falling where supply is growing
- Rents are still growing where supply is not growing
- If you take elevated supply out of the equation, rents would still be growing nearly everywhere today due to robust demand for apartments
The other potential headwind is the economy finally entering a recession, but this forecasted recession has been “six months away” for more than two years and we can offer no more insight than others. As such, we avoid timing the market, and instead de-risk by using defensible capital structures.
Long-term tailwinds
Excluding the aforementioned supply challenge, we believe the fundamental drivers of multifamily demand remain strong.
- Unemployment remains low at 3.3% as of the end of 2023
- Baby boomers reaching retirement age creates income upside for younger workers of apartment-renting age
- Inflation has cooled, driving a rebound in consumer confidence
- Young adults continue to delay marriage and childbirth, two drivers to single-family homes, thus extending their apartment stage of life
- Wages are growing faster than rents again and should continue to do so through 2024, widening the demand funnel
- The sustained work-from-home movement indicates more single-occupant units than in past cycles (particularly for Class A)
Summary
Arlast Capital believes the current supply spike is a black swan event caused by a combination of factors unlikely to reoccur in tandem:
- Generationally low interest rates
- Abnormally elevated demand
- Cap rate compression between asset classes
- Investment capital being redeployed from office
With supply dropping off, we are optimistic about apartment performance in the coming years and intend to be buyers.
