Rising homeownership and investments in rental housing The homeownership rate is one of the most publicized of the nation's housing numbers. This year, the rate - defined as the percentage of all households that are homeowners - has reached a record high of 66%. It began its climb at 63.8% in 1994, after hovering around 64% since the mid-1980s. The size of the increase in this typically slow-moving statistic has surprised many analysts.
Homeownership has direct implications for rental housing. An increase in ownership means a decrease in rentership. Of particular concern for real estate investors is that nearly half of all renters who live in multifamily (five or more apartments) buildings and, even more, the 7 million households that live in large apartment communities with at least 100 units.
While more apartment renters will always be better than fewer for multifamily investors, recent experience shows that the apartment industry can post strong financials without rapid growth in the number of customers. Looking forward, growth in the apartment market is almost certain to pick up. Even if it does not, the resulting reductions in new construction will limit the downside risk to property values and to investors, who routinely face far more serious challenges than a rising homeownership rate.
A storm weathered Rising homeownership combined with only moderate overall growth in the number of households nationwide has resulted in an essentially unchanged number of renters since 1994, according to the U.S. Census Bureau. Available data do not allow for a good estimate of the trend in apartment renters but, given the flat count of total renters, growth in apartment renters has been moderate at best.
Despite this period of modest growth in consumer demand, apartments have performed very well for investors. Vacancies have remained in check, rent increases in most markets have exceeded inflation, and management efficiencies have further boosted net operating income. This strong operating performance, together with attractive financing opportunities, has pushed up the prices at which apartment properties have been selling.
The performance of newly built apartments has been particularly impressive, given the recently sluggish consumer demand. Approximately 700,000 rental apartments in buildings with at least five apartments have been completed in the past four years. (By the broader multifamily measure of all condominium and rental construction in buildings with at least two apartments, 1 million units have been completed.) The speed at which the newly built apartments are being rented has remained at or above the historical average, and the median asking rents for these newly built apartments rose 27% between 1994 and 1997.
If the total number of apartment renters has been nearly flat, who has been filling these new apartments? Last year, for example, about 200,000 rental apartments (units in structures with at least five apartments) were completed and brought to market. Of these, roughly 100,000 would be expected to replace depreciated apartments and other units somehow lost from the stock. In normal times, the other 100,000 would be absorbed by the net growth in the number of apartment households. But absent the demographic boost, something is needed to reconcile the numbers. Perhaps losses from the existing stock have been higher than usual. Or there may have been a shift among renters into multifamily structures and away from single-family rentals. Or maybe some of the construction or population estimates are flawed. Available data, unfortunately, are inadequate for identifying the correct explanation.
Whatever the reconciliation of the construction and population statistics, the fact that the apartment industry has done so well despite this soft demand growth is a positive sign of stability and resiliency that bodes well for the future. A storm has been weathered quite nicely, and the sky ahead is clearing.
Renewed demand growth likely Growth in apartment households seems almost certain to accelerate. The recent increases in ownership are exceptional, the result of a variety of economic, demographic and political factors all hitting at once. Going forward, this pro-ownership package is unlikely to continue.
Regarding the economy, sustained growth in jobs and personal income have given consumers the money and confidence to take advantage of some of the most attractive home mortgage rates in the past 30 years. No one thinks that this Oz-like combination of growth, confidence and financing can go on indefinitely.
Politically, the homeownership bias could not be much stronger than it has been recently. Homeownership is widely embraced by politicians, who recognize that homeownership ranks close to apple pie and motherhood on the feel-good-o-meter. Aided and abetted by business interests, politicians in Washington in recent years have been particularly vocal in jawboning consumers into ownership. But, for now, the relevant point is that the rhetoric and policy advantages afforded owner-occupied housing can only soften.
Demographics promise to be more supportive of multifamily rental housing in the future. For all housing types combined, total growth in the number of households is likely to remain near 1% annually over the next decade, according to Census Bureau projections. While down considerably from the 2.5% annual rate achieved during the 1970s as baby boomers were reaching adulthood, the projected growth should provide a moderately supportive platform for all housing types.
More important than the overall growth, the mix of growth in households is likely to turn more favorable toward rental apartments. The Census Bureau projections indicate renewed growth in young adults, accelerating expansion of the empty-nester market, and, at all ages, an increasing prevalence of single-person households. Young adults and single-person households have relatively high propensities to live in rental apartments, and some empty-nesters sell their homes and move back into multifamily. Based on these Census Bureau projections, research by the National Multi Housing Council indicates that, if current patterns of housing choice by detailed age groups and family types are maintained, multifamily rental housing should pick up share from other rental housing over the next 10 years and match the overall 1% rate of demand growth projected for all housing types combined.
Consumers' housing choices may well turn more favorable toward multifamily rental housing and improve upon this 1% projected annual growth. Demand for luxury apartments should get a boost from last year's tax changes that eliminated the taxation of capital gains on almost all owner-occupied housing. The repeal opened up rental housing as a viable option for millions of current homeowners who previously were locked into ownership by the prospect of having to pay the tax if they moved to rental housing.
Multifamily housing also stands to benefit from the "smart growth" movement and stepped up resistance among citizens and elected officials toward urban sprawl. If this movement translates into zoning and other land use regulations becoming more favorable to highdensity housing, multifamily rental will gain a price advantage over lower-density housing alternatives.
All told, several forces point toward a positive long-term outlook for multifamily housing. In recognition of this prospect, Harvard's 1998 State of the Nation's Housing report forecasts that multifamily's share of all housing construction will increase over the next decade.