While the magnitude
isn't clear, that the growth of renter households has risen far above average
in recent years is. The Housing Vacancy Survey reports that the number of these
households increased by half a million in 2013 while the Current Population
Survey reports nearly double that number.
In the fifth part of its report on The
State of the Nation's Housing, the Harvard Joint Center on Housing Studies
said either number exceeds the 400,000 annual increase of the last few decades. The report also notes that this increase
appeared to slow at the end of 2013 along with the drop in homeownership rates.
Along with growth,
there has been a shift in the renter population. The usual groups, young adults, low-income
households, and singles have been joined by high-income earners, families with
children, and older persons. While those under age 35 account for a quarter of
renter growth, renters 55-64 ballooned almost as much.
expanded the ranks of lower income households and these in turn accounted for
the largest share of renter growth. Those earning under $15,000 per year
accounted for a quarter of the growth and those with incomes of $15-29,999 for
30 percent. Families with children have
had the sharpest drop in homeownership and the greatest spike in renting while
the highest income earners contributed to 23 percent of the growth.
growth in demand for rentals was not immediately met by supply and the rental
vacancy rate tightened to 8.3 percent in 2013, the lowest since 2000. However it represented the smallest shrinkage
in the rate since 2010. The vacancy rate
for professionally managed apartments has not changed in over two years.
Rent increases have
been relatively constant, about 2.8 percent in both 2012 and 2013 while rent
hikes in professionally managed buildings have slowed from 3.7 percent to 3.0
percent. Both rates outpace the 1.5 percent growth in inflation. The same patterns holds through most
The supply is now
catching up with rental demand.
Construction starts for multifamily buildings have moved from a low of
109,000 units in 2009 to 300,000 in 2013, 13 percent fewer than at the 2005
peak and 90 percent of those units are intended as rentals. But these gains may be short-lived; permits
increased in 2013 at half the rate of 2012.
Still completions should continue to grow from the 195,000 units in 2013
as much construction may still be in the pipeline.
Even at the
recently increased pace, multifamily production is below the average for the
last decade in many markets. Permits
exceed the 2000s averages in 47 of the largest 100 metro areas but were less
than half those levels in 23.
Investment grade properties appear to be
close to supply/demand balance; the growth in each was about 160,000 units in
2013. Rent gains in these units has been
more modest and even if demand remains constant the expected growth in
completions should create some slack.
The growth in new multifamily
construction, 1.6 million units from 2006 to 2012, met just a fraction of the
growing rental demand from 5.2 million households. The conversion of owner-occupied single
family homes to rentals provided most of the new supply. An estimated 3.2 units converted to rentals
during this period, pushing the single-family composition of the market from 30
percent in 2006 to 34 percent six years later.
Single-family rentals have traditionally
been owned by individual investors but the high volume of distressed homes for
sale, weak demand from owner occupants, and high rent-to-price ratios enticed
institutional investors to buy following the recession. An estimated 200,000 single family units
were bought by these investors between 2012 and early 2014.
These investments were concentrated in
select markets and now with the distressed market shrinking there is evidence
these investors are pulling back. However the experience they gained in managing
and financing large portfolios of single family housing may provide new
business models for investors to follow; several have issued securities backed
by cash flow from these rentals. There
are also implications for communities with large concentrations of these
investments should their owners opt out of ownership.
New construction typically tends toward
higher priced units; the median rent for new units in 2010 was $1,052,
affordable by traditional measures to those earning over $42,200. Only a third of units built in 2010 rented
for less than $800, "affordable" for a household earning $28,000. Building
affordable housing is difficult because of the high cost of appropriately zoned
land and financing for acquisition and development on top of actual
Meanwhile at the low end owners may lack
revenue for operating and maintenance, putting these properties at risk for
removal. Some 1.9 million of the 34.8
million rentals that existed in 2011 (5.6 percent) had been demolished 10 years
later and the loss rate for units renting under $400 was twice that high,
accounting for a third of all removals.
Removal rates decline as rents increase to 3.0 percent of units with
rents over $800.
Losses are particularly high in rural
areas, 8.1 percent compared with 5.7 percent in central cities and 4.7 percent
in suburbs, reflecting the greater presence of mobile homes. These homes account for 10 percent of the
housing stock in the South and West and more than one in five was removed
between 2001 and 2011.
The Center said that low vacancies and
rent increases that consistently outrun inflation means apartment properties
continue to perform well. Net operating
income of commercial grade properties were up 3.1 percent in 2013, below the
6-11 percent growth in 2011-12 but still nearly matching the three decade
Apartment values are appreciating at
what the Center calls a remarkable pace, up 14 percent on average in 2012-13 to
a new high; beating the 2007 peak by 6 percent, far outstripping owner-occupied
market recovery. Cash flow and appreciation led to a 10.4 percent annual rate
of return on commercial grade properties in 2013, nearly matching the 11.5
average of 1995-2004 and suggesting more sustainable growth.
Multifamily loan delinquencies are
trending down with serious (90+ days) delinquencies slipping below 1.0 percent
in 2013 for the first time in five years.
Delinquencies in Fannie Mae and Freddie Mac backed Commercial
Mortgage-backed Securities (CMBS), while still high by historical standards,
also dropped under 1.0 percent.
Private multifamily lending has
rebounded. According to a Mortgage
Bankers Association survey, these originations were up 36 percent in 2012 and 13
percent last year. Of note is that
lending by banks and thrifts which was flat in 2010 had jumped 29 billion by
2013 while government backed loan, the dominant factor in multifamily lending early
in the recovery, increased by only half that amount.
The Center projects that, as long as
they perform well, multifamily properties should attract increasing levels of
private funding. In the meantime, plans
to shrink federal involvement have been put on hold because of rising demand
and to address affordability challenges.
The Center points to the difficulty in
predicting homeownership rates and thence rentership rates because of their
dependence on several economic and attitudinal factors. But assuming that homeownership is
stabilizing and that new rental units continue to come on line, the Center
estimates that demographic forces alone will left the number of renter
households by 4.0 to 4.7 million over the ten years ending in 2023, exceeding
long-ran averages over the past several decades.
Two broad trends will drive this; the
imminent surge in older households; renters over age 65 are projected to rise
by about 2.2 million or about half of market growth, and the increasing
racial/ethnic diversity of younger age groups.
The aging population also means that the share of renters who are single
or married without children will soar.
Meeting this diverse demand will require a range of new rental options
and a variety of community settings.