Harvard Study Shows Multifamily Demand at a Three-Decade High

With multifamily properties valued 85% higher than its pre-recession peak, San Francisco is a prime example of what unprecedented multifamily demand can do to rent and vacancy levels.

The Joint Center for Housing Studies of Harvard University (JCHS) recently released its The State of the Nation’s Housing 2016 report, which found that multifamily vacancy is at three-decade low, while rents are at a three-decade inflation-adjusted high.

Below are findings from the current report most relevant to multifamily investors.

Homeownership Continues to Decline

In 2015, the U.S. homeownership rate reached its lowest level since the 1960s, falling to 63.7%. Declines were particularly large in the first-time homebuyer age groups, although all age groups have declined since 1995 except for the oldest generations.

Three factors have led to the decline in homeownership. First, foreclosures remain approximately twice the annual average compared to before the downturn and are likely to continue to exert downward pressure on homeownership in the short-term. Second, subprime borrowers (those with credit scores below 620) are far less likely to have their mortgage credit extended as compared to during the early 2000s. Third, real incomes have dropped 18% among 25-34 year olds and 9% among 35-44 year olds between 2000 and 2014.

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The report cites several factors expected to improve homeownership levels in the future, including a loosening of credit standards for mortgage borrowers and increased wage growth. It also states other factors that could have a negative effect on homeownership, such as the rising tide of student loan debt: The share of the 20-39 age group with student debt jumped to 39% in 2013, compared to 22% in 2001. During that time, the average debt balance increased from $17,000 to $30,000 per borrower.

Home buying has also been delayed by the increased average age of marriage and childbirth, as well as the growing minority population — though offset by aging baby boomers, who increased the rate of homeownership. The study was unable to make a determination as to whether the housing crisis permanently diminished the appeal of homeownership in the U.S., though points to evidence that it did not.

Rental Market

In good news for multifamily investors, the housing recovery continues to be driven by the rental market. Over 36% of U.S. households rented in 2015, the largest share since the late 1960s. The number of renters increased by 9 million over the previous 10 years, which was the largest 10-year gain on record. Demand has been driven by all age groups, with the largest gains measured among older renters and families with children.

This high level of demand has driven vacancy rates steadily downward since 2010, falling to 7.1% at the end of 2015. Additionally, rents increased 3.6% during 2015, based on the Consumer Price Index for rent of primary residences. Adjusted for inflation, it has been three decades since either indicator of the rental market reached such levels.

Although activity has spiked in the multifamily development pipeline, which could help loosen conditions, much of the new supply is intended for the upper end of the market. The national average for high-end new developments was $1,381 per month during 2015, well out of the price range of the typical earner’s average earnings of $35,000 per year.

Multifamily Vacancy Rates - 2000 - 2016
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The Moody’s/RCA price index for multifamily properties was 39% above its previous high at the end of 2015, and capitalization rates were below the levels reported prior to the recession. Valuations were especially high in gateway markets such as New York, where property levels were up 93% compared to their previous peak, and San Francisco, up 85%.

Affordability Remains an Issue

The number of cost-burdened households remains an issue on both the owner and renter sides.

On the ownership side, the number of households paying more than 30% of income for housing decreased by 4.4 million households since 2008, finishing off 2014 at 18.5 million. However, the decline in cost-burdened ownership has been improved by high foreclosure rates pushing out financially strained owners.

On the rental side, the number of households paying more than 30% of income for rent increased by 3.6 million since 2008, finishing off 2014 at 21.3 million. The number of severely burdened households paying more than 50% of income increased by 2.1 million, to a record 11.4 million. Among the nation’s lowest-income renters — those earning less than $15,000 — 72% are severely burdened.

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The rental market continues to expand at a robust pace, while the owner-occupied market continues to recover. Home prices have rebounded since the recession, and homeownership rates are expected to remain level over the next few years. However, affordability remains a major issue in the U.S., with record numbers of renters paying more than half their income for housing.

Download the full 2016 State of the Nation’s Housing report.