Runaway Rents: How Operators Should Respond to A Crisis in Cost

As we’ve written about before, there’s an inflation and cost of living crisis going on across the country right now, and it’s almost certainly affecting your bottom line in unexpected ways. One of those things that’s skyrocketing in cost throughout America is apartment rent, and not just in the big cities. You may ask, isn’t a nationwide rise in rents good for property investors? Doesn’t it mean more profit? You might be surprised at the answer. Let’s explore.

Since the COVID pandemic, millions of Americans have reevaluated the way they live their lives. Many decided to pick up and go somewhere else, with one of the most prevalent patterns being a flight from expensive coastal housing markets in the Northeast and California for warmer, cheaper climates. The problem? Work from home has allowed many of these people to keep their jobs. This means that when they enter a market with a significantly lower average wage and property values than, say, New York City, because they’ve been able to keep their existing high salary, they may choose to rent a property that’s cheaper than where they came from but much higher than anyone from the area can afford. The result: property values go up and price out the locals.

In states like Texas and Florida, where thousands of new arrivals from coastal metropolises in California and New York have arrived in recent years seeking low taxes and warmer climates for both business and pleasure, this has exacerbated an already existing real estate crisis. In Miami, arguably the city most severely affected by this trend, plenty of landlords have taken advantage of the city’s lax regulations on housing by raising rents to exorbitant rates. Miami was recently ranked the least affordable housing market in the country, surpassing even New York. Moreover, much of the housing stock being built is designed to take advantage of new arrivals wishing to live a high-end lifestyle. As a result, the city has plenty of nearly-empty luxury condos with precious few mid-market listings for the taking.

This has resulted in several reactions from local residents that may leave operators concerned. Many longtime residents, first of all, have begun leaving the city, seeking cheaper places to live in the surrounding suburbs. Some, especially younger renters, are living with their families for longer or leaving the state entirely. If this continues, operators not catering to the high-end market could lose an entire generation of new renters.

Another reaction is coming from locals who don’t want to be pushed out. Recently, community organizers have succeeded in agitating for a tenant bill of rights, which was ratified by Miami-Dade County. Though the bill does not include any form of rent control or ban on rent increases, it could be seen as a sign of things to come, and should come as a shock to a market as regulation-averse as Miami.

These types of situations aren't exclusive to Miami and Florida. Austin, Texas saw the highest annual rent increase (40%) in 2021, with cities like Portland, Oregon, Las Vegas, Phoenix and even Cincinnati seeing massive hikes. Plenty of places have also had to contend with Airbnb and other short-term rental services contributing to the rise in rents and shrinking the amount of available housing stock for ordinary residents. The situation is especially dire in New York City.

So, what’s an intrepid operator to do in the face of these upheavals?

As we’ve detailed, markets across the U.S. are being disrupted by profiteering, often upstart landlords issuing their tenants 20, 50, even 100% rate increases in order to attract wealthier tenants. For our operators of Class C properties, which are lower-tiered, located outside of prime locations, and usually in need of refurbishment, these properties are generally insulated from inflation and severe market fluctuations.

With markets being what they are and housing shortages still affecting demand, a modest rent increase may be unavoidable in order to cover your costs and keep up with inflation. There are ways to properly navigate these tricky waters, however. Raise your tenants’ rent by a few percentage points annually, or even biannually. This way, you’ll be better able to keep an existing tenant that can hold up their lease – and your stable revenue stream – every month rather than hunt for a new one that’s willing to pay more.

You should also make sure you understand the markets you’re renting and developing in. The real estate situation in, let’s say, Boise, Idaho is very different from that of San Francisco. Due diligence is necessary for every market. You should know the kind of people you’re renting to – are they students? Young professionals? Is your market dominated by ownership or are the majority renting? And how has COVID affected things – are more people coming in and driving up prices thanks to telework?

Knowing what you’re getting into before investing is crucial. It’s something that A&S treats as a part of our daily business. Recently, we launched A&S Capital California, and we’ve already provided loans for operators throughout the Golden State to the tune of $94 million in the past six months alone.

We’re here to help you achieve your investment goals, no matter the market conditions. Contact us today to get started.