October 10, 2017–Oakland, CA–Demand for rental housing has been on the rise for the past decade, with no signs of slowing down. A recent analysis says there will most likely be enough demand to fill whatever new units come online in the near future, at least over the next decade.
The study, conducted by Hoyt Advisory Services and commissioned by the National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA), estimates that we’ll need another 4.6 million new apartments by 2030 to keep up with demand. There are already 39 million renters in the U.S., with an average of one million new renter households forming each year over the past five years—a record level. An estimated 325,000 new apartments will be needed each year to keep up with demand; yet, on average, just 244,000 apartments were delivered from 2012 through 2016.
“The western U.S. as well as states such as Texas, Florida and North Carolina are expected to have the greatest need for new apartment housing through 2030, although all states will need more apartment housing moving forward,” explains NAA Chair Cindy Clare. “The need is for all types of apartments and at all price points.”
There are three primary reasons for the increased demand, according to the report.
- Millennials are postponing major life events. Young adults are increasingly waiting to get married and have children, events that traditionally translate into home purchases. Instead, Millennials are chasing after career opportunities and splurging on experiences like adventure travel.This shift is particularly evident when compared with previous decades. In 1960, roughly 44 percent of all U.S. households were married couples with children, the report finds. Today, they account for just 19 percent. Researchers expect this trend to continue.
- Baby Boomers want to downsize and simplify. Aging Baby Boomers are trading their oversized single-family homes for the convenience of apartment living, especially with the kind of amenities that many apartment communities now offer. The study finds this shift is going to be most prominent in the Northeast, where renters aged 55+ are expected to account for more than 30 percent of all rental households.
- International immigration is on the rise. By some estimates, international immigration will account for approximately half of all new population growth in the U.S., with the highest growth expected in the nation’s border states. This population increase is driving apartment demand, as immigrants have a higher propensity to rent and tend to rent for longer periods of time.
“We’re experiencing fundamental shifts in our housing dynamics, as more people are moving away from buying houses and choosing apartments instead. More than 75 million people between 18 and 34 years old are entering the housing market, primarily as renters,” says Dr. Norm Miller, Principal at Hoyt Advisory Services and Professor of Real Estate at the University of San Diego.
“But renting is not just for the younger generations anymore,” he says. “In fact, more than half of the net increase in renter households over the past decade came from the 45-plus demographic.”
Rental Demand Exacerbated in California
The study finds that rental demand is particularly exacerbated in California. There are a number of reasons why this is the case.
For instance, the tendency to rent has always been higher in high-growth, high-cost states where housing affordability puts constraints on homeownership. “California exemplifies this trend,” the report states. San Jose, Los Angeles, San Francisco and San Diego had the lowest ownership affordability rates of any metro markets in the survey. All four markets ranked in the top 10 markets with the highest rentership rates.
Employment growth is also driving rental demand in California. More than 14 percent of total U.S. jobs created between 2009 and 2016 were concentrated in just three metropolitan areas: New York, Los Angeles and San Francisco.
New Apartment Construction is Constrained
Despite the growing demand for rental housing, new construction has been limited. Outdated zoning laws, unnecessary land use restrictions, arbitrary permitting requirements, inflated parking, and environmental site assessments are just a few of the regulatory burdens the report sites as hindering apartment construction. Red tape at the local level translates into higher costs and longer development timelines, ultimately slowing production.
Basic costs for things like land, labor and materials have also risen in recent years.
While these statistics may come as no surprise to seasoned investors, having the hard data is useful when evaluating future real estate opportunities. Sure, the report says that rental housing is needed across the board, but rental housing is needed in some locations much more than others. As always, location and timing are key to a successful investment.
The report contains a wealth of other information, including data and graphs for individual states and metro areas. You can find the full report here.