When new apartments flood a market, rents stagnate or fall, forcing developers to cut prices to fill units. Bob Fraser says this creates a buying window: investors can grab properties cheap now with low cap rates, then profit when supply tightens and rents rebound.
Where supply is going, rents are falling. Where there's no supply, rents are increasing. Okay, so it's all about supply. Everybody wants to make about something else. It's about demand shortages, about affordability. Nothing correlates as well as supply. It's all about supply. And if you're in these higher supplied markets, I think this, this chart's actually encouraging because what it shows you is when supply is less, we should see more rent growth because the markets with little supply are seeing rent growth. And oh, by the way, these markets, all the supply also are seeing the most demand. And so, as supply drops off, assuming the economy's in decent shape, these markets should be able to see better rent growth.
Yeah, this is one of my favorite charts. And, you know, you know, I love a good chart. And this, he pulled out all the stops for this, but it's almost too obvious to point out. But then when you see it, it makes so much sense. And the point he's making here is there's a negative correlation between rent growth And supply, meaning the more supply there is, the lower rent growth you can expect. And it's, it's obvious because what happens is as these developers are building new multifamily buildings, as they bring them to the market, and, uh, there's a lot of other competitors of new buildings you gotta compete with. What do you gotta do? You gotta lower your prices. You gotta lower your prices to compete, to get absorption, to get renters in. What that does is it, it drops the ability for rent growth across all vintages of real estate. Right now, not just the A's are being discounted, but the B's and the C's also have to discount to, to, to, to stay competitive. And so it's, it's been difficult the past few years, especially in these high supply markets where there hasn't been any rent growth or negative rent growth. But the point is, as supply is mostly absorbed, we're not seeing a lot of new supply being delivered over the next few years that will likely spell strong rent growth in the future for those markets that have strong demand, right?
Once— so we're seeing the negative correlation of high supply equals low rent growth. Okay, duh. And but as we see that supply burn off, which we will, right, the growth will remain. The demand remains because these are high-demand markets. And so that argues good time to be buying in these oversupplied markets right now while you can get discounts, while NOIs are low, while cap rates are challenged, well, that's time to buy and get in at a low price. And then, uh, as these— as the challenges burn off, you're left with just high growth.
