While the short-term focus is on the rising cost of capital and the resulting high cost of debt for multifamily investors, the United States continues to suffer from a chronic shortage of homes for rent, especially traditional apartments.
According to a new baseline study analyzing demographic and immigration trends scenario prepared for the National Multifamily Housing Council and the National Apartment Association, between now and 2035, the country will require 3.7 million more apartment units in buildings with five or more units, which is also the category most attractive to institutional investors. That’s in addition to the lower supply of rental homes built over the last 15 years.
Following Are 5 Must-Know Impacts from this chronic shortage:
1.Ongoing shortage of apartment homes
In addition to the estimated 3.7 million new apartment homes needed by 2035, due to residential underbuilding following the financial crisis of 2007-2008, there is a pent-up shortfall of another 600,000 homes in buildings of five or more units. This brings the total shortfall to 4.3 million multifamily rental homes.
However, that 3.7 million demand estimate is in the middle of a range depending on demographics, homeownership and immigration. In a downside scenario with fewer births, higher homeownership rates and less immigration, the demand could fall to 2.4 million units in properties with 5 or more units. Alternatively, should homeownership rates wane and immigration return to past levels, the demand could rise as high as 4.8 million units.
2.Increased loss of affordable units
With fewer multifamily homes available, monthly rents have steadily been outpacing income gains, leading to a sharp decline in the number of affordable units priced under $1,000 per month. Between 2015 and 2020 alone, the number of these affordable homes fell by 4.7 million nationwide. When most new market-rate units are built, due to rising costs for land, materials and labor, they tend to focus on the upper pricing segments which are already unaffordable to many renters. The impacts of this decline have included overcrowding, rental payments squeezing out other types of spending in the economy, and increased levels of homelessness.
3.Homeownership – on rise or decline?
While a variety of public policies can impact homeownership, in general, owning a home increases across all income groups as people age and form families. Looking at the forecast horizon through 2035, and based on current demographic trends, the rate of homeownership is projected to rise by 3.8 percent.
However, while that may lower the share of rental households by the end of the forecast period, this change may be delayed in the near term.
Firstly, the reluctance among younger people to own homes, which started at the end of the Great Recession, continues to this day, often because they have delayed traditional life milestones such as marriage and having children later than did previous generations.
Secondly, the combination of higher home prices and rising interest rates has made buying homes less attractive. Still, given the recent legislation forgiving student loan balances up to $20,000 for some borrowers, that action may speed up the ability of existing renters to qualify for mortgages.
4.Immigration impacts on demand
Typically, immigration is a significant driver of apartment demand, but for now it’s difficult to predict if levels will return to previous levels. Whereas total legal immigration had averaged over one million persons per year from 2007 through 2017, that plummeted to below 250,000 by 2021, as more restrictive policies came into effect.
Due to continuing uncertainties in global health trends, geopolitics and international trade volumes, immigration levels are forecast to average half of the historic average, or 562,000 persons per year, through 2035.
Notably, during the pandemic years of 2020 and 2021, overall population growth dipped sharply as borders were closed and death rates soared. However, even prior to the pandemic, an aging population had slowed overall population growth from about 1.0 percent per year from 1991-2011 to 0.6 percent over the last ten years, and is projected to slow to 0.4 percent per year through 2035.
However, if immigration levels remain at low pandemic-era levels, then annual population growth will slow to 0.2 percent. Should immigration levels return to levels seen earlier in the century, that rebound would significantly increase apartment demand.
5. Texas, Florida and California account for 40% of future demand
Due to their existing large populations, the states of Texas, Florida and California will account for up to 40 percent of future demand, requiring an additional 1.5 million multifamily apartment units in buildings of five or more units by 2035.
However, in terms of percentage growth, the following fast-growing secondary cities are expected to grow at twice the rate of the country from now through 2035:
5 Must-Know Trends for Multifamily Investors is published monthly by X-Caliber Capital, a leading, national multifamily lenders who believes in Lending and Investing for the Greater Good.