Rental Market in Overdrive According to Harvard University Study

Contributing Writer, B2R Finance | Real Estate,Real Estate Investment,Renters

By Brianna Bobola. Marketing Writer, B2R Finance

The nation’s residential rental market is in overdrive, fueled by exceptionally strong demand over a sustained period, according to a report released last week by the Joint Center for Housing Studies of Harvard University.

This decade is on track to witness the strongest growth in rental demand in history, according to the report, “The State of the Nation’s Housing.” The share of U.S. households that rent now stands at a 20-year high.

Source: Harvard Joint Center for Housing Studies, The State of the Nation’s Housing 2015, www.jchs.harvard.edu. All rights reserved.

Source: Harvard Joint Center for Housing Studies*

Renter household growth has averaged 770,000 households annually since 2004, making 2004–2014 the best 10-year period for renter growth since the late 1980s, JCHS said. The pace of growth accelerated to an average of 900,000 households annually from 2010 to 2014.

OLDER AND WEALTHY HOUSEHOLDS FUEL DEMAND

While rental demand is often attributed to young adults who are most likely to rent, the number and share of older renters has risen significantly over the last decade.

Although households aged 55 and over made up just 25 percent of renters in 2014, this group contributed 42 percent of renter household growth over the preceding decade, according to the report.

Similarly, households in the top half of the income distribution, although generally more likely to own, contributed 43 percent of the growth in renters.

While some of these upper-income renters may have faced economic challenges that prevented them from purchasing a primary residence, more were simply opting to rent rather than own their housing, the report said.

REAL ESTATE INVESTORS RESPOND

To meet the surging demand, the number of single-family detached properties in the rental market increased by a net 3.2 million between 2004 and 2013, according to the JCHS study. This increase brings the number of households living in single-family rentals to 14.8 million.

“This shift accommodated more than half of the growth in occupied rentals over this period, lifting the single-family share from 31 percent to 35 percent,” the report said. Developers have also steadily expanded the multifamily housing supply to meet rental demands, adding 1.2 million apartment starts to the mix since 2010.

RENTAL MARKET REMAINS TIGHT

Even with the added supply, the rental market tightened last year to a national vacancy rate of 7.6 percent—the lowest in 20 years, and rents rose 3.2 percent. MPF Research, which studies the rental market, estimates the vacancy rate at professionally managed apartment complexes is even lower—4.6 percent—with rents rising at these complexes by 3.8 percent.

Some markets saw even steeper increases. Rents in San Jose, Honolulu, San Francisco, and Denver rose 10 percent or more in 2014. The 20 hottest rental markets, where rents rose more than 5 percent last year, were all located in the West or the South.

If the economy continues to improve, the rental supply might tighten even further as millennials move out of their parents’ homes and into their own detached rentals or apartments.

CONCLUSIONS

Rental growth is likely to remain strong as the millennial population enters the housing market. Individuals that are under age 30 will form more than 20 million new households between 2015 and 2025—and most of these households will be renters, JCHS said.

Aging baby boomers that want to downsize will also be among those entering the rental market in the coming years, meaning single-family rental investors will need to ramp-up supply in order to meet unprecedented demand.

The JCHS report suggests that the rental market will play a critical role in the nation’s housing economy for years to come.

*Source: Harvard Joint Center for Housing Studies, The State of the Nation’s Housing 2015, www.jchs.harvard.edu. All rights reserved.

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