Current supply and demand trends in the U.S. multifamily and single-family markets are sending some confounding signals to investors.
On the one hand, U.S. apartment construction has reached a post-recession peak, driven by demand for high-end luxury properties in the largest CBDs. On the other hand, both multifamily and single-family housing stock remain well below long-term averages that are not nearly enough to house the millions of millennials now entering their 30s and starting families — not to mention the empty nest baby boomers who are increasingly opting for smaller, more conveniently located quarters in downtown apartment rentals.
With new apartment towers being built across almost every large American CBD, it’s easy to forget that nationally multifamily construction inventory remains at roughly half the levels of the 1970s and 1980s.
“There is a lot of building going on, and while no one is saying that we need another luxury apartment building in many of America’s cities, we desperately need more housing,” according to Mark Hickey, real estate consultant for CoStar Portfolio Strategy.
Multifamily construction has been increasing steadily since 2011 and construction levels are now at a rate not seen in 30 years. Yet, due the dramatic decline in single-family construction since the sub-prime mortgage collapse and recession of 2007, new households are forming at greater levels than U.S. housing can support, resulting in a strong supply and demand imbalance.
Home ownership rates are finally increasing again and single-family construction is slowly getting back on track, helping to let some of the steam out of apartment demand. That said, renters continue to lease apartments at a strong clip.
After several rocky quarters for apartment net absorption amid rapidly rising rental rates in many markets, renters filled a net 73,000 units in the U.S. during the second quarter — the strongest quarterly total since 2014 and near an all-time peak — as the national apartment vacancy rate again fell below 6% to 5.9%, according to CoStar data.
“The downtown cranes may give the appearance of a housing supply glut, but in fact, U.S. household formation has outpaced construction by more than 3 million housing units,” said John Affleck, CoStar director of analytics, during the company’s recent Midyear 2017 Multifamily Review and Forecast.
While CoStar is forecasting more temperate levels of rent growth compared with the torrid pace seen during the 2014 to 2016 period, annual rent growth for apartments in 2017 is still expected to exceed last year.
Latest ‘Renters By Choice’: Baby BoomersWhile homeownership remains the largest risk for the multifamily sector, and is particularly pronounced among affluent renters who have the means to choose between renting or buying a home, increasingly it’s downsizing baby boomers, not millennials, who are now driving apartment demand growth that sparked the current development wave a few years ago.
“It turns out that the older baby boomers are emerging as the real ‘renters by choice,’ ” Affleck said.”We’ve reached a point in the cycle where the rental rolls have added more 55-64 year olds than age 25 and up.”
Anecdotal evidence from CoStar consultants and analysts supports the rising trend of retiring boomers seeking scaled down quarters, said Michael Cohen, director of advisory services.
“We are being inundated by questions from investors on seniors housing opportunities, which will receive an increasing amount of attention going forward,” Cohen said.
Almost out of necessity as home prices rise, publicly traded and private homebuilders that have based growth and profit projections for the move-up market may finally begin to shift their focus to entry-level housing targeting growing millennial families, Cohen added.
“The demographics suggest that homebuilders will catch on to the fact that the millennial generation, which now averages 26 years old, will produce several million millennial births and will need larger rental dwellings, or be looking for homes,” Cohen added.
“Homeownership remains the goal of most American households and many more households would purchase home if they were more affordable and available,” Affleck added.
The multifamily sector would also stand to benefit from building more affordable apartments as developers have for the most part continued to build expensive luxury buildings in core urban areas.
The expected new supply will continue to weigh heaviest on Class A apartment sector, which is expected to see peak levels of supply for the next two years. However, construction starts have started to slow as labor and equipment shortages push back some projects from their original timelines. Lenders have also pulled back in financing apartment construction in recent quarters, which could further put a brake on new construction.