By Meghan Hall
There is a lot of speculation as to what the next few months and years—let alone a decade—will bring for the U.S. commercial real estate sector. Heading into the beginning of 2020, commercial real estate professionals had high hopes for the multifamily sector, as demand for rental units across the country continued to grow. However, despite the uncertainty that lies ahead, a report released by the National Multifamily Housing Council (NHMC) and the National Apartment Association (NAA) indicates that demand for apartments will continue to grow, and that 4.6 million new units would need to come online by 2030 in order to keep pace with market demand.
The research is based off of findings from Hoyt Advisory Services (HAS), and, according to the report, a projection of 4.6 million new units is actually low, as supply-demand imbalances that currently exist in some markets were not included. The report also notes that the number of older, existing apartments—around 11.7 million— could need renovation by 2030, taking them offline.
Meeting demand would mean that markets would need to construct more than 325,000 new units on an annual basis. Between 2012 and 2016, however, the industry only brought 244,000 apartment units to market, on average. The only year that the industry exceeded the 325,000 mark was in 1989.
Increases in rental demand are due to a variety of factors, but according to Caitlin Walter, NMHC’s vice president of research, the increased need for apartments is largely due to demographics.
“I would say demographic demand and consumer choice related to that [are the biggest factors],” explained Walter. “Millennials started to become young adults around 2008-2009. A lot of them choice to live in mixed-use areas, and just generally speaking, young adults have the highest rental rates historically. And, they were the biggest generation to come online since the boomers, and that was fuel for apartment demand.”
In addition to young adults choosing to rent, immigration and population growth, as well as aging baby boomers looking for a change, will contribute to new demand over the next decade. Over half of the net increase in renter households between 2006 to 2016 were from baby boomer households, says NMHC. To date, the number of renters in the U.S. totals about 39 million, an all-time high, and annual growth in renter households has exceeded 800,000 on average since 2010, and apartment residents contribute more than $3.5 billion to the economy every day.
Factors such as income stagnation—median rental income, for example, have fallen nine percent since 2001—as well as student loans for young adults and delayed household formation, mean that renters are also renting for longer periods of time before deciding to buy a home, contributing to demand.
However, there are a number of hurdles that the industry needs to overcome in order to meet demand. At the forefront of those challenges is COVID-19. While HAS accounted for an economic correction in the report, said Walter, but it may not be enough to account for the pandemic’s impact.
“They did build a recession into 2021, although it was more conservative than what I believe we could experience going forward,” cautioned Walter.
The ultimate impact of COVID-19 moving forward will ultimately depend on renters’ ability to pay rent, and developers’ ability to start or continue construction. Government response to the pandemic will be paramount moving forward, according to the NMHC.
“Right now, it’s very much a wait-and-see game,” said Walter. “Going into this, we had really good fundamentals, and so we’ve been encouraged so far by what we’re seeing. I think what is important moving forward is government intervention to make sure residents have what they need, so we don’t experience defaults on mortgages on the property owner side that creates a domino effect that ultimately impacts supply.”
The NMHC is currently asking the government for $100 billion for interventions in an effort to keep the multifamily sector afloat. That number could change, however, depending on the length of the pandemic.
“The key determinant of what happens will be how long the public health crisis goes on,” said Walter. “The financial stuff right now is sound, it is just the public health element.”
As construction resumes in states like California and Washington, where shelter-in-place orders put a halt to any non-essential business, and continues in regions like the south, which was allowed to proceed with construction, many other challenges still remain. Among the, NIMBYISM and construction costs. The report estimates that between 75,000 and 125,000 apartment units are lost due to these factors, the majority at the lower end of the housing market, compressing availability for middle-income and affordable units.
“NIMBYISM probably has the biggest impact because if a neighborhood is against a new construction project, it is not going to even get off the ground,” stated Walter. “If you’re talking about new affordable supply, then costs are likely going to be your biggest constraint going forward. That is something we’re concerned about now, because so many people are losing their jobs, but land prices are still very expensive.”
NMHC and NAA make a number of recommendations to push new units through the pipeline, including the establishment of “By-Right” housing development, which would allow for projects to be approved by officials without discretionary reviews, so long as they adhere to zoning regulations and established community development goals. The expedition of affordable housing approvals, along with the elimination of parking requirements and the creation of separate rehabilitation building codes are also small steps that could encourage the creation of rental units. Other initiatives, such as the creation of a middle-income housing tax credit to mimic low-income tax credits that are already in place, as well as the expansion of public-private partnerships, can also lead to incentives to build rental units for a variety of income types, not just luxury, Class A apartments.
At the end of the day, each municipality and region will be different in its approach, said Walter, who emphasized that just knowing what options are out there is a positive step forward for developers and public officials.
“What works in Detroit will not work in San Francisco,” said Walter. “At the very beginning, it’s just a matter of education.”