The planets are lining up, so to speak, making residential rental property owners positive about expectations, and at the same time with tenants facing a prognosis of ongoing rising rents amid a mounting wave of demand for properties. Perhaps more significantly, this trend is expected to continue for several years.
Freddie Mac just released a report analyzing and forecasting the residential rental market through 2015. A combination of declining homeownership rates and demographics (more people creating household formations) spells out rising rents for at least the next two years—if not more. Click here to read the entire document.
Their findings indicate a need for a minimum of 1 to 1.6 million new rental dwelling units by 2015. The lower number assumes a rapid economic recovery while the larger number assumes ongoing relatively stagnant economic performance—as we see today. That’s an increase ranging from 333,000 per year to potentially more than one-half million of new household creations needing multifamily housing. In comparison, the Freddie Mac report notes, that, in the past 30 years, the average increase annually in the demand for multifamily housing hovers at 200,000. So the next 24 to 30 months contains a far-greater-than-average wave of demand heading into the multifamily housing beach. A beach that is already crowded given very low vacancy rates.
In the past 12 months, total residential dwelling permits tallied just less than 700,000 units, composed of 256 thousand multifamily dwellings and 441 thousand single-family dwellings. Stated differently, while demand for multifamily housing may grow by up to 1.6 million units from 2013 to 2015, in that same period of time, assuming the current pace of construction, multifamily will add at most 768 thousand units, creating a potential shortfall from 232 thousand units to potentially more than 830,000. That said, rents will continue to rise as demand pressures a limited albeit growing supply.
Not surprisingly, this pepped-up demand is translating into sales and purchase activity in the multifamily sector. CoStar reports that multifamily is the only real estate segment delivering year-over-year increases in sales volumes. Click here for the CoStar report.
In the decade prior to the housing bubble (1993-2002) the average annual number of single-family permits ran at 1,153,000 multifamily at 368,000,000 for total of 1.52 million new dwelling unit permits per year. In the latest 12 months, single-family permits were just 38 percent of that average, multifamily was 69 percent of the average, and total permits issued were less than half (46 percent) of what we thought of as normal just a few years ago.
So what are renters doing about rising rents? They are weighing the decision to buy homes rather than rent. Interest rates remain at the lowest levels in our lifetimes. And home values, while in most places are recovering from the wild roller coaster ride from 2002 to 2010, are still highly affordable. Fannie Mae’s October National Housing Survey of 1,001 Americans, found that 50 percent anticipate increasing rents making them lean towards homeownership.
The prognosis is simple:
- Rents will continue to rise
- Investments in rental housing will continue to grow
- Home values, driven by renters making economic decisions to own rather than rent, will make the tight inventory of homes available for sale shrink even further.