Since 2011, more than 90 per cent of multifamily construction starts in the United States have been channelled into purpose-built rental housing. Even so, a new report from Harvard University’s Joint Center for Housing Studies concludes the market is undersupplied, particularly as the demographics of the U.S. tenant base diversify.
“Young, college-educated households with high incomes are really driving current rental demand,” observes Whitney Airgood-Obrycki, lead author of America’s Rental Housing 2020.
Drawing on recent data from a range of government, financial and professional industry sources, the report explores: the evolving profile of renter households; the condition of rental housing stock; market dynamics for investors, developers and landlords; and the erosion of affordability since the 2008 financial crisis. It finds a growing share of tenants with annual incomes in the range of USD $30,000 to $75,000 (CAD $40,000 to $100,000) now fall into the “cost-burdened” category, meaning they pay more than 30 per cent of their income for housing.
Nationally, rents increased, on average, by 18 per cent in the period from the fall of 2014 to fall of 2019. That overlaps with a building spurt that has added more new multifamily rental units to the market than any time since the 20th century.
“More than 600,000 multifamily units are currently under construction, the highest level of activity since 1973,” the report states. “Completions are on pace to exceed 350,000 units in 2019, in line with the recent high in 2017 and surpassing every other year back to 1989. Permitting for multifamily units through November 2019 also hit a 500,000 unit annual rate, the fastest pace since 1987.”
Investors saw, on average, a 5.4 per cent total return in the four quarters from fall of 2018 to 2019 — down from 6.4 per cent over the comparable quarters of 2017-18. Average cap rates nudged up just 10 basis points, from the record low of 4.1 per cent to 4.2 per cent.
Last year saw an influx of private investors purchasing multifamily properties in deals worth at least USD $2.5 million (CAD $3.4 million) — accounting for 63 per cent of acquisitions in the first three quarters. “The share of acquisitions by institutional and equity fund investors was at 20 per cent and that of real estate investment trusts (REITs) at 5 per cent, both below historical averages,” the report notes.
It also points to “record levels of capital” now available to investors. Multifamily loan originations increased by 16 per cent between the third quarters of 2018 and 2019. In the longer term, government agencies, Fanny Mae, Freddie Mac and the U.S. Federal Housing Administration, tripled their lending volumes in the five years between 2013 and 2018. Banks’ share of the multifamily loan market slipped from 39 to 32 per cent, and insurance companies’ share dropped from 11 per cent to 9 per cent in the same period.
“Record-low delinquency rates may be encouraging lenders to maintain the strong flow of capital,” the report hypothesizes. “The rate of multifamily loan delinquencies stood at 0.12 per cent in third quarter of 2019, the lowest rate since recordkeeping began in 1991.”
So-called pass-through entities — limited liability partnerships, limited partnerships and limited liabilities companies — currently own nearly 60 per cent of large apartment buildings. Individual investors own about a 14 per cent stake, while general partnerships, real estate corporations and non-profits own split the remainder.
“Individual ownership of rental properties has been on the decline since 2001, with potentially important implications for the stock,” the report submits. “Institutional and individual owners generally have different incentives to invest in their rentals, as well as different capacities and resources.”
The report estimates that spending on capital improvements is now outstripping maintenance upkeep at a rate of more than two to one, with approximately USD $87 billion (CAD $115 billion) invested in upgrades versus USD $41 billion (CAD $54.5 billion) allotted to maintenance in 2018.
“Adjusted for inflation, improvement spending was up 198 per cent in 2010-2018, and per unit spending nearly tripled from $660 to $1,840,” the report estimates. “In contrast, maintenance spending increased only 31 per cent, with unit expenditures rising just 22 per cent, from $710 to $870.”
There is concern the backlog of needed repairs is deepening as the stock ages. Already, more than half of all rental housing stock in the United States is more than 40 years old and nearly 20 per cent was built before 1950. Demand for improved accessibility is expected to add still more pressure for investment.