Are you chasing the high rent growth markets? That feels a lot like the shiny object, and I’m wary of falling into that trap. It’s like a syndrome. We see high rent growth and we think we’re going to make some good money here.
It’s not always like that. High rent growth could be one of the most invaluable, overused, and misleading metrics in real estate.
Rent growth is usually measured in spans of a year or a month. It is a short term metric with a high level of volatility. It isn’t like population or job growth, where a consistent trend will most often continue into the future.
No, rent growth comes in spurts. Then it ends. Not always, but too often to make a long term bet.
What happens when rent growth is high? Especially when it’s high for two years?
Two things: developers move in and build lots of new apartments, which leads to over-supply and rent reductions, and renters look around for other, more affordable, places to live.
Rent growth is contrary to value add investing, too. If you are excited because you found a market whose rent growth over the last year was 7%, where another market is only at 5%, you are ignoring the much more significant upside potential of value-add apartments. Your potential for rent increases from buying and then renovating could be 20-30% rent increases.
The only time I’m happy with a high rent growth in a market is if the growth is sustainable. Not over-heated. That metric has to be backed up with other positive metrics – population and job growth, affordability, rising household incomes, and strong diversity in employment.
Even 0 or negative rent growth (Charlotte? Dallas?) can make for a compelling contrarian opportunity if the market is otherwise strong. Who wants to be doing what everyone else is doing?
Market update
Knoxville, TN – For a city right square in the middle of what’s known as the Appalachian region, it has become extraordinarily progressive. Located in east Tennessee, your first impression might be of a backward region but it shouldn’t be. The Appalachian region is actually the mountain range from north of Maine, down through Tennessee, Georgia and Alabama. Most of this is hilly, not mountains, and definitely not backward.
In fact, Knoxville is one of the largest cities in this region, with an MSA population of nearly 900,000. It’s population has grown over 12% over the last 20 years, impressive for an area that doesn’t claim Fortune 500 company headquarters, isn’t near the coast or oil deposits or other natural resources, and isn’t close to any major hub cities.
It just has a very business-friendly culture, stable family-oriented communities, a major university, University of Tennessee, and affordability, without the big-city annoyances of crime and congestion.
Stability is the key to Knoxville’s success. It’s jobs growth rate is not spectacular, averaging under 2% last year and under 1% this year, but employers know they will find hard workers and not have to cycle through short-timers.
What is actually changing the outlook in Knoxville is the U of T’s growth in student population. This has helped drive rent growth of over 9% in 2023, with occupancy keeping pace at 95%. Watch out for new units hitting the market, though. Over 2,000 were completed in 2023 and more than 4,000 are in the pipeline. These new units will create downward pressure on rents, but the growth trends indicate this may be minimal and short-term.
Knoxville has grown vibrant healthcare, education, energy industries, and one of the nation’s premier research facilities, Oak Ridge National Laboratory. Oak Ridge is famous for building the first continuously operating nuclear reactors and pioneering work on the world’s fastest supercomputers. With a staff of 5,700, most of them highly educated, Oak Ridge is one of those rare institutions that attracts other companies that hire smart, well-paid people, and breeds extensive communities of service businesses. Whose employees rent apartments.
This may be the right time to get into the Knoxville market, as it is very well positioned for long-term growth when we begin the next growth cycle. Classic qualities of an emerging market.
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Finer Points of Multifamily Properties
Create Your Scope of Work Like an Owner
Your real estate needs a project to be done. Something’s not working right or something needs to be improved and it’s not something you or your maintenance person can do.
Are you quick to call a contractor for a bid?
It is always a good idea to define your scope as thoroughly as you can before taking that step. Here’s why.
Without a lot of guidance or a very thorough description of the problem, a contractor will fill in the blanks with their own assumptions. This is broken? We’ll build you a new one. This is made from wood? We’ll put in a new one made of steel. You don’t have a budget? Our fee will be $50,000.
The contractor works from the information you provide them. When they show up to look at whatever needs to be worked on, in most cases you or your designate aren’t even there with them. They’re on their own, making their own assumptions.
When I see a bid come back from a contractor and it wildly missed the mark, my hostility is usually directed at myself or my team for not providing the contractor the information they need to create a quality bid. We wasted the contractor’s time.
When I take the time to describe the problem as thoroughly as I can, and offer what I think is the solution, responses from contractors are so much more meaningful. And in most cases less expensive than a contractor who submitted a bid with less information.
The difference between providing only a little information and providing a lot can be huge. My team had a requirement on a property to fix several structures on the property, but we weren’t clear about it. Our initial bid was to replace them. We revised our information that we sent to the contractors so it was clear we wanted the structures to be fixed, not replaced, and the bids came in at less than 25% of the original bid.
Just a little extra effort on your part can result in huge savings.
Don’t let your contractors define your scope of work. Be the owner. Own the scope.
“To do more for the world than the world does for you – that is success”
– Henry Ford