US Apartment Rental Demand Increasing
The multifamily apartment sector is continuing to outperform all other asset classes. The one overriding factor contributing to the multifamily apartment asset class performance is demand. In 2011 one million new rental households were added in the U.S. per "The State of the Nation's Housing 2012" report by the Joint Center for Housing Studies (JCHS) at Harvard University. This represents the largest increase of renter household formation since the early 1980's. In the past six years 4.4 million new renters have been added to this demand.
Traditionally the majority of new renters come from the age bracket under 25 years old, with renters above this age contributing a net loss of renters as older people move from rental housing to home ownership. However more recently there has been an increase in new renters in the 25-34 year-old age bracket. In addition there has been a large increase in the percentage of married couples as renters. While 25-34 year olds only account for 36% of all renters in 2011, this was a massive increase of 50% over the past five years.
Another noticeable trend change is the socio-economic background of the rental pool. Minorities accounted for 59% of all new rental households since 2004. While whites accounted for just 41% of the new renter growth in that same period, this represents 2.1 million new renters, which is in sharp contrast to this group's large rental declines of the 1990's. A decade ago the majority of new renters were earning $30,000 or less. Since 2006 that same group only accounted for half of the new rental growth. There has been a sharp increase in higher earners entering the rental pool, with households earning over $75,000 accounting for 20% of new rental households since 2006.
These latest rental trends should reverse back to the long-term norm once the market for "for-sale" homes returns. The change in the rental pool has come about due to the softness in the "for-sale" home market, with prolonged price declines, the increase in foreclosures, and the difficulty securing home mortgages. This coupled with an extended period of high unemployment and sluggishness in the economy has crippled people's confidence in their own job security and therefore their willingness to make a long-term investment in a new home.
There are signs that the "for-sale" home market has already bottomed out with foreclosure inventories in some markets almost cleared, and the inventory of homes for sale well below 6 months supply, which is an indication of it becoming a seller's market once again. No doubt a contributing factor to the low inventory is the lower market values discouraging potential sellers placing their homes on the market. Another contributing factor to the low inventory is the lack of new home construction over the past five years, which has been well below the historical long-term average and could cause a supply shortage over the next few years.
Home mortgage interest rates are currently at an all time low, and home values have decreased substantially over the past six years. These two factors have resulted in the home affordability index being at its highest since its creation. Why then are we not seeing a surge in activity in the "for-sale" home market? For the following reasons:
Many homeowners are in negative equity and cannot afford to sell their home at a loss;
Confidence in one's job security is low, and the publics' outlook for the economy is negative, resulting in people being pessimistic and hesitant to buy; and
Mortgage interest rates, while at their lowest historically, can be difficult for many buyers to qualify for.
For the time being all this bodes well for multifamily apartments. Interest rates available for apartment buildings are also at very low historical rates. Right now is an excellent time to refinance an existing apartment loan, or to obtain a mortgage on a new acquisition, and lock in a long-term low interest rate.