Separate studies issued this week share the same conclusion that demand for rental apartments and other housing options will stay at elevated levels largely due to continued robust household formation and limited affordable housing options, especially for detached single-family houses.
The first study was co-commissioned by the National Apartment Association (NAA), sponsor of NAA Education Conference & Exposition running this week through Friday at the Georgia World Congress Center in Atlanta. The report projects that based on current trends, an additional 4.6 million new apartment units will be needed by 2030 to keep up with demand as younger people delay marriage, the U.S. population ages and immigration continues.
Another study, released a few days later in Washington, D.C. by the Joint Center for Housing Studies at Harvard University, focuses on the increasing lack of affordable housing due to the limited stock of available single-family housing and rising apartment rents amid an extremely tight pipeline for both for-sale and rental housing.
The study by Hoyt Advisory Services commissioned by the NAA and the National Multifamily Housing Council (NMHC) projects that on average, developers will need to add at least 325,000 new apartment units every year to the nation's stock to meet demand, far above the average 244,000 units delivered annually from 2012 to 2016.
With nearly 39 million Americans now living in apartments, the industry has quickly exceeded capacity, with a record average of 1 million new renter households formed annually over the last four years, the study notes.
Based on current trends, hundreds of thousands of new rental units will be needed by 2030 in high-cost and fast-growing metros in California, Georgia, Arizona, Florida, North Carolina, Nevada, New York, Texas, Virginia and Washington, according to the NAA/NMHC study. Demand will be especially strong in Raleigh, NC, with a 69.1% increase in new units needed between now and 2030, followed by Orlando, (56.7%) and Austin (48.7%). New York City will require an additional 278,634 units, while Dallas-Ft. Worth and Houston will need 266,296 and 214,176 new units, respectively.
Meanwhile, Harvard's State of the Nation's Housing 2017 study, released at a gathering of the National League of Cities in Washington D.C. on June 16, outlines a current and projected housing market in which both renters and potential homebuyers are facing an increasing affordability squeeze. The study notes that while the national housing market has returned to normal by many measures a full decade after the Great Recession, nearly 19 million U.S. households paid more than half of their net incomes to cover housing expenses in 2015.
Even after seven consecutive years of growth in new residential property supply, the U.S. has added less new housing over the past decade than at any 10-year period dating back to at least the 1970s. The rebound has been particularly weak in single-family construction just as the national homeownership rate has begun to level off after years of decline.
"Any excess housing that may have been built during the boom years has been absorbed and a stronger supply response is going to be needed to keep pace with demand, particularly for moderately priced homes," said Chris Herbert, the center’s managing director.
Those who want to buy homes face intense competition for the limited supply on the market, and those who want to remain renters are finding it increasingly expensive in many markets. According to the Harvard report, an average of 45% of renters in the nation’s metro areas could afford the monthly payments on a median-priced home in their market area, but that share falls to 25% in several high-cost West Coast, Florida and Northeast metros.
The vacancy rate for rentals hit a 30-year low in 2016 despite years of ramped-up construction. Although rental rate growth did slow in a few large metros last year, notably San Francisco and New York City, rent increases again outpaced inflation in most metros and there's little evidence yet that supply additions are outstripping demand. In fact, with most new multifamily construction focused on luxury high-end units, and ongoing losses of housing stock at the low end of the market, there's a growing mismatch between the rental inventory and low- and moderate-income households.
"The problem is most acute for renters," Herbert said. "More than 11 million renter households paid more than half their incomes for housing in 2015, leaving little room to pay for life’s other necessities."
Coming Shift from Millennials?
One reason for the elevated demand for rental apartments has been the decision by millennials to postpone marriage and starting families. However, as this major demographic cohort move into their late 20s and early 30s, economists expect to see a shift in demand for entry-level homeownership and rental housing in suburban school districts to increase, with the baby boomers continuing to play a strong role even in their retirement years, panelists agreed during a discussion of the Harvard report at the League of Cities meeting in Washington, D.C.
The lone private apartment developer on the panel, Robert C. Kettler, chairman and CEO of McLean, VA-based Kettler, noted that high land acquisition and construction costs make it virtually impossible for apartment developers to build for much below $450,000 to $550,000 per unit in urban areas such as DC's14th Street Corridor near Union Market.
"Even if you were building it at cost, rents would still be $3.50-$4.25 per square foot," Kettler said.
In response, Kettler has built smaller units. In one of its new projects called The Flats, Kettler has reduced average size ranges by 625 feet in an attempt to make units affordable for people who earn in the $45,000-$80,000 range.
Kettler, noting the bifurcation in the market and oversupply at the upper end of the market, acknowledged that "we don't have an urban solution for affordable housing solution at our company." Kettler built 7,000 tax credit subsidized units between 1994 and 2006, but margins were squeezed and much of that supply is currently Section 8 or voucher housing.
How can private developers profitably build affordable housing, given the high development costs?
Kettler tried to raise a traditional real estate fund for affordable house two years ago, but "we found ourselves misaligned with the capital markets," he replied.
"Investors were looking for high rates of return, to turn properties quickly and do quick value-add renovations on high-dollar properties, to juice them up for the just-under luxury market, and that's an over-investment segment of the market now," Kettler said. "The real opportunity is to go into secondary and tertiary market like Savannah, GA; Birmingham, AL, and the outer suburbs of Charlotte with long-term institutional investors."
John Affleck, research strategist for CoStar Group, said while demand for apartments is expected to remain acute, the expected shift among millennials will have an impact across a large number of markets.
"More and more folks will shift into homeownership, causing a potential decline in the number of renter households, at least in the near- to medium-term," said Affleck. However he sees no letup in demand for rental units in major gateway metros, where the cost of homeownership is simply out of reach for most residents.
On the eve of the NAA conference this week, NAA President and CEO Robert Pinnegar, responded to the Harvard study by noting that the number of renter households grew for the 12th consecutive year in 2016, with nearly 10 million households added since 2005.
"In addition to young people, who remain a key factor, families with children, high-income households and older adults are driving demand," Pinnegar said in a statement. "This confirms what NAA research has repeatedly found, that demand for apartments remains strong, even though the pace of growth is moderating."