Even before the recent financial crisis brought on by the COVID-19 pandemic, multifamily investments have seen unprecedented demand due to various factors.
Since the Financial Crisis, there has been unprecedented demand for multifamily properties, with supply failing to keep pace and falling further behind – especially in the affordable to middle-income spaces.
Rental demand, limited new construction, and rising development costs have contributed to above-average growth in the multifamily sector in the past decade. And there doesn’t seem to be any relief to the supply shortage in sight.
According to a recent study by the National Apartment Association and the National Multifamily Housing Council, 4.6 million new apartments need to be completed by 2030 to keep with demand. That means an average of more than 325,000 new apartment homes would need to be built each year to meet demand.
For perspective, from 2012 through 2016, only an average of 244,000 new apartment homes were built per year, and in the last 30 years, there has never been a year where more than 325,000 new apartments were built.
A convergence of a variety of trends has contributed to multifamily demand. Here are the most significant ones:
Millennials.
Millennials (i.e., Echo Boomers), the second-largest demographic group in U.S. history, are moving into the 18-30 range, and many are either delaying purchasing a home or foregoing it altogether.
This age group has historically constituted the largest group of renters. They rent more in numbers and rent for longer durations before purchasing a home – typically, 5 to 7 years. And there are signs this Millennial generation of 18-30-year-olds will rent at higher rates and longer durations than past generations of the same age group.
Burdened with student loans and home prices far outpacing wages, many Millennials can’t afford to buy their first home. As for Millennials who can afford to buy, many simply choose not to because they don’t want to be tied down since the average Millennial changes jobs every two years.
Baby Boomers.
The oncoming tsunami of retiring Baby Boomers is poised to cause ripple effects on the housing market on multiple fronts for decades. Baby Boomers, the largest demographic group in U.S. history, numbering around 77 million, are aging, with 40% of them (~ 30 million) set to retire in the next five years.
As an age group, those over 55 rent more than they own as many seek to downsize or sell their homes to extract equity to fund their retirement lifestyles.
Additionally, there are signs that Baby Boomers will rent at higher rates than past generations in the same age group because, as a group, Baby Boomers are less financially prepared for retirement, with less than 30% on track for retirement and 50% expected to live off social security exclusively.
Home Affordability.
Despite low unemployment and a strong economy, homeownership has become less affordable since the Financial Crisis. That’s because home prices have outpaced income growth by more than 2:1 on an annual basis. Between 2012-2017, incomes rose at a higher rate of 2% annually, while home prices rose 5% annually.
Immigration.
U.S. Immigration is continuing to increase and is expected to grow year over year into 2030 despite threats of a border wall. Immigrants as a group rent far more than they own.
A Renter Nation.
Demand for apartments is at an all-time high as the number of renters has reached an unprecedented level. More than 39 million people in the United States (almost 1 in 8) call apartments home.
The growth of the renter population is now outpacing the owner population. More U.S. households are renting than at any point in 50 years.
Multifamily is in high demand with no relief on the supply side insight – especially in the affordable housing sector. Now, with the onslaught of COVID-19 and rising unemployment and falling wages, home affordability is only becoming more out of reach for millions of more Americans.
Unprecedented demand for multifamily properties looks only to get stronger as the country’s economy struggles, and with supply unable to keep up demand, the gap will only widen.
For investors, this means any new supply from development or repositioning existing assets will be swallowed up by the market as soon as these new apartments become available. This is evident in multifamily’s consistently positive Net Absorption rate.
Multifamily investments have historically been one of the most stable recession-resistant commercial asset classes – especially properties located in the right areas with the right demographics.
And since the Financial Crisis, it is standing as a preferred commercial asset class has only solidified due to increasingly favorable trends and demographics the likes of which this country has never seen. Due to these favorable trends and demographics, multifamily is in demand and will continue to be so for at least the next decade.
This is good news for multifamily investors where favorable demographics with a widening gap between demand and supply will ensure positive absorption for years to come, ensuring low vacancy rates, consistent cash flow, and steady appreciation.
