Happy Holidays from the Johnson Property Mgmt, LLC (JPM) team! We sincerely appreciate the continuing opportunity to manage your investment property, and work each day to provide the best possible service to our valued owner-clients. As always, we greatly appreciate any feedback from owner-clients on this letter, or our management services in general. Feedback helps us understand your needs, and improve our service. For the last 10+ years, we have provided our owner-clients with a year end Treasure Valley Rental Market Recap, mixed with thoughts about the upcoming year. Please note that this letter will contain forward looking statements*, and in no way should these statements be substituted or used for financial advice, but only describe our market outlook based on daily observations made about our local rental market. It is our hope that you will find value in these observations on the state of the rental market, and no we did not use ChatGPT to write this letter 🙂
2023 Treasure Valley Rental Market
In all of our memories, we cannot recall a year with as much of a complete rental market momentum reversal than in 2023. During Winter and into Spring 2023, the market did a complete “180”. We started the year smoking hot and continuing the momentum seen during 2021-2022, with large rental rate increases the norm. It was truly an owner’s market, with rent increases and quick vacancy rent-ups abundant. Starting in approx. March 2023, two trends started appearing in Idaho’s Treasure Valley that have only magnified during the remainder of the year, and will continue to affect the rental market in 2024. If you become nervous while reading, please read through to the end, as there is light at the end of this tunnel!
#1 trend: Inflation.
We are not sure what the Federal Reserve thought was going to happen when they increased our monetary supply by over 40% in less than two years. This was of course done in a very quick response to the economic slowdown caused by COVID. Obviously our economic leaders thought that this monetary infusion was necessary to avoid a severe economic crisis. Maybe it was, I guess we will never know. Regardless, in Winter 2022 prices of everyday necessities started getting much more expensive very quickly. Gas went over $4.50 per gallon in Idaho, a dozen eggs went to over $5.00, a gallon of milk around $4.50. Economists would call this rapid inflation “regressive”, so it affects lower income Americans the most. The large majority of your/our tenants were greatly affected. Within only months, it became much more expensive to drive to work and eat than it was the previous fall.
In addition to this, the Fed’s significant monthly interest rate increases started having a strong effect on the everyday person. Interest and payments on car loans, personal loans, credit cards, etc. started going up quickly. **In Sept. 2023, CNBC reported that over 60% of Americans are living paycheck to paycheck. When the cost of everything (gas, food, credit card payments, etc.) is going up month after month, it starts to hurt tenant’s wallets. Rent collections became increasingly difficult starting in Spring, with tenants who had never had payment problems before suddenly having issues. There was HEAVY reliance on the last of the COVID era rental assistance programs in 2023, with JPM receiving very large amounts in rent during 2023 through these programs. Lastly, two other factors came into play. On October 1st, despite much legislative debate, Federal student loan payments resumed, affecting many of the tenants that had payments deferred for years. Secondly, the federal rent assistance programs managed by our two local housing authorities ran out of funds in June (Ada County) and October (Canyon County) 2023. So, what did this mean for the Treasure Valley Rental market in 2023? Seemingly almost overnight in Spring 2023, the rental market hit the brakes. Daily rental inquiries, and demand for showings and rental agreements started decreasing notably during March 2023. Demand stayed fairly normal for the most affordable rental units, but average to higher priced units started experiencing much longer days on market than normal. Demand for single family home rentals, and A class townhomes on the upper end of the rental market ($1700+monthly rent) slowed down to an almost dead halt unless some rent reductions were made. This market turnaround was all caused by economic factors completely out of your and our control. So, what did JPM do during 2023 to combat this declining rental market? We tried to focus on the only things that we can control when offering rental housing. We focused on our marketing of your properties, we tried to improve properties to give available units the most curb appeal possible, and we tried to price as affordably as possible to be competitive in an increasingly challenging rental market. We got creative with marketing, using rental tactics we have not had to use since 2009-2010 after the great recession. With owner’s permission, we started offering a variety of lease terms on properties, we started offering rental incentives such as “two weeks free”, and we started using new softwares to increase the quality of our marketing photos and listings. This trend of the everyday Treasure Valley resident being financially squeezed has only become stronger as the year has progressed. In November, we had a large number of tenants provide zero Notice to Vacate on their rentals, and simply vacate and turn keys into our office on the properties. We heard over and over that they simply could not afford their properties any longer. While willingly vacating properties and not requiring a legal eviction is admirable of the tenants, this situation is less than ideal for owners and JPM alike. These tenants were mostly quality tenants that had verified good employment income and credit when renting. So, this begs the question, where were these tenants going? Where did they move? When you can’t afford your rental property any longer, where do you go? The answer is……..anywhere you can. Many Gen Z and Millennials are moving back in with their parents, grandparents, or other family members. We have had a number of former tenants purchase RVs or trailers and park them on family properties to live in. Elderly tenants moved back in with their kids or family members. The amount of roommate requests in 2023 was immense. Each roommate request to be added to existing rental agreements were all handled on a case-by-case basis. We had a large number of rental applications with four to five adults applying for two bedroom apartments. All of this “household combining” means a deduction in demand for rental housing in the Treasure Valley in 2023. This leads into the second trend witnessed in 2023.
#2 trend: New Developments and Increasing Housing Supply
We, at JPM, consider economics fascinating, especially when you can see first hand the effects of supply and demand on the rental market over time. Prior to the interest rate hikes that started in March 2022, factoring in 2% + annual inflation, money had been almost free to borrow for many years. Housing developers were ready, willing, and able to borrow almost unlimited money to build large housing developments, and they knew about the Treasure Valley. Our once quiet valley started experiencing heavy population growth in the early 2000s, and continued rapidly with Boise and surrounding cities hitting national Top 10 lists from major media outlets. Our relatively low cost of living, beautiful outdoor access, low crime, and conservative political values attracted new residents from all over the country. COVID only magnified this population influx as the “work from home” trend took full steam.
The red hot Treasure Valley rental housing market seen in 2020-2021 was no secret. Large, national developers took notice of Treasure Valley housing data, and they started to build. And build. And build. In the last several years, we have seen large multi-family developments built here from large national Real Estate Investment Trusts (REITs) and investment groups such as Greystar, Blackrock, and PCC. These are national REITs backed by billions of investment dollars, and they arrived in force. Due to the high cost of construction materials and land, these developers were, and still are unable to profitably build B or C class affordable housing developments. Meaning, most all these new large multi-family developments are A class housing with all the bells and whistles. All of the units include Stainless Steel Appliances, attractive LVP flooring, Quartz or Granite Countertops, carport parking or single car garages, onsite gyms and swimming pools, clubhouses for rent, EV charging equipped parking spaces, etc. Thousands of units in these large multi-family properties came online in 2023. We are unable to find the exact number of new housing units that were finished and offered for rent in Ada and Canyon County in 2023, and honestly I’m not sure these counties even know. Building applications were rapidly approved in 2021 and 2022, and development money was almost free. The result of this heavy building over the last several years has resulted in a current multi-family vacancy rate in the Treasure Valley of just under 8%*** currently.
When many thousands of units have come to market during 2023, it has caused what we have heard described from other property managers as anything between a “dog fight” to a “knife fight” for tenants. A year ago, it was an Owner’s rental market. Less than a year later, it is a complete Tenant’s market. So, when potential tenants are already budget stressed, how do these large multi-family developments attract new tenants? Three ways:
1) Low deposits – deposits are available right now as low as $500, which in 2023 pricing won’t hardly pay for carpet and general cleaning. We see this as a very bad idea.
2) 100% pet friendly.
3) Rental specials and incentives. One month free became commonplace to see in ads starting in fall 2023, and one complex in Boise was offering two months free in Nov. 2023!
While these short term rent up strategies seem ridiculous, they are! Developers and REITs know they are overbuilding this Valley, and they are doing anything possible to secure financial returns for their investors and shareholders. This trend is not just isolated to the Treasure Valley, as NPR reported this week nationally that over one million new multi-family units came onto the US rental market in 2023, and another one million are still currently under construction. Again, we cannot find data on how many more multi-family rental housing units are under construction in the Treasure Valley right now, but there are MANY.
So……how has JPM battled this rising supply of rental units during 2023 for our owner/clients? Firstly, when the amount of new construction developments became apparent a year ago we started focusing heavily on “tenant retention”. Not something we have had to do actively for more than a decade. We added features and verbiage to our website, Notice to Vacate form, and call scripts urging tenants to stay in their rental properties. We started contacting every tenant that gave a Notice to Vacate immediately asking why they were moving, asking what we could do to retain them as a tenant, and offering incentives to stay if necessary. Thanks to all our owner/clients that had patience with our requests for rent decreases during 2023 to try and retain good tenants. Going into 2024 we are bumping up our lease renewal process to work on renewing leases two months in advance, so that we have more time to work with any tenants not wanting to renew, and truly understand their circumstances. We are also working on a defined process to periodically check in with all residents via phone call, and see what can be done to increase their satisfaction with their rental property in a continued effort to retain tenants.
Forward Outlook to the 2024 Treasure Valley Rental Market
We expect the trend of “household combining” to continue through 2024 due to overall high prices of everything, and tenant budgets being stressed. In order for this trend to lessen or reverse, prices of goods and services are going to have to come down, or wages would need to continue increasing. Post COVID consumer demand has propped and held up prices of everything. We know that thousands more multi-family units will enter our rental market in 2024, and continue to offer their heavy rental incentives. The competition for tenants will continue, and adaptability will be very important. 2024 may very well be a year of decreased revenue and net income for all Treasure Valley rental investors, and owner-clients should be prepared for that possibility .
Our proposed strategy and the light at the end of the tunnel
Now for some optimism! Does the decreased demand for rentals and the increasing supply of rental units mean all owner-clients should sell properties and invest in bank CDs or Bonds? Not in our opinion. The bottom line is that every owner-client that has invested in this Valley likely has moderate to high equity in their property. Property values are likely to only continue to increase here, as the Treasure Valley offers the same appeal it always has, and compared to many other states Idaho is a very Landlord friendly state. Property sales equal high sales costs, and capital gains taxes of up to 20% due to the IRS. So, while 2024 and 2025 may be lower income and profitability years for owner-clients, everyone should understand all markets are cyclical. The rental market here will recover and rental investment returns will get back to 2020-2021 levels. Likely within 3-5 years. Tenants from other areas will continue to move here, and eventually the existing housing inventory will fill. Interest rates are now at a 30 year high, and building permits have reportedly come to a complete halt. Oh…..we almost forgot, the light at the end of the tunnel. The majority of the property that JPM manages for our owner-clients should be classified as B class rental housing (meaning 15+ years aged construction, medium grade finishes, affordable pricing). As prices of everything and budgets stay tight in 2024, there will be a continued transition from A class expensive housing to………your properties!!! Yay!!! B class affordable housing is relatively market and recession proof, and we expect to gain a large number of tenants in 2024 that are looking to decrease their housing costs. Tenants will trade their on-site swimming pool access and stainless appliances for rent prices that are considerably less than what they are paying to Blackrock to live at their new mega complex in Boise.
JPM’s strategy for 2024 will be……. to focus on exactly what we can control.
1) Tenant Retention. We will be working HARD to retain each and every tenant. Owner-clients should expect requests for reasonable rent reductions as dictated by market conditions, rental incentives, etc. Lease renewals will be a huge emphasis for 2024.
2) We will continue to focus on the highest quality Internet marketing possible, reaching the largest amount of tenant prospects possible, high quality photos and 3D Tours, etc.
3) We will price units at market rent rates, and will continue to work with owner-clients directly to remain adaptable, so that we may fill vacancies quickly.
4) We need vacant units to have the most “curb appeal” possible. Units need to be clean and shiny, bushes trimmed, flooring in good shape, paint looking new(ish), modern countertops, etc. Vacancies need to smell nice, look nice, and have a nice “feel”. Tenants have unlimited housing options in the Treasure Valley right now, and rental incentives are thrown at them right and left.
5) Owner-clients need to keep all properties as affordable as possible based on current market conditions to fill vacancies quickly. Spending money on major upgrades such as quartz countertops, stainless appliances, or high end fixtures will not offer a worthwhile financial return in 2024, and may only frustrate owners making these investments. LVP Flooring is nice and should be used when owner-clients budgets will afford it, but if not rental grade carpet still works fine. Vacant units need to be functional, clean, and AFFORDABLE . The more affordable properties are, the quicker they will rent, and the higher your net return for 2024 will be.
We wish everyone the happiest of holidays, and a very happy 2024!
Matt Johnson
Johnson Property Management, LLC
* Certain information set forth in this presentation contains “forward-looking information”, including “future-oriented financial information” and “financial outlook”, under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, the information contained herein constitutes forward-looking statements and includes, but is not limited to, the (i) projected financial performance of the Company; (ii) completion of, and the use of proceeds from, the sale of the shares being offered hereunder; (iii) the expected development of the Company’s business, projects, and joint ventures; (iv) execution of the Company’s vision and growth strategy, including with respect to future M&A activity and global
growth; (v) sources and availability of third-party financing for the Company’s projects; (vi) completion of the Company’s projects that are currently underway, in development or otherwise under consideration; (vi) renewal of the Company’s current customer, supplier and other material agreements; and (vii) future liquidity, working capital, and capital requirements. Forward-looking statements are provided to allow potential investors the opportunity to understand management’s beliefs and opinions in respect of the future so that they may use such beliefs and opinions as one factor in evaluating an investment. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what management of the Company believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. The Company undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
** https://www.cnbc.com/2023/09/27/60percent-of-americans-are-still-living-paycheck-to-paycheck.html
***https://www.weknowboise.com/rental-market-vacancy-rates.php