In both good economic times and bad economic times, multi-family real estate has a long established track record of outperforming most other institutional grade commercial real estate asset classes. As can be seen in the chart below, during the period of 2009-2011, it has been the best performing major real estate asset class. Through all previous recessions dating back to the 1980 recession, multi-family real estate also outperformed other real estate asset classes. Multi-family assets have delivered a relatively rare combination of higher returns and lower risks/volatility versus other real estate.
Since 2010, apartments have been realizing effective rent growth in excess of the rate of inflation. The most recent national data shows effective rents increasing by over 4.0% annually, well ahead of the existing inflation rate. It is anticipated that apartment rent growth will exceed the inflation rate for the foreseeable future as increasing numbers of people choose apartments over single-family ownership and new apartment supply stays relatively constrained with developers having more difficulty raising the necessary construction financing.
The % of homeownership in the U.S. has been on a steady decline since 2004 and this represents a structural shift in society's heightened preference for apartments over single-family ownership. The homeownership rate peaked at 69.2% in 2004 and has declined to 66.4%. (The Urban Land Institute projects that homeownership may fall to 62% over the next decade. Each 1% decline in the home ownership rate means that there will be demand for approximately 1.2 million more apartments.) There are several factors that will continue to drive more people to renting over homeownership which bodes well for keeping the supply/ demand balance skewed in favor of apartment owners.
Echo Boomers Hitting Prime Renting Age. In next 5 years, echo boomers, the children of baby boomer, will increase the size of the high propensity renter age band of 25-29 year olds by 2.5 million people.
Baby Boomers are Older and Financially Scared. The largest single demographic is the baby boomer segment, nearly 80 million of them, and they are the ones that have driven spending patterns across the economy for decades. The average baby boomer is now 55 years old. The oldest is 65. The recent financial crisis combined with baby boomers' recognition of their own mortality has and will lead to more conservative lifestyles, less spending and more savings. Baby boomers have realized that they have 20-30 years of life left and not enough money to retire or live in the life style to which they have become accustomed. It is scaring this demographic and it is changing their behaviour in a structural way. Baby boomers are working longer and they are now viewing renting as a viable option to owning a home in order to free up needed capital and increase their savings rate.
The financial fear which is causing baby boomers to stay in the labour force longer is in part causing higher unemployment/lower participation in the labour force for younger workers as indicated in the chart on the right. The unemployment or job insecurity that this creates for younger workers is driving more of this demographic to rent, and rent for longer periods of time. And as the economy slowly re-gains steam, younger workers and recent graduates, many of whom moved in with friends and family during the economic crisis, are beginning to enter the rental market, termed "the un-doubling up effect". For the aforementioned reasons, these younger people are not considering and/or cannot afford home ownership and this is further increasing apartment demand.
Financial Reality is Taking Hold of the Mortgage Market. There are other financial constraints being imposed on the population that will continue to drive more people to rent over the next decade and it will create growth in the demographic that we call "Renters Not By Choice". Professor Richard Florida, an expert in the area of home ownership and regional economic vibrancy, thinks that the home ownership rate needs to be reduced to 55%-60%, comparable to that of the most vibrant economies of the world. The Obama Administration explicitly acknowledges that long standing policies of the past, promoting home ownership, have failed and not everyone was meant to own a home. This will likely mean that already stricter mortgage qualification criteria in terms of credit scores and down payment requirements as a result of the financial crisis will be with us for some time. This is another tailwind in favour of increased demand for apartments over the next decade.