Follow the Money, Not the Cranes: Income Growth's Dominance over Construction in Driving Rent Growth

We investigate whether excess construction or middle-class income growth is the more prominent driver of multifamily rent growth in major US metropolitan statistical areas (MSAs) over the past 19 years. Using data from CoStar, we perform a series of horse race tests, using both traditional methods and machine learning methods, to compare the relative importance of net deliveries to the growth of median household income in explaining the growth of effective rents. Our results consistently show that middle-class income growth dominates. Income growth is more than twice as influential as net deliveries in driving rent growth. These findings suggest that recent concerns about oversupply in the multifamily sector may be overblown and could provide opportunities for long-term investors.