As those in the commercial real estate industry know, the multifamily sector has been white hot over the past year, with demand for apartments remaining high in the first half of 2014. And despite a wave of new developments on the horizon, experts say the fundamentals of the market should hold strong well into 2015.
Despite the incremental new apartment unit supply growth, it remains in line with historical averages, follows a multi-year period of well below-average supply growth, and is occurring at a time of historically low apartment vacancy rates, according to Philip Martin, vice president of market research at Chicago-based Waterton Associates LLC, whose portfolio comprises more than 50 rental communities across the U.S.
Contributing to the strength of the apartment market are favorable supply and demand drivers. A limited number of new and existing homes have driven up prices in many areas, positioning apartments as an alternative, and more affordable, form of housing.
“Apartment rent-to-income ratios remain in line with long-term averages,” Martin said. “We estimate rental housing, as compared to owning a home, is more affordable on a monthly basis in most metropolitan markets.”
The relative value, compared to owning a home, is further strengthened when factoring in the hard-to-replicate locations and hotel-like amenities apartments often offer, and the onerous down payment required when purchasing a home, Martin added.
The apartment sector, like other asset classes, has also benefitted from ongoing, albeit sluggish, job growth and economic improvement, important factors for continued apartment demand. Improving job growth has resulted in a resumption of more normalized household formation growth, which declined by approximately 50 percent during the financial downturn, creating pent-up demand for rental housing, according to Martin.
Apartments are especially appealing to Millennials, whose views of homeownership have changed over the years. Faced with rising student loan debt, higher down-payment requirements and tougher lending standards, many would-be homebuyers are instead opting to rent as they take advantage of the relatively desirable lifestyle attributes apartments offer associated with affordability, location, amenities and mobility.
Older generations, including empty-nesters looking to downsize, have also gravitated to apartments not only because of the affordability, but also due to a desire to live a more maintenance-free and mobile lifestyle, Martin said. All of this has contributed to strong returns for investors, according to Martin.
“Due in part to the need-driven nature of housing, multifamily apartment investments have proven more resilient than other commercial real estate sectors in terms of returns and operations,” Martin said.
“Although we expect performance to moderate, fundamentals continue to support underlying asset valuations and above-average operating performance for the foreseeable future.”