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It’s a Record Period of Growth for the Multi-Family Industry

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Each year, RubinBrown publishes an Apartment Statistical Analysis. This data is collected from clients, as well as other contacts and referrals within the industry, to compile averages in a variety of markets within the United States.
October 26, 2017

Each year, RubinBrown publishes an Apartment Statistical Analysis. This data is collected from clients, as well as other contacts and referrals within the industry, to compile averages in a variety of markets within the United States.

The most recent publication of statistical information includes operational data for 2016 and represents approximately 600 apartment projects in roughly 40 states.

While these averages are representative of a smaller pool of projects, the trends are usually consistent with those experienced at the national level.

Multi-Family Industry
The multi-family industry continued to experience above-average performance in 2016. There were 321,000 multi-family units completed in 2016, up 5% from the averages seen in the 2000s and slightly higher than the 306,000 units completed in 2015.

The new multi-family units added in 2016 are the greatest annual increase in new units entering the market in a single year since 1989. Over 90% of the units were intended to be rentals and over 80% were in properties consisting of more than 20 units.

According to the Joint Center for Housing Studies of Harvard University, even though the construction of new multi-family units is at the highest level in 20 years, the additions to the rental supply have not been able to keep up
with the huge demand.

As a direct result of the supply versus demand, rent rates continued to increase. According to data from the Survey of Market Absorption, the recent additions to the rental supply have been focused on the upper end of the market.
With the addition of new units at the upper end, there is potential for some existing units to filter down to lower rent levels.

According to the Housing Vacancy Survey, the number of households that are renting has increased by 600,000 from 2015 to 2016. This was the twelfth consecutive year of growth to nearly 10 million households. Although this is an impressive figure, the growth rate in the rental sector in 2016 reflects a deceleration from 2014 and 2015.

Even with the increase in multi-family construction, according to MPF Research, the national rental vacancy rate was at a 30-year low in 2016 at 6.9%. The rental markets throughout the country remain tight.

As expected when demand exceeds supply, rents were up in 2016 and continued to increase in the first half of 2017. However, there was a slowdown in the percentage increase in rent in 58 of the 100 markets that MPF Research tracks.

Low vacancy rates along with increasing rents, mean that multi-family rental properties continue to perform well.

According to data from the National Council of Real Estate Investment Fiduciaries, the net operating income for investment grade properties rose in 2016 for the seventh consecutive year.

Capital spending per unit has increased 13% annually from 2010 to 2015 in real terms, according to the National Apartment Association. Improvements have focused in the following areas: fitness and business centers, clubhouses and common areas, installation of in-unit washers and dryers and improved kitchen appliances.

Market Trends
Demand for housing is primarily driven by an increase in household growth, which is expected to remain strong based on aging millennials and the overall population, as well as immigration. The Housing Vacancy Survey shows on a three-year rolling average basis that household growth has gone from under 600,000 per year in 2009 to 2011 to more than 1 million in 2015 to 2016.

Although millennials currently have a limited impact on housing demand, this is expected to change. According to the State of the Nation’s Housing 2016, published by the Joint Center for Housing Studies of Harvard University, millennials headed only 16 million of the nation’s 124.5 million households in 2015. By 2035, millennials are estimated to head 49.8 million households which will have a huge impact on housing demand.

While the number of young adults impacting the housing demand will be growing very rapidly, the older population is growing even faster. According to projections by the Census Bureau, the total U.S. population age 65 and over will be 79 million in 2035. This is an increase of 31 million over the same statistic in 2015.

The largest increase in the housing demand of older adults is expected to come from single-person households. The share of adults age 75 and over that are living in nursing homes was 4.9% in 2015 compared to 10.2% in 1990. 

The decision of older households to age in place will require additional accessible housing that also offers supportive services.

While the demand for units increases, it is coupled with an affordability crisis. According to the State of the Nation’s Housing 2016, the demand has increased across all income levels, however approximately half of the growth consisted of households making less than $25,000 annually.

In the report, the Joint Center for Housing Studies noted that the amount of renters with severe burdens (those who pay more than 50% of their income on rent) rose by 2.1 million to a record 11.4 million last year.


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The problem, in many cases, is that higher-income households are occupying the affordable units, putting pressure on the government to find alternatives to help low-income renters.

With all of the uncertainty in Washington, the role of immigration as it relates to household growth is uncertain. If the number of immigrants allowed into the country is decreased, this could translate into lower annual household growth.

Over one-third of total household growth from 1995 to 2015 was contributed by immigrants. While immigration into the U.S. decreased from 2015 to 2016, it is still above the annual average immigration figures of 2009 to 2011 by 150,000 people.

The number of households moving continued to decline in 2016. The percentage of people changing residences in 2016 was 11%, the lowest figure in the past 40 years according to the current population survey.
According to the American Housing Survey there were 5 million fewer moves in the rental markets in 2015 compared to 1997. The largest decline in households moving was for adults under age 35.

Tax Reform
With the prospect of corporate tax reform looming over the affordable housing industry, some of its effects are already being felt.

Bank financing for affordable housing projects are being delayed causing much needed projects from being started. Once there is more clarity from Washington, financing should begin to free up for much needed affordable units.

Looking Forward
According to the Freddie Mac Multi-family Outlook, we can expect 2017 to be another good year for the multi-family housing market.

“A greater amount of new supply will be delivered to the market in 2017 but most of it will be absorbed, given continued economic growth and strong multi-family fundamentals.

Vacancy rates will increase slightly, but still leave room for rent and gross-income growth.”

With the millennial generation aging, the Joint Center projections point to solid growth in rental households over the next 20 years. The need for additional supply of rental units at the lower end of the rent market continues to be an issue, as affordable units are becoming harder to find.

The following is from the State of the Nation’s Housing 2016:

“Nearly 39 million U.S. households live in housing they cannot afford. The shrinking supply of low-cost rentals,
along with potential losses of subsidized units and declines in the value of tax credits, could widen the already substantial gap between the demand for and supply of affordable housing.

Meanwhile, the retrenchment in federal funding has put increased pressure on state and local governments to address the housing needs of the most vulnerable individuals.”

RubinBrown invites you to utilize the 2017 Apartment Stats as a development and management tool to compare your financial operations to the operating results of your peers.

The study also provides sound comparable data to utilize in formulating an acquisition model.

Like all compilations of data, it will be most useful when carefully and properly interpreted.

 

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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