Multifamily Market has room to run.

AuthorGuggenmos, Steve
PositionMULTIFAMILY

Market participants debate how long the multifamily rental housing market can sustain its current strength. Years of favorable occupancy and rent growth driven by strong demand have motivated apartment property developers to deliver new supply. [paragraph] The number of new units entering the market is now higher than the long-run average seen over the past two decades, raising concerns among some market participants about the supply/demand balance. [paragraph] However, comparing the current level of new supply with recent historical levels is informative only to a limited degree. To really know the impacts on the market, it is necessary to understand the supply in the context of market demand. [paragraph] By understanding the factors influencing the demand for multifamily rental housing, we project strong future demand over the next several years. Based on these projections, the volume of multifamily rental units required will easily exceed the long-run average. [paragraph] That being established, attention can shift from concerns about oversupply toward better serving the needs of the nation's renters.

Drivers of demand

Analysis of demand can be tricky. While supply is known and measurable, demand is unknown until it is realized in the form of new households occupying housing units.

The key drivers of demand are generally acknowledged in the industry, but the public discussion around the topics is sometimes anecdotal. The basis for discussion can become more concrete by considering longer-term demographic factors, going back further than two decades, to raise awareness of the impacts of long-horizon swings in the population. Those factors have driven demand in the past and will continue to do so today and into the future.

We start by looking at housing supply in the context of population growth and household formations over the last 50 years, shown in Figure 1. Housing starts have been historically low since 2010, but the population has grown as fast as in the 1970s and 1980s. Furthermore, multifamily rental properties account for 29.2 percent of total housing starts since 2010. That is much higher than in the 1990s and 2000s, when the share of multifamily starts was less than 20 percent. However, looking back further, to the 1970s and 1980s, the percentage of multifamily starts was closer to 30 percent, as it is today. Even though overall housing starts are lower this decade, it is evident that construction has shifted toward multifamily rental housing--which makes sense, given the drivers of housing demand.

Long-term demographic trends

One of the key drivers of multifamily demand is simply age; younger adults have a higher propensity to rent than older adults. The majority of households made up of young adults, those aged 25 to 34 years old, choose to rent instead of own their homes.

As of 2013, 63 percent of young adult households were renters, according to the U.S. Census Bureau's American Community Survey. Therefore, this age cohort is one of the most important to analyze to understand...

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