CoreLogic (NYSE: CLGX) reports that rent for single-family homes was on the rise nationally in February until the onset of the COVID-19 pandemic, which may stunt the growth of that income stream for investors, particularly in lower-priced rentals.
The Irvine, California-based data analytics company said rent prices were up 3.3% in February 2020 compared with February 2019, driven by a 3.6% jump in lower-priced rentals.
Higher-priced rentals rose 3% and, by market, Phoenix showed the highest year-over-year jump at 6.2% for overall single-family rentals, the 15th consecutive month it led in that metric, according to the company's most recent Single-Family Rent Index (SFRI) report, which analyzes the national market and 20 metropolitan areas.
A downshift in demand in the medium term
That 3.3% overall jump was the largest year-over-year monthly gain since August 2016, but investors considering single-family versus apartment homes should note this caveat in the CoreLogic report: "However, as consumers contend with widespread unemployment in the wake of the coronavirus (COVID-19) outbreak, there may be a downshift in demand in the medium term."
The CoreLogic index defines lower-priced rentals as those charging less than 75% of the regional median and higher-priced rentals as charging more than 125% of that median. Lower-priced rentals have been leading national rent growth since 2014, but that gap narrowed in February, the company said.
Location, location, location, location
Phoenix, Seattle, and St. Louis led the gains in single-family rental prices year over year at 6.2%, 6.1%, and 5.4%, respectively. The only metro area to show a decline was Detroit, which fell 2.2%.
"Metro areas with limited new construction, low rental vacancies, and strong local economies that attract new employees tend to have stronger rent growth," the report observed, noting that Phoenix was experiencing annual employment growth of 3.2% at that point, twice the national average.
Like the rest of the economy, employment growth nationally was humming along until the pandemic caused massive job losses.
"This has disrupted the typical rental demand-and-supply dynamic, which will ultimately impact rent growth in the coming months," the report said.
Cause for a comeback
CoreLogic's data shows low supply and high demand -- as in single-family home sales -- also had been fueling the growth of single-family rent prices for the past 10 years. That growth began slowing after a peak of 4.2% year over year in February 2016 and had begun rising again early this year before the COVID-19 outbreak.
That changes the calculus, but how much remains to be seen. "In the coming months, the virus' impact on the rental market will become more apparent," said Molly Boesel, principal economist at CoreLogic.
"Uncertainties surrounding job security and shelter-in-place mandates could lessen rental demand in the near term," Boesel said. "However, as we look ahead to an economic recovery, consumers may begin considering single-family rentals over multifamily options to provide more space for at-home offices and distance from other housing units."
And that's when the market may return to something closer to normal for investors considering when and where to invest in rental properties.