Multifamily circus: Is the rental sector's hot streak doomed to fizzle out?
Homebuilders often snatch the headlines away from the multifamily sector, as all eyes are focused on the recovering housing market. But while the for-sale side struggles to regain its footing, the rental industry has enjoyed a period of extended growth. PCBC focused more on the homebuilder segment, but the San Diego conference’s multifamily panels and experts provided valuable insight into the dominating industry. They also questioned, however, whether its hot streak can last.
Success in the multifamily market is no surprise, as rents continue to skyrocket and homeownership has fallen to a 22-year-low. A recent Urban Institute report predicted that between 2010 and 2030, the majority — 59% — of the 22 million new households that form will rent, while only 41% will buy their homes.
While this trend away from ownership may harm homebuilders, those residents who opt to rent are benefiting the multifamily industry. Dan Epstein, founder and chairman of the board of real estate management group ConAm, said during a panel Thursday, “I don’t ever remember so much euphoria within the industry than I’ve experienced here at PCBC this year. Things are good, interest rates are friendly, and we’ve got demand.”
Tim Sullivan, practice leader for Meyers Research LLC, said during the panel, “Multifamily left single-family in the dust five years ago. If you build near jobs, you’ve got upward potential toward rents.”
During the economic recession, a good portion of homes were converted into single-family rentals. Those properties filled up fast and are still profitable for the building owners, so there’s no reason to transition them back to for-sale, according to Greg Willett, vice president of MPF Research.
“We’re not losing apartment residents going out the back door to buying homes at this point,” he said. Willett attributed this delay into ownership to demographic trends and affordability. Younger people, and especially millennials, are waiting longer to get married and have children. “We have renters who are staying renters,” he said.
Due to this consistent demand, the number of multifamily construction projects has seen a significant uptick, according to Willett. Several years into the current cycle, the industry’s “performance results are stunningly strong,” he said.
One sticking point remains for the multifamily sector: affordability. Several PCBC expert panelists expressed concern about rising rents that seem to have no ceiling. More affordable properties are scarce in both the multifamily and for-sale industries, leaving lower-income residents with extremely limited options.
“Everyone is building for a narrow, isolated market,” Willett said. “There is downside risk if the apartment industry completely ignores the needs of those lowest-income households. We’re challenged as an industry to serve these people.”
Dean Henry, CEO of residential management group Legacy Partners, said: “With absent government intervention, you can’t build low-cost housing. You have to be careful what you wish for. We want the government to be involved in our knickers a little bit.”
The conundrum, however, is in the fact that these rising rents — which are unattainable for so many potential residents — are still succeeding in attracting higher-income buyers. Prices haven’t hindered the wild demand.
With these factors of rising prices and steady demand for renting over owning, many in the industry are left wondering when the successful streak will reach the end of its run.
Willett asked whether the increased construction levels are leading to overbuilding in some areas and causing the risk of damaging rent growth. He concluded, however, that with the exception of Washington, DC, he has seen no evidence of overbuilding in the nation’s largest construction centers.
Jerry Brand, senior managing director of Greystar, said during the panel, “This period when we’ve had positive leverage has been unique. We’re nearing the stage in the market when the sweet spot will pass.”
Henry said he believes that to reach a more stable market, wages need to increase significantly, and rents have to plateau or decrease.
Epstein doubted whether millennials will keep filling all of the properties currently under construction, and whether the rising rents will continue to be sustainable. “In my experience of over 45 years, I’ve seen too many cycles… Nothing lasts forever.”