The once red-hot US apartment market has suddenly softened. Although many experts suggest this is due to a mix of factors that are largely temporary, there are reasons to believe that after a decade in which the market seemed to only get tighter, with apartment construction struggling to keep pace with demand, we're in for a prolonged period with more balance than any time since the mid-2000s.
Why? Well, demographic trends are beginning to favor homeownership over renting. Plus, with overall population growth slowing there shouldn't be the same need to increase the supply of rental housing as there was in the 2010s.
The weakness is happening for two reasons. The first is that the market is going through the same pandemic-fueled boom/bust dynamic that many industries have experienced, but with a lag because renters typically only sign leases once a year. The second is there's a ton of new supply hitting the market, with more apartments currently under construction than ever.
This is coming just as the boom in household formations in 2020 and 2021 – which were much more than would have been expected from population growth alone as people took advantage of cheap rents and more space – is beginning to unwind to some extent. As John Burns Research & Consulting noted in a recent report, population growth between 2020 and 2030 will be concentrated among two age buckets. The first is people between the ages of 35 and 49, and the second is people over 65. The first bucket is people who tend to buy homes, and the latter is retirees who are largely staying put. Importantly, the population of adults between the ages of 20 to 34 -- a group that tends to rent -- is expected to decline. Using homeownership rate by age data from the Census Bureau along with the John Burns population estimates suggests that 75% of the population growth this decade should be homeowners while just 25% should be renters.
This is a reversal of the 2010s. In that decade, population growth was largely among people in their 20s as the Millennial generation was entering the workforce, providing a tailwind to the rental market. There was a shift from homeownership to renting due to the fallout in the housing market from the foreclosure crisis in the late 2000s. And don’t forget that housing construction in the 2000s was geared more toward single-family homes than apartments, so there was a rental deficit that had to be made up.
And while there's still a deficit of rental housing, because there's no longer the same demographic tailwind for renting, the market has the ability now to reduce that deficit. Census Bureau data shows that the rental vacancy rate increased in the first quarter of 2023 by the most in more than a decade outside of one quarter during the pandemic. More timely measures of rental vacancy data from private sector sources such as Apartment List show greater normalization. We should expect a continued increase in the vacancy rate into 2024, and at that point, we might just find ourselves with a balanced rental market for the first time in 20 years.
If the rental market strengthens after that it will probably be due to the much more daunting shortage in the single-family market. It's much easier to build hundreds or thousands of rental units in most downtowns or commercial corridors than it is to build that many units of single-family housing in desirable parts of metro areas. It's simply a matter of space -- a 200-unit apartment building needs a lot less land than 200 single-family homes. Arguably, the supply deficit in the single-family market is getting worse, not better, as production fails to keep pace with the ever-growing demand from Millennials. And if there isn't as much for-sale inventory as people want, that will force some folks into the rental market, at least until single-family supply can catch up.
Regardless, the rental boom that began in the aftermath of the 2008 financial crisis is likely over, having peaked in the middle of 2022. There will always be a need for rental housing, and some metros still have solid demographic trends supporting growth in the future, but it will be more pedestrian-like than we've seen in the past. And periods of oversupply -- where rents can't cover construction and development costs -- are a possibility in the 2020s that they weren't in the 2010s.
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