What the Rental Housing Shortage Means for Multifamily Real Estate Investments

Nov 18, 2021

Record Demand Amidst a Shortage of Housing in the U.S. Multifamily Rental Market is Pushing Rent Growth to New Heights

There is a rental housing shortage impacting real estate markets around the country that does not appear to be letting up anytime soon, making investments in multifamily real estate appealing.

Typically, markets with multifamily vacancy rates of 4% to 5% (meaning all but 4% to 5% of total rental units are occupied) are considered to be in high demand relative to supply. In September, the U.S. apartment rental vacancy rate fell to a record low 2.7%, according to RealPage, Inc. Furthermore, 140 of the 150 largest metropolitan areas in the country have vacancy rates below 4%, demonstrating that demand for apartments is widespread.

High rental demand stems not only from new renters, but also from existing renters staying put. Apartment renewals increased to an all-time high of 58%, surpassing the prior peak of 57.8% in April 2020 when people chose to stay in their apartments because of the pandemic, RealPage indicated.

Rental demand continues to expand due to expensive for-sale home prices and demographic shifts. The rental housing shortage is helping to produce outsized rent growth with asking rents for new leases in October 13.1% higher than the prior year, according to RealPage.

The Rental Housing Shortage is Even More Pronounced in Secondary Cities

While much of the country is being impacted by the housing shortage, nine of the top 10 metro areas with the lowest vacancy rates are located in secondary markets, with Miami being the only primary city on the list.

This is consistent with the trend of residents moving to smaller metro areas and suburban markets during the pandemic for more affordable and spacious homes, and a higher quality of life.

Orange County, CA leads the country with approximately 1.12% vacancy, according to RealPage’s report. It is followed by Providence, RI; Riverside, CA; San Diego, and Miami. Rounding out the top ten are Virginia Beach, VA; Fort Lauderdale, FL; Sacramento, CA; Tampa, FL and Detroit.

How the For-Sale Housing Shortage Affects Multifamily Rentals

Much like the lack of inventory in the rental market, there’s a nationwide shortage of homes for-sale, which is also responsible for driving up rents and the cost to purchase a home.

Currently, the shortage of for-sale homes is estimated to be 5.24 million, 36% higher than the 3.84 million shortage of for-sale homes in 2019, according to a recent study by Realtor. The low home supply began prior to the COVID-19 pandemic because of construction labor shortages, but was exacerbated by supply chain disruptions caused by the virus, according to CNBC.

The housing shortage has impacted younger generations in particular, as record prices for existing and new homes are pricing out many young families. Entry-level homes make up less than 10% of the new single-family homes built today, compared to more than 35% percent in the 1970s, according to Census Bureau data cited in a Freddie Mac report. This has resulted in more young families becoming renters and delaying homeownership.

Notably, this trend has increased demand for single-family rentals (SFR) and build-to-rent (BTR) communities, as these young families require the space of homes without the costs of being a homeowner.

What this Means for Multifamily Real Estate Investing

It is well known that multifamily real estate investments can be a hedge against inflation. This is because multifamily rents often outpace inflation, while some of the major expenses hold steadier. The rental and for-sale housing shortages seen around the country has driven rent growth to new heights and may continue its upward trend as the high demand and low supply dynamics of the rental and for-sale housing markets endure.

Institutional investors have been noting these trends and pouring investment dollars into the space. The SFR and BTR markets specifically have seen an uptick in investment with more than $30 billion of institutional investments made for the asset class between March 2020 and November 2021. As with any investment, it is imperative that investors do proper due diligence, invest in markets with solid fundamentals, such as strong population and employment growth, and partner with experienced sponsors who understand the intricacies of the markets and asset class.

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