5 minute read time
September 8, 2020
Total U.S. multifamily demand should rise by two million units over the next decade.
CBRE Econometric Advisors’ latest long-term outlook for U.S. multifamily rental housing indicates the net gain in occupied units—from 15.4 million in Q2 2020 to 17.4 million in Q2 2030—represents an 11.6% demand increase in the 66 metro markets.
The new demand will bolster multifamily’s dynamic investment environment and create new opportunities for buyers of all types. It will create significant opportunities for developers. Steady increases in demand over the decade will generate revenue for large-to-small multifamily property owners across America.
The outlook assumes tepid market demand into early 2021; a year of recovering demand following that, and steady gains thereafter. The favorable long-term outlook should help owners and operators to weather the current storm, knowing that the sector’s COVID-19 challenges will be relatively short term and more promising conditions should be sustained after that.
While outlook favorable, demand growing at slower pace
The long-term outlook suggests a slight moderation from the last decade. The demand totals are roughly the same, but growth rate was higher in the past decade. From Q2 2010 to Q2 2020, U.S. multifamily net absorption totaled 2.0 million units, an increase of 15.1% compared to the projected increase of 11.6% for the upcoming decade.
While the drivers of multifamily demand going forward will be similar as those in the past, many will not be quite as dynamic.
Secular headwinds slowing demand growth going forward
Short-term forecasts are largely based on expectations for future economic performance (cyclical forces). Household formation rises and falls with the health of the economy, and multifamily demand is created from household formation and housing choice. Yet, longer-term outlooks are more dependent on secular trends. In the latter category are three trends that will moderate future demand.
First, the younger population—future multifamily renters—is 15.8% smaller than the population that entered the rental housing market over the past decade. The U.S. Census Bureau shows that there are currently about 50.4 million young adults aged 25 to 34. These younger millennials were the latest cohort to come into the rental market and contributed significantly to creating rental demand over the past decade. The next generation of new renters—Americans currently aged between 15 and 24 (all Gen Zers) totals 42.4 million.
Second, the millennials’ move out of multifamily rentals into homeownership will accelerate. Millennials are famous for delaying marriage, delaying starting families and delaying homeownership. The strong appeal of urban lifestyle combined with social acceptance of renting have kept millennials in rental housing longer than previous generations. And the financial difficulty of buying a house, especially with student debt have contributed to keep the millennial exodus to homeownership moderate.
Today, two-thirds of the millennial generation (68% of 72.1 million total millennials) are in their 30s. Millennials are catching up on the lifestyle stages such as marriage and having children that often trigger homebuying. Many are finding that if they cannot afford a home in one metro, they can in another. Homeownership rates have been rising since 2016 and will continue to climb as the large millennial population ages into their 40s over the coming decade. The recent fall in mortgage rates is facilitating this trend.
Third, immigration rates have been trending down over the past several years and, at least in the short-term, will trend down further. New immigrants are largely renters. For example, nearly 78% of foreign-born residents who entered the U.S. in 2010 or later were renters in 2018.
In 2019, net international migration fell 15.2% year-over-year to 595,000, the lowest level in at least 30 years. Due to further federal policy restrictions, COVID-19 and the economic recession, the 2020 total will undoubtedly come in as the lowest in several decades.
Secular tailwinds helping to sustain multifamily demand growth
The U.S. has three notable positive secular trends for multifamily rental housing demand over the coming decade. They will mitigate some of the impact of the secular headwinds.
The first is high housing costs. While the American dream of buying a house remains a strong cultural and financial objective, buying a home remains out of reach for a large percentage of renters. The U.S. has a shortage of more affordable for-sale housing, especially in the neighborhoods that millennials tend to favor. While the current low mortgage rates have helped would-be homebuyers, it has not solved the affordability challenge.
Second, small households are expected to continue to rise as a percentage of all households over the next decade. Multifamily rental housing is more suited for smaller households.
The U.S. Census found that 62.9% of all households were one- or two-person in 2019. Single-person households represented 28.4% of all households, up from 26.7% in 2010. Two-person households rose from 33.6% to 34.5% in the same period. Larger households have been edging down as a percentage of all households and should continue on that path as the U.S. population ages and birthrates fall.
Most demographers and economists had expected a mini-baby boom from millennials, even if starting families at older ages than past generations. That has not happened and is not likely to happen at this point. The number of U.S. births in 2019 fell to only 3.7 million according to the National Center for Health Statistics. The total represented the sixth year in a row for decline in total births.
Third, baby boomers are likely to create more rental demand over the coming decade. The multifamily industry has been waiting for a large wave of baby boomers for a long time. In the last decade, it was a small wave; baby boomers trickled into rentals over the past few years, but the overall impact was less than expected by many.
The trend of baby boomers moving into multifamily rental units is likely to accelerate over the next 10 years. Today, there are 73 million baby boomers aged 55 to 73. They have high homeownership rates (high 70s%) but are in ages where many want to downsize in order to lower expenses and/or increase convenience. Many will pick rental housing, though some rentals will be active-adult rental housing rather than conventional multifamily.
Future demand remains strong, creating opportunities for stakeholders
Despite the smaller rate of growth in overall U.S. multifamily rental demand, the total demand gain of two million units is robust. As the industry moves past the COVID-19 crisis of 2020, the steady wave of new multifamily renters will create new opportunities for investors, owners and developers over the next decade.
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