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July 14, 2014

Multifamily Housing Can't Live on New Construction Alone

David Brickman
David Brickman, EVP Multifamily Business

Given current trends in renting and multifamily rental-housing inventory, apartment demand should exceed supply for years to come. New construction by itself won't fill the gap. Additional investment needs to be made in existing units to keep them in active inventory. As part of this, there is a growing need to direct "flexible" capital into renovating, preserving, and, in some cases, transforming the nation’s aging rental-housing stock.

Demand for multifamily rental housing is robust and expected to remain strong.

  • Many households want to rent. The trend is strongest with Echo Boomers (born 1977-1995)
    and Baby Boomers (born 1946-1964) who value renting’s flexibility, the freedom it gives from the responsibilities related to homeownership, and the conveniences of a more urban lifestyle. In addition, immigrants to the United States typically start out as renters, and many remain so longer-term.
  • Many households need to rent. Their financial situations or credit histories prevent them from qualifying for a mortgage or being able to sustain homeownership.
  • Increased and accelerating growth of the urban cores in major metropolitan areas likely will
    lead to higher rentership rates.

Demographic forces alone could create as many as 4.7 million more renter households by 2023, according to the Joint Center on Housing Studies of Harvard University (JCHS) report, 2014 State of the Nation's Housing. Also, as employment rates improve, many people who have been living either with parents or roommates will be able to create their own households, adding to the renter ranks.

Construction starts of new multifamily units have rebounded, following a building drought during the financial crises. In the last few quarters, starts hit historical averages – an annualized rate of around 330,000 units. As completions begin flowing into inventory at levels consistent with historical averages in the next couple of years, we're looking at about 3.1 million new units over the next 10 years. Not enough.

Compounding the issue, the existing rental housing stock is aging. The U.S. Census Bureau's 2012 American Community Survey found that nearly 60 percent of U.S. rental properties with 20 or more units were built before 1980 – with many showing their age. More than half of the units affordable to extremely low-income renters are at least 50 years old. According to JCHS, nearly 6 percent of all units are retired each year; almost double that number for lower-income units.

Supply already could be 1.5 million apartments short, by some estimates. And low vacancy rates have sped up rent growth – faster than inflation and income growth. Add to that stagnant or falling wages, and the result is that more than half of all renters live in apartments considered unaffordable to them today – that is, they spend more than 30 percent of household income on rent and tenant-paid utilities. An even larger share of lower-income renters tends to be "rental-cost burdened." (See Freddie Mac Multifamily's article on rental affordability and targeted affordable housing.)

Adequate, affordable rental housing could become more challenging to access in the years ahead without additional efforts to increase supply and slow the rate of removals. Renovating, rehabilitating, and otherwise preserving existing apartments could help bridge the gap.

  • Modernizing units could help keep them viable.
  • Modifying units could help better meet evolving needs. For example, adding amenities that promote working from home, creating larger units for families, or increasing storage space, especially for Baby Boomers who previously owned homes. Making accommodations for seniors – from those who want an active lifestyle to those who need physical assistance – could meet a growing need, too.
  • Some enhancements could help preserve not only the units themselves, but also the subsidies – such as Low-income Housing Tax Credits (LIHTC) and rent assistance – that keep the units affordable, particularly to lower-income renters.

Private funding sources (such as life insurance companies, banks, and conduits) tend to focus mainly on high-end properties and top-tier markets along the U.S. coasts. Older, more distressed rental properties across the country and properties in smaller markets have greater difficulty tapping into private capital, especially in times of economic stress. Modernizing, rehabilitating, and preserving existing units typically costs less than building new ones and benefits tenants as well as the property developer/owners and the surrounding communities. This approach could be especially valuable in slowing removals from the housing stock, better meeting evolving renter needs, and promoting neighborhood stabilization and growth.

Boosting overall multifamily rental-housing inventory – through more emphasis on rejuvenating existing units in addition to new construction – would help close the supply gap and offer more housing options. More availability would help moderate rents and improve affordability. And make a positive difference to renters and communities nationwide.

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