Main Takeaway: As interest rates rise and housing prices remain elevated, many would-be homebuyers will be stuck renting for the foreseeable future, keeping demand for apartment housing strong. We will need 4.3 million apartment units by 2035, which equates to 700,000 new units per year. As of July 2022, the yearly production was 500,000 and hasn’t sustained above 700,000 since the 1970s. This translates into a strong demand profile for apartments in the coming decades as supply is limited by a number of macroeconomic factors.
Story: According to a new study by the National Multifamily Housing Council (NMHC) and National Apartment Association (NAA), we need 4.3 million apartment units by 2035 to satisfy the growing demand for rental housing. This deficit is heavily weighted regionally according to the 193-page report, with Texas, Florida, and California accounting for 40% of total future demand.
Here’s what NAA President and CEO Bob Pinnegar had to say about the new data:
“The U.S. has undergone tremendously difficult conditions that have fundamentally altered our nation’s demographics, but one thing remains certain—there is a need and demand for more rental housing…Put simply, we do not have enough housing. The U.S. must build 3.7 million new apartments just to meet future demand, on top of a 600,000 unit deficit and loss of 4.7 million affordable apartment homes. It is time to reverse course after decades of underbuilding, and instead pursue responsible and sustainable policies that will not only meet this demand but address the missing middle and loss of affordable housing stock.”
Given the increasing regulatory burdens on developers, this deficit is all the more alarming. Construction takes longer than ever, and now construction debt is rising which will put downward pressure on construction starts. Further, the current apartment stock is aging, with 21.3M apartments nationally, and of those 46% were built before 1980.
The report concludes that “we need about 710,000 units of housing production in 2021 and a similar percentage of the stock each year simply to maintain what we have.” This will challenging considering not only the above regulatory and financing hurdles, but also our historical production pipeline hasn’t hit those numbers consistently since the 1970s.
Source: FRED
The July 2022 projection for yearly apartment construction sat just above 500,000 units, already well short of the baseline “maintenance” benchmark noted in the above study. Another study puts the construction projection at more like 400,000 for 2022.
We are seeing an uptick in permits, however, but completions are still flat as a result of a number of headwinds facing the construction industry including supply chain and labor disruptions, material shortages, rising debt, and as noted above, red tape.
Source: NMHC
Here are some additional data points from the NMHC and NAA report of note for multifamily investors and owners:
- 35% of renters are less than 35 years old with another 20% less than 44 years old.
- In the near term, the recent increase in interest rates seems to have at least dampened the appetite for home buying.
- Demographic growth is expected to generate demand for another 3.7 million new rental properties with 5 or more units through 2035.
- The average age of first-time homebuyers has slowly increased from 29 in 1981 to 33 in 2021.
- Homeownership rates are expected to fall from 65.4% in the first quarter of 2022 to near 64% by the end of 2024 and remain flat.
Source: NHMC
Expert Take on Apartment Supply
“It is critical that policymakers at all levels of government address housing affordability. Some demand for homeownership will ease amid higher interest rates, which could ultimately lower housing prices and then spill over into lower rents. However, such shorter-term changes do not address the overall challenge of too little supply for the demand from lower-income households that has created financial insecurity for millions of Americans for so long.” — Ashfaq Khan, Christian E. Weller, Lily Roberts, Michela Zonta – Center for American Profgress
