Changes in Rent Growth for Office and Multifamily Sectors

The deviation is known as a “great divergence” by analysts.

According to a recent research from Moody’s Analytics, rent growth in the office and multifamily sectors is no longer trending together. This new development shatters a long time trend in which the two sectors frequently followed the same path.

Analysts describe the anomaly as a “great divergence,” noting that last year was the only time that rentals for offices and multifamily buildings really moved in the opposing ways.

“Companies haven’t fully reopened offices, but households come back to cities anyway,” they say. “Further, in a rebuff of the historic link – it wasn’t just suburban apartment markets feeling the positive demand shock, dense urban areas bounced back, with many having apartment rent levels that have now fully rebounded.”
Office market performance also trended below the US average in cities like New York, Tampa, Orange County, Charleston, and Greenville, with asking rents ticking up 0.8% from 2021 to 2022, while multifamily rents in the same markets “skyrocketed.” And in Minneapolis, St. Louis, and Columbus, all of which had office markets that were above average last year, the apartment market is performing far below the national average.
“If people choose where to live based on their office locations, this divergence should not be as evident,” the analysts say. “Lifestyle must play a very critical role in this divergence, though the single-family market, zoning regulation, industry types and other factors affect it as well.”

According to a recent RentCafe poll, San Francisco, Jersey City, Manhattan, Philadelphia, and Boston witnessed the most increases in Gen Z renters’ lease applications over the past year, with rises of up to 101%. Moreover, a quarter of recent renters in San Diego, Los Angeles, Manhattan, and Philadelphia are also Zoomers.

However, Moody’s also noted that asserting that remote labor has no adverse effects on urban apartment markets would be “premature.”

In an era of hybrid and totally remote office employment, they claim, “it is likely that as households age into child rearing, the typical pull of suburban/exurban life could become stronger.” But it’s also true that a particular lifestyle only exists in urban areas.

If households followed work as the dominant pattern in contemporary life, we may now be approaching an era where work follows households, the analysis suggests. Whether this transition is temporary or permanent, however, remains to be seen.
“At a minimum, the link between office and multifamily performance has dramatically weakened over the past year,” they write. “The US economy is based heavily in the production of knowledge, and the main resource in the process is skilled labor.  If firms still believe there is value in the office, even in a hybrid capacity, they will look to locate within striking distance of those workers.  The link may not be permanently broken after all, but instead, economic strength may be diversifying and shifting towards where people want to be. Time will tell how this dynamic between office and apartment property types plays out.”
We are ready to assist investors with Santa Ana multifamily properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard. 


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