The Bright Spot in the Real Estate Market
There has been a lot of doom and gloom surrounding the global economy over the last several years. We’ve had the tech bubble, the housing bubble, and the banking bubbles, to name a few. All aspects of the economy have been affected one way or another.
Real estate has also been affected by the global slowdown. Millions of homeowners have had the value of their homes decrease. There has also been a wave of foreclosures across the nation. Retail and office have had their struggles as businesses try to do more with less. Some analysts say that retail and office prices have decreased by as much as 20%.
The economy as a whole has struggled, but that doesn’t mean there haven’t been some bright spots as well.
After declining for decades, the U.S. consumer has changed some economic trends. U.S. personal savings rates have increased recently. Americans are also paying off more of their personal debt. Real estate has also had its bright spots, and the multifamily real estate market has been one of its stars. The multifamily market’s fundamentals are very strong. While other property types have struggled, the multifamily market is getting stronger.
What is driving the multifamily market?
Understanding the multifamily market comes down to supply and demand. While demand has increased steadily each year, supply has not kept pace. New construction has not kept up with the amount of new apartments needed to keep up with population growth. On top of that, there are also apartments that have to be taken out of service each year. These apartments are taken out because they no longer meet the needs of renters due to age or condition. In 2011, the National Association of Home Builders projected that only about 133,000 apartment units would be built. That is only about a third of the apartments are needed to meet normal demand across the U.S.
Lack of financing for new projects has been the main reason for fewer new apartments being built. This is a problem that will not be solved overnight. The construction process takes years to complete. If a new apartment project was approved today, it would take 2-5 years before the units would be available. Meanwhile, the demand keeps growing, compounding the problem.
In addition to the lack of new supply, demand for apartment rentals has increased. Normal population growth increases the amount of housing needed each year. In addition to the normal population growth, additional demand is being created by the echo boomers entering the rental market. Echo boomers are the children of the baby boomer generation. It is estimated that there will be 66 million echo boomers entering the rental housing market over the next fifteen to twenty years. These echo boomers will be between the ages of 18 and 34, which is the prime renting age for apartments.
Another factor driving rental demand is fewer homeowners. After the housing meltdown, lending guidelines have become stricter for buying a home. This has made it much harder for the average American to move from rentals to home ownership. These increased lending standards are very difficult for the first time homeowner. Gone are the days of just showing that you have a job and signing loan papers. Now, lenders are requiring home buyers to put down larger down payments. They are also requiring higher credit scores from prospective home buyers to qualify for home financing. Because of this, millions of renters who would have purchased homes will be forced to rent for longer periods of time.
Fewer renters leaving, echo boomers entering, and normal population growth are driving increased rental demand. Lack of new properties and older properties leaving the market has decreased supply of rentals. Put the two together and you have a recipe for the multifamily market strength. The multifamily sector is the silver lining in an otherwise cloudy real estate market.