Supply and demand is the heart of economics 101. The same principle is true in real estate, and now more than ever, we’re seeing this play out in the apartment rental market.
While some may think that the rental apartment market is becoming overbuilt and that there are too many new apartments in the pipeline, just the opposite is true.
In a new study released on June 22, 2016 conducted by Harvard University on national housing trends, the data indicates a continuous surge in demand for rental housing and a limited supply, resulting in a stark shortage.
The report also notes that the high demand for rental housing has been a positive catalyst behind the housing recovery. A total of 36 percent of U.S. households, comprising of nearly 110 million people, lived in rentals last year alone. In fact, according to the Housing Vacancy Survey, the number of renter households increased by nearly 9 million from 2005 to 2015.
Who’s Renting: Renting, compared to homeownership, has surged. Many individuals have chosen to rent instead of purchasing a home due to many factors. These factors range from not wanting the pressures that come with owning a home to the flexibility of renting (a huge plus with millennials) and of course lack of affordability in chiefly entry-level housing. Renters also represent a diverse range of individuals, families, ages, incomes and communities.
For example, although young adults are the most likely age group to rent, the rate of millennials living with their parents is still high and has increased further from 17 percent in 2008 to 22 percent in 2015. Households under age 30 accounted for only 1 million of new renters, a steep decline among this generation following the Great Recession.
However, it is safe to say that in the next 10 years, these same millennials are expected to form 2 million households per year, significantly increasing the share of households led by this generation, from 16 million in 2015 to an estimated 40 million in 2025.
Rental demand is primarily being seen among the middle-aged household groups and an increasingly growing number of high-income households. Another interesting fact is that families with children, one of the household types likely to own, are choosing to rent for the flexibility and convenience it provides.
The study further indicates that households led by individuals between the ages of 30–49 rose by 40 percent, accounting for approximately 3 million households despite the dip in population this generation has experienced. The number of renter households in their 50s and 60s also increased by 4.3 percent and households led by individuals over the age of 70 has seen a steady rise of more than 600,000 households over the decade, a figure that is expected to soar more than 40 percent, to over 8 million, from 2015 to 2025.
Demand and Key Facts that Benefit the Rental Market: Fortunately, the national housing market has regained momentum and has impacted the economy’s growth. Healthy rental demand continues to drive the housing expansion and is expected to continue to remain robust, particularly among the millennial population that is set to account for millions of new households in the next decade.
The following are additional findings in the report that benefit the overall rental market:
- 36% of U.S. households opted to rent in 2015 – the largest share since the late 1960s.
- While growth in multi-family starts topped 10 percent for the fifth consecutive year in 2015, demand continued to outstrip supply.
- Millennials are expected to form well over 2 million new households each year on average, raising their numbers from 16 million in 2015 to a projected 40 million in 2025.
- Renter households earning $100,000 or more have been the fastest growing segment over the past three years.
- Rental demand should remain strong over the coming decade.
Supply: Whether for its flexibility or affordability, more individuals are opting to rent. While the housing market continues to lift itself up from the recession years and accompanying volume of distressed properties (be they foreclosures or short sales), new construction has been responsible for much of the growth in the multi-family stock. The volume of multi-family construction intended for rent climbed from a low of about 92,000 units in 2009 to 370,000 units in 2015, the highest level we’ve seen since the 1980s. Yet, there is a need to develop additional product in order to meet ongoing demand. The inability of supply to keep up with the rapid rise in pent up demand has led to the longest period of rental market constriction since the late 1960s.
The Forecast: The rental housing markets nationally tightened in 2015 and demand continues to outstrip supply while pushing down vacancy rates. The data encourages the fact that the rental demand is rising and is expected to remain strong over the next decade, especially as millennials form their own households and the baby boomer generation seek “accessible” units with no steps and wider hallways and contribute to the boost in demand. As a result of the confluence between demand and supply, new construction opportunities would provide some slack as rental demand remains robust, keeping markets under pressure and developers busy across the board to provide rental housing that will meet the high demand.
In our own business, we are observing continued strong demand for rental apartments, especially in the urban core locations, and we are actively developing new projects in Miami, downtown St. Petersburg, Orlando (Downtown Maitland) and West Midtown Atlanta. Young professionals and millennials are relocating from the suburbs to the Downtown and Midtown locations to eliminate long commutes, to be closer to work and to more restaurant and entertainment options.