All commercial real estate investments are not the same. At Securian Asset Management (Securian AM), we evaluate the different sectors within commercial real estate from both a debt and equity investment perspective, including detailed market analysis and fundamental opportunity and risk perspectives.
Sean O’Connell, CFA®, senior vice president and head of real estate and alternatives, and Matt Richmond, senior vice president and portfolio manager, discuss their take on re-urbanization in the United States and its impact on multi-family housing.
Q: How would you compare recent trends in multi-family housing to historic trends or any previous periods of significance?
Matt: Apartments have been a favored property type by developers over the last 10 years, and as such the supply of new apartments has remained elevated compared to historical averages. We’re starting to see new permitting activity begin to level off and even fall nationally.
Fortunately, job growth post-recession has been steady, we are at near record low unemployment, the millennials are choosing to rent for longer periods, and housing affordability remains low — thus occupancy and demand for apartments has been strong in the face of new supply. We are optimistic these conditions will persist so long as a recession, or material slowdown in employment growth, does not materialize.
Sean: Individuals and families are staying in apartments longer, fueling elongation of the rental continuum. Single-family home rentals have become a legitimate option, which began with the housing foreclosure crisis.
Building materials (with the exception of lumber) and labor are more expensive now than 10 years ago and with tighter financing it is more difficult today, than in the early 2000s, to purchase a home. Public policy encouraged home loans in the 1990s and early 2000s, pushing the home ownership rate high, and as a result, apartments were not being built — developers are now playing catch-up.
Q: In your view, is there an oversupply of multi-family housing in certain markets?
Matt: For the most part, supply has been absorbed by demand (due to employment and demographic tailwinds). There are some markets where excess supply and slowing job growth have presented weakness — Seattle; Charlotte, N.C.; Dallas; and Orange County, Calif. — are markets that come to mind. We believe rent growth will continue to be constrained by excess construction in those areas.
Sean: Since the recession, we have seen explosive multi-family housing growth in the urban core of American cities. This trend is not solely focused on the coasts, it is happening in every part of the country. What is lacking is affordable housing to a vast section of the population.
We are not creating households like we use to; millennials are marrying later, waiting to start families and struggling under enormous amounts of student debt — impacting their ability to finance a home.
Q: What is your outlook for multi-family housing?
Matt: Fundamentals should remain in balance, with most major metro areas exhibiting 3-4 percent rent growth and steady occupancy levels (near record highs). We are watching for the leading edge of the millennial generation to age out of traditional apartments as they begin to start families and believe those life events will cause an uptick in single-family rental demand.
Student debt remains a huge overhang on this entire generation, particularly as default rates have sharply risen. We have an entire generation of individuals for whom homeownership will be just a dream; necessitating a prolonged rental cycle in both apartments and single-family homes.
Keep in mind, a full 25 percent of the U.S. population is comprised of the Millennials — now 17 to 34 years old. Compounding this cycle is the Baby Boomers, who are choosing to stay in their homes for longer than previous generations.
Sean: If we truly are at the end of the current economic expansion and a mild recession is around the corner, those high-amenity multi-family projects under construction now could certainly precipitate a reset of location-specific rent structures.
While not beneficial to the equity holders, such an event could be beneficial to the broader rental market, as far as the actual renters are concerned. I am in Matt’s camp as it relates to the supply of renters today versus the recent past. In-fill single family is expensive to build, as most markets have no greenfield land inventory, so you’re tearing down a house to build new.
Another dynamic is the commute times in many cities are becoming worse. So the idea of trading a high-amenity apartment close to jobs for a home in the suburbs is another reason to believe the rental market has more staying power.
From my perspective as a lender, I am in the wait-and-see camp in financing the nicest product at this time. I want to see these high rental properties season a bit and prove out the market. We like older, well-maintained suburban product, where rents are affordable to a wider and deeper pool of potential renters.