Home buying

How Large is the U.S. Multifamily Rental Market?

Newly-released Census data provides some clarity to the size of the multifamily rental market and how its size compares to other types of housing in the U.S.

Note that vacant units are not included. The Census calculated a total of 17.0 million vacant homes in 2018, including second homes.

Multifamily housing of all types (rented and owned) totaled 31.4 million units and represented 25.8% of the total housing stock of 122 million units in 2018.

Of the 31.4 million units, 27.2 million (86.5%) were known to be renter-occupied units.

The rental multifamily housing total represented 22.4% of all occupied housing in the U.S.

Very small multifamily properties—the 2-to-9 unit category—had a surprisingly high total of renter-occupied units of 12.7 million units.

The data confirmed the enormity of single-family rental market. At 14.7 million units, it was still smaller than rental multifamily, but single-family rentals represented 12.1% of the total.

Single-family owner-occupied housing still dominates the U.S. housing landscape at 68.6 million occupied units and 56.4% of the 2018 total.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Homeownership Gets Boost From Ageing Millennials

Homeownership in the U.S. continued its ascent in Q3 2019 boosted by increased buying from an ageing millennial population.

The homeownership rate reached 64.8% not seasonally adjusted and 64.7% seasonally adjusted. Both rates rose 0.4 percentage point from Q2 and year-over-year.

The homeownership rate has been gradually rising for three years following a decade-long decline. Q3 marked the largest quarterly increase since Q3 2016.

Tailwinds for homeownership include low mortgage rates, low unemployment and millennials moving more firmly into lifestages where homeownership is traditional.

Yet, the financial challenges of buying a house and the mismatch between consumer demand and available housing product present headwinds.

I believe the homeownership trend will continue the slow upward course it has been on for three years. Rates will level off far below the 2004 peak of nearly 70%.

Youngest Cohorts Have Largest Gains From Trough

Homeownership for the 35-to-44-aged households—half Gen Xers, half millennials—had the largest year-over-year increase in Q3 (0.8 point). The under-35 cohort—nearly all millennials—experienced the next largest increase (0.7 point).

The 45-to-54 age group—all Gen Xers—had the third largest year-over-year gain (0.4 point). Homeownership fell for the 55-to-64 year old households—all baby boomers.

Historically, from the 2004 peaks to the 2016 troughs in homeownership rates, the largest declines occurred with the younger cohorts. Homeownership in households aged 35 to 45 years old fell 12.1 percentage points and the under-35-year-old households fell 9.5 percentage points.

Since the troughs, however, these two cohorts have also experienced the largest increases in homeownership rates. Homeownership of the youngest households rose 3.4 percentage points since the trough, compared to the gain of 1.9 points for all ages. Households aged 35 to 45 years old experienced a 2.3 percentage point gain.

Homeownership rates for the 65+ year olds and for the 55 to 64 year olds have experienced minimal movement since the trough three years ago (1.0 point and 0.4 point, respectively).

South & West Have Largest Rise

Regionally, the Midwest maintained the highest homeownership rate in Q3 (69.0%). Homeownership in the South and West regions rose 0.8 and 0.4 percentage points from a year ago.

By metro, Los Angeles had the lowest homeownership rates in Q3 (48.2%), followed by New York, Orlando, San Jose and San Francisco. Metros with lower rates typically have either high housing costs or high levels of in-migration.

Lifestyle & Housing Costs Influence Trends

During the 2008 recession and in the early years of recovery, the stressed economy and uncertain individual household finances contributed greatly to reducing homeownership rates. Yet homeownership rates continued to fall even as the economy and households began to get back on their feet.

In recent years, many non-economic lifestyle factors have influenced homeownership trends, including marrying later than previous generations, starting families later and placing a higher value on housing flexibility (renting allows for more mobility). The greater social acceptance of renting than in previous generations and the increased popularity of urban living (where renting is more common than owning) have also kept homeownership gains subdued.

Surveys have shown, however, that most renters want to own a home at some point. Therefore, the rising cost of housing is the major deterrent to homeownership. U.S. home prices have risen by about 6% annually since the recession with significantly higher increases in many markets. (Note, however, that this year, mortgage rates have been coming in quite low, thereby mitigating the cost of homebuying. As of October 24th, 30-year fixed-rate mortgages averaged 3.75% according to Freddie Mac.)

The biggest trend which should be driving homeownership rates higher is demographics: aging millennials. Homebuying increases with age, and millennials are moving into homeownership, albeit at a slower place than previous generations.

BJeanette Rice, Americas Head of Multifamily Research, CBRE.

Multifamily Housing Still Hitting Home Runs

It’s the time of year when many of us become re-engaged with major league baseball via the playoffs (go Astros!), root for the home football team (the Cowboys, well there’s still hope) AND begin to think about multifamily market performance in the coming year.

All outlooks begin with the economy. CBRE Econometric Advisors (CBRE EA) projects the 2020 GDP at 1.5%. Positive, but it will feel slow compared to 2018’s 2.9% and 2019’s expected 2.3%

Multifamily demand is also fueled by secular trends such as demographics and lifestyle dynamics. The availability, appeal and cost of alternative housing options—such as single-family homeownership—also impact multifamily demand. The secular and housing alternatives drivers in 2020 will be largely unchanged from recent years.

However, millennials are aging, and the vast majority are now in traditional homebuying stages of their lives. Many millennial households will move or consider moving into homeownership, but that path will remain challenging given high home prices and the mismatch between what millennials can afford and what’s available.

For the 66 largest U.S. multifamily markets, CBRE predicts 2020 net absorption to reach approximately 200,000 units. The total is about 25% lower than the 2019 estimate of 271,000 units, but still fairly healthy.

Development activity continues at a steady pace. In 2020, completions are likely to total about 280,000 units, only marginally under the estimated 297,000 units to be delivered in 2019. Evidence of the sustained level of deliveries in 2020 comes from several sources.

CBRE EA’s under-construction total for August was 612,000 units which is only slightly below the March 2019 cyclical peak of 630,000 units. Year-to-date through August, construction starts were up only 0.2% year-over-year according to the Census Bureau, but multifamily permitting activity was up 4.2%.

Fortunately, development activity is becoming more widely dispersed geographically within metropolitan areas and more varied by type of structure (i.e., more suburban and more garden). This dispersion allows for a better match with market demand and gives a “breather” to many of the urban core submarkets which had become temporarily saturated.

Nationally, with demand at 200,000 units and new supply at 280,000, vacancy rates are positioned to rise. From the estimated 2019 annual average of 4.3%, vacancy is likely to climb 40 bps to 4.7%, reversing the downward trend experienced over the past two years.

Even with this increase, vacancy will still remain under the long-term average of 5.1%. Rent growth is likely to ease down from 2019’s estimated annual average of 3.2% to 2.4% in 2020, just below the long-term average of 2.6%.

Next year’s mild cooling in multifamily’s market performance should not diminish the appeal of the sector, and investment should remain very active.

Multifamily housing is playing a larger role in the country’s broader housing environment, and the long-term trends of inadequate single-family and multifamily housing construction given household growth and obsolescence, urban densification and rising costs of urban living will continue to strongly support multifamily housing over the long term.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.