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A publication of
Winter issue 2016 sponsored b
yCRE Finance World Winter 2016
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The apartment sector’s strong performance reflects a variety of
trends, including the desire of global investors to increase allocations
to U.S. real estate in general and multifamily in particular. It also
reflects investors’ confidence that multifamily property fundamentals
will continue to improve as a result of the continuation of demographic
and social trends, including:
• The growing number of Millennials entering the 20- to 34-year-
old prime renter cohort.
• Job growth that is enabling Millennials to move out of
parents’ homes.
• The general population shift to urban areas with concentrations
of rental housing.
• Millennials waiting longer to get married and having fewer children.
• The declining homeownership rate as Americans of all ages
lack the financial wherewithal or stringent credit requirements
of banks. Young adults are putting off buying homes for many
reasons, including crushing student debt and reasons of lifestyle
preferences, such as waiting longer to get married and have
children. Older Americans are giving up large suburban homes,
for reasons both financial and lifestyle.
By now, these trends are familiar — whether and how long they
continue are key factors in gauging future multifamily demand.
Rental Demand to Grow
Multifamily absorption has been strong for years, but has the wave
passed? Demand for multifamily is based on a number of factors,
including population changes, household formation and the proportion
of renters versus those who own a home. To calculate future rental
demand, we used U.S. Census Bureau forecasts of population
growth and household formation by age cohort and factored in
projected homeownership rates by age cohort.
Our study contains three scenarios depending on potential trends
in homeownership. Our baseline scenario assumes that home-
ownership rates will remain at current levels. While it isn’t likely
that homeownership rates will not change, we believe that the rate
is nearing a bottom. If homeownership rates continue to fall, we
would expect a policy response stimulate, as the housing market’s
contribution to the broader U.S. economy already is falling short of
its historic watermark.
An optimistic scenario for rental demand assumes that homeownership
rates will continue to decline slightly, which means more households
will rent. The most pessimistic scenario assumes that homeownership
rates will rise to the mid-point between where they are today and
the 10-year average. We believe that this pessimistic scenario is
unlikely because it would hinge upon a quick reversal of social and
economic trends that have been building. Lower homeownership
rates are associated with marrying and having children at later ages
and preferences for living in urban neighborhoods, where a greater
percentage of housing stock is for-rent as opposed to suburbs.
Preferences and trends are fluid, which makes them hard to
predict. Millennials’ preference to live in urban cores has had
profound impact on commercial real estate, not only on multifamily
but all property types. A holistic live-work-play lifestyle has given
rise to “24-hour” core markets and “18-hour” secondary markets
that combine housing, offices, shopping and entertainment. It is
possible that as Millennials age into child-rearing years, this trend
will reverse and many will seek out suburbs for better schools and
quieter streets. Banks might loosen credit as the financial crisis
moves further into the rear view mirror, which could help push
homeownership rates back up. Even if trends that favor renting
start to reverse at some point, the shift will be slow and gradual
and will take years for the homeownership rate to rise significantly.
Table 3
Total U.S. Renter Households, Current and Forecast
(Source: Census Bureau, Yardi Matrix)
With that caveat, even under the most pessimistic scenario in
which homeownership makes a comeback, demand for multifamily
units will rise by 2.3 million over the next decade and 4.6 million
over the next 15 years. The demand growth comes mainly from the
rising population and growth in households.
Under our baseline scenario in which homeownership remains at
current levels for each of the individual age cohorts, rental demand
will rise steeply. In this case, the demand for multifamily units will
total 2.2 million over the next five years, 4 million over 10 years and
Led by Boomers, Multifamily Demand to Remain Robust