The Future of Multifamily Housing

Seniors, Lifestyle, and Low- and Moderate-Income Renters Will Drive Demand for Apartment Stock.

The U.S. multifamily housing market has benefited from the most stable supply-and-demand fundamentals of any property type for the past several years. As a result, at a time when many property markets, particularly the office and hotel markets, were overbuilt and suffering from falling rents and negative returns, apartments were posting strong rental growth and gains in value. Since 1990, average apartment rents have moved up at an annual rate of 5 percent and sales prices have escalated 4.5 percent per year on average. Yields have averaged 10 percent since 1993, making apartments the market leader for the first half of the 1990s.

However, some of the dynamics that helped propel the apartment market have begun to change. Having led the property recovery, the multifamily housing market is further along the current property cycle than any other property sector and is showing the characteristics of a maturing asset class. These characteristics include rising new construction, slowing rent, and income-based value escalation. Apartment sales prices continue to rise as investor demand bids up prices in a number of markets. Other recovering property types, particularly suburban offices and hotels, have captured a large share of investment dollars recently by offering higher short-term gains in rents and values.

Nationally, multifamily vacancies have been dropping and have remained the lowest of all property types. The national vacancy rate is projected to stay at less than 6 percent in 1997, despite continuing construction activity. Another sign of strength for apartment properties in relation to the other major property sectors is reflected in their low delinquency rates. According to the American Council of Life Insurance, only 0.48 percent of apartment property loans are delinquent, down from 1.5 percent a year ago and 3.5 percent in 1993. The overall delinquency rate for all property types stands at 1.8 percent.

Demand Drivers

The U.S. population continues to grow at a moderate rate, with a total of 62 million residents added since 1970. By 2001, the United States will have added 12 million people to its population base. The nation's population will climb by an estimated 45 million residents during the next two decades thereafter. At the same time, total households have grown by 57.5 percent, or 36.5 million, since 1970. Household growth in the 1990s is projected to total 12.7 million, or 13.8 percent.

Low- and Moderate-Income Renters

Households with annual incomes of less than $25,000 comprise 61 percent of all apartment renters, according to the U.S. Bureau of the Census. Low- and moderate-income households rely on older class B and C properties to accommodate their housing needs.

Foreign immigrants in particular represent a sizable segment of the low- and moderate-income households. According to the U.S. Immigration and Naturalization Service, the annual average number of foreign immigrants entering the U.S. legally has averaged 800,000 since 1990, up from 700,000 in the 1980s and 410,000 in the 1970s, placing a high level of new-renter demand on low- and moderate-income housing. The long-term outlook for immigration patterns is difficult to predict due to several measures designed to curtail the inflow of foreign immigration into the United States.

First-Time Renters

Young renters (18 to 34-year-olds) and older renters (65 years and older) will have an influential role in the future apartment supply-and-demand balance. The population of younger renters has fallen from 67.3 million in 1980 to about 65 million today. By 2001, the number of U.S. residents in this category is expected to fall to 64.1 million. Over this 20-year span, this segment will have fallen from 30 percent of the population to 23 percent. The drop in this segment is more than offset by the rise in older and lifestyle renters (who have an annual income of more than $50,000) on a national scale.

Lifestyle Renters

The number of affluent individuals and families that choose apartment community living over single-family home ownership also is growing. Frequently referred to as lifestyle renters, these individuals and families make up another growing segment of the rental market. According to the Census Bureau, 13 percent of apartment renters have household incomes exceeding $50,000 and fall into the lifestyle-renter category, a segment expected to continue growing at a modest but steady rate over the next two decades.

New apartment design and construction have changed in response to the fastest-growing segments of renters-seniors and lifestyle renters. Characteristics such as higher ceilings, garages, upscale appliances, advanced alarm systems, expanded clubhouses, business centers, and multiple phone lines for in-home offices are becoming common in new construction projects. More new communities also are offering extended landscaping and gardens, elaborate exercise facilities with more variety, after-school programs for children, and organized social activities.

Seniors Housing

The widely publicized aging of the U.S. population is a significant trend in multifamily housing rental demand. In 1970, 20 million U.S. residents were over the age of 65-9 percent of the total population base. By 2001, an estimated 45.5 million residents will be in this category, comprising 16.4 percent of the U.S. population. According to the U.S. Census, the shift toward an aging population will accelerate rapidly after 2010, and by 2050, 21 percent of the U.S. population, or 80 million residents will be 65 or older.

Apartment Investment Trends

Investors' appetite for apartment properties has remained strong throughout the 1990s. As the market supply has tightened and demand has increased, improving cash flows and prospects for growing operating income have captured investors' attention. In the early '90s, when most property types were suffering from the economic downturn and over-building, apartment properties were posting a strong comeback and therefore became the most sought-after property type among investors.

Public market financing and equity funding for apartments have been increasing in the past several years. In addition to lowering the cost of capital, public market development funding has helped keep new construction in check by requiring significant equity investments on behalf of developers. Many apartment real estate investment trusts (REITs) were active in 1993 and 1994, positioning themselves to take advantage of a strong market. In these two years alone, apartment REIT's initial public offerings totaled $2.9 billion. In 1995 and 1996, there was very little IPO activity; however, secondary offerings totaled $3.8 billion.

Courtesy: Hessam Nadji

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