Apartments to Benefit the Most from 3.4 million Units of Pent-Up Housing Demand | John Burns Real Estate Consulting

Apartments to Benefit the Most from 3.4 million Units of Pent-Up Housing Demand

We believe the apartment business is set to explode, with steadily rising rents and occupancy that will justify new construction. Here are the three primary reasons for the optimistic outlook:

  1. Pent-Up Demand: We recently calculated 3.4 million units of pent-up household demand, which is the aftermath of the recent recession and lackluster recovery. The largest segment of this demand is young adults, who have either moved back in with their parents or taken on roommates. We expect this demand to materialize over the next few years, with most of the demand entering the apartment market because of the inability to qualify for a home and uncertainty over their employment situation.
  2. Modest Job Recovery: Job recovery has been slower than expected, which is keeping unemployment high. The uncertain environment is enough to convince consumers that renting is safer than taking on a mortgage. We believe job growth will approach 2% by 2012.
  3. Government Policy19 years of continually more aggressive government intervention toward homeownership is about to reverse itself.

Wall Street and pension fund consensus, at least for apartments in good locations in coastal cities, seems to be that 25%+ rent growth over the next three years can easily occur, or that buying a building is a great inflation hedge. We don’t think it is that easy. Our forecast, which we do by MSA and is clearly more optimistic in the best MSAs, call for an average of 4.5% rent growth per year through 2015. Here is why we think rental growth will eventually be constrained:

  1. Affordability Favors Homeownership: From a mortgage payment to income standpoint, for-sale housing has not been this inexpensive in at least 30 years. We calculate an own vs. rent premium across all metropolitan areas, and in many areas, it is considerably cheaper to own a home than to rent an apartment.
  2. Not Smart to Rent Forever: Increasing rents will provide the motivation renters will need to explore owning. As rents start to grow, more renters will consider buying. Most people realize that paying rent all your life is probably not a great retirement decision unless you are a fantastic saver.
  3. Construction Will Increase: Development money is flowing steadily into apartments. One of our favorite land brokers in Tampa, Bruce Erhardt, told us that there are at least eight apartment development sites in escrow right now!
  4. Renters Have a Limit: Several of our apartment clients feel that they are already near the limit of what their tenants can afford. Renters are a clever, creative bunch who won’t take huge rent increases easily.


Lesley Deutch If you have any questions, please contact Lesley Deutch at (561) 998-5814 or by email.