While the magnitude isn't clear, that the growth of renter households has risen far above average in recent years is. The Housing Vacancy Survey reports that the number of these households increased by half a million in 2013 while the Current Population Survey reports nearly double that number. In the fifth part of its report on The State of the Nation's Housing, the Harvard Joint Center on Housing Studies said either number exceeds the 400,000 annual increase of the last few decades. The report also notes that this increase appeared to slow at the end of 2013 along with the drop in homeownership rates.
Along with growth, there has been a shift in the renter population. The usual groups, young adults, low-income households, and singles have been joined by high-income earners, families with children, and older persons. While those under age 35 account for a quarter of renter growth, renters 55-64 ballooned almost as much.
The recession expanded the ranks of lower income households and these in turn accounted for the largest share of renter growth. Those earning under $15,000 per year accounted for a quarter of the growth and those with incomes of $15-29,999 for 30 percent. Families with children have had the sharpest drop in homeownership and the greatest spike in renting while the highest income earners contributed to 23 percent of the growth.
The continued growth in demand for rentals was not immediately met by supply and the rental vacancy rate tightened to 8.3 percent in 2013, the lowest since 2000. However it represented the smallest shrinkage in the rate since 2010. The vacancy rate for professionally managed apartments has not changed in over two years.
Rent increases have been relatively constant, about 2.8 percent in both 2012 and 2013 while rent hikes in professionally managed buildings have slowed from 3.7 percent to 3.0 percent. Both rates outpace the 1.5 percent growth in inflation. The same patterns holds through most metropolitan areas.
The supply is now catching up with rental demand. Construction starts for multifamily buildings have moved from a low of 109,000 units in 2009 to 300,000 in 2013, 13 percent fewer than at the 2005 peak and 90 percent of those units are intended as rentals. But these gains may be short-lived; permits increased in 2013 at half the rate of 2012. Still completions should continue to grow from the 195,000 units in 2013 as much construction may still be in the pipeline.
Even at the recently increased pace, multifamily production is below the average for the last decade in many markets. Permits exceed the 2000s averages in 47 of the largest 100 metro areas but were less than half those levels in 23.
Investment grade properties appear to be close to supply/demand balance; the growth in each was about 160,000 units in 2013. Rent gains in these units has been more modest and even if demand remains constant the expected growth in completions should create some slack.
The growth in new multifamily construction, 1.6 million units from 2006 to 2012, met just a fraction of the growing rental demand from 5.2 million households. The conversion of owner-occupied single family homes to rentals provided most of the new supply. An estimated 3.2 units converted to rentals during this period, pushing the single-family composition of the market from 30 percent in 2006 to 34 percent six years later.
Single-family rentals have traditionally been owned by individual investors but the high volume of distressed homes for sale, weak demand from owner occupants, and high rent-to-price ratios enticed institutional investors to buy following the recession. An estimated 200,000 single family units were bought by these investors between 2012 and early 2014.
These investments were concentrated in select markets and now with the distressed market shrinking there is evidence these investors are pulling back. However the experience they gained in managing and financing large portfolios of single family housing may provide new business models for investors to follow; several have issued securities backed by cash flow from these rentals. There are also implications for communities with large concentrations of these investments should their owners opt out of ownership.
New construction typically tends toward higher priced units; the median rent for new units in 2010 was $1,052, affordable by traditional measures to those earning over $42,200. Only a third of units built in 2010 rented for less than $800, "affordable" for a household earning $28,000. Building affordable housing is difficult because of the high cost of appropriately zoned land and financing for acquisition and development on top of actual construction costs.
Meanwhile at the low end owners may lack revenue for operating and maintenance, putting these properties at risk for removal. Some 1.9 million of the 34.8 million rentals that existed in 2011 (5.6 percent) had been demolished 10 years later and the loss rate for units renting under $400 was twice that high, accounting for a third of all removals. Removal rates decline as rents increase to 3.0 percent of units with rents over $800.
Losses are particularly high in rural areas, 8.1 percent compared with 5.7 percent in central cities and 4.7 percent in suburbs, reflecting the greater presence of mobile homes. These homes account for 10 percent of the housing stock in the South and West and more than one in five was removed between 2001 and 2011.
The Center said that low vacancies and rent increases that consistently outrun inflation means apartment properties continue to perform well. Net operating income of commercial grade properties were up 3.1 percent in 2013, below the 6-11 percent growth in 2011-12 but still nearly matching the three decade average.
Apartment values are appreciating at what the Center calls a remarkable pace, up 14 percent on average in 2012-13 to a new high; beating the 2007 peak by 6 percent, far outstripping owner-occupied market recovery. Cash flow and appreciation led to a 10.4 percent annual rate of return on commercial grade properties in 2013, nearly matching the 11.5 average of 1995-2004 and suggesting more sustainable growth.
Multifamily loan delinquencies are trending down with serious (90+ days) delinquencies slipping below 1.0 percent in 2013 for the first time in five years. Delinquencies in Fannie Mae and Freddie Mac backed Commercial Mortgage-backed Securities (CMBS), while still high by historical standards, also dropped under 1.0 percent.
Private multifamily lending has rebounded. According to a Mortgage Bankers Association survey, these originations were up 36 percent in 2012 and 13 percent last year. Of note is that lending by banks and thrifts which was flat in 2010 had jumped 29 billion by 2013 while government backed loan, the dominant factor in multifamily lending early in the recovery, increased by only half that amount.
The Center projects that, as long as they perform well, multifamily properties should attract increasing levels of private funding. In the meantime, plans to shrink federal involvement have been put on hold because of rising demand and to address affordability challenges.
The Center points to the difficulty in predicting homeownership rates and thence rentership rates because of their dependence on several economic and attitudinal factors. But assuming that homeownership is stabilizing and that new rental units continue to come on line, the Center estimates that demographic forces alone will left the number of renter households by 4.0 to 4.7 million over the ten years ending in 2023, exceeding long-ran averages over the past several decades.
Two broad trends will drive this; the imminent surge in older households; renters over age 65 are projected to rise by about 2.2 million or about half of market growth, and the increasing racial/ethnic diversity of younger age groups. The aging population also means that the share of renters who are single or married without children will soar. Meeting this diverse demand will require a range of new rental options and a variety of community settings.
