Annual Harvard Study Finds ‘Unprecedented’ Surge in Rental Demand
By Kerry Curry, B2R Contributing Writer
Demand for rental housing has surged over the past decade and should remain robust well into the future, according to the annual rental housing report from the Joint Center for Housing Studies (JCHS) at Harvard University.
Vacancy is at its lowest levels since 1985, pushing rents up 3.5 percent annually, in what the study says is the fastest pace of rent growth in 30 years.
Real estate investors have sought to meet this demand for rentals, which the report says is expected to remain strong for at least the next 10 years.
Rental stock rose by about 8.2 million units from 2005 to 2015, according to the report. Conversions of single-family properties from owner-occupied into rentals accounted for the bulk of the growth, according to the JCHS report, “America’s Rental Housing: Expanding Options for Diverse and Growing Demand.”
A number of factors have driven the nationwide demand for rental properties, including economic and demographic trends that include a drop in homeownership rates.
Strong Fundamentals for Rental Property Investors
The report bolsters the belief among real estate investors that the buy-hold strategy of converting single-family properties into rentals is a sound one.
The report indicates that while much attention has been placed on millennials, who make up the single largest share of total renters, Gen Xers and baby boomers actually have driven most of the recent growth in renting, illustrating that the decades-long increase in renting has been broad-based with a multigenerational demand.
As of mid-2015, 43 million people lived in rental housing, a rise of nearly 9 million from 2005 and the largest gain in any 10-year period on record, according to the report. The 2010s are on track to be the strongest decade of renter growth ever recorded.
The demand has translated into a strong growth in rental income that has outpaced inflation and that has accelerated over the past year.
After increasing by an average of 2.7 percent annually since 2011, nominal rents were up 3.5 percent during the 12 months ending September 2015, according to the consumer price index (CPI) for contract rents, broad and conservative measurement. With overall inflation slowing to just 0.4 percent, the real increase in rents in the preceding 24 months was larger than in any other two-year period since 1987.
Increase in Single-Family Rental Properties
The number of single-family houses being used as rental properties has risen dramatically since 2005. According to JCHS, single-family share increased to 40 percent in 2015 from 34 percent 10 years ago.
These single-family properties meet rental needs across the price spectrum. They make up 37 percent of all units that rent for less than $400 a month, for example, but they also have among the highest median rents of any structure type.
In suburban areas, 64 percent of single-family rental properties command monthly rents of $800 or more per month.
Future Outlook for Rental Growth
The JCHS said rental households will grow over the next decade, even if the homeownership rate stops its downward trajectory.
The report cites several reasons for expected future rental growth:
- An aging millennial generation will continue to grow the demand. Half of the members of this generation are still in their teens. Millennials now account for 11.3 million renter households, and that number will grow to 22.6 million without any changes to the current homeownership rate.
- The growing share of minority households. Strong immigration trends both past and present mean that minorities will contribute more than three-quarters of household growth – with Hispanics accounting for 40 percent of the increase – in 2015-2025.
- Movement of baby boomers into the 70+ age group. These aging boomers will transition into rental housing to accommodate their needs for accessibility and eliminate the maintenance requirements of homeownership.
Although the Harvard study suggests rental household growth will likely slow from its current blistering pace, the industry looks to remain vibrant for many years to come. The study also notes that all in all, rising rents and low vacancy rates have yielded solid income gains for property owners, along with double-digit growth in property prices.
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