Ingredients in Place for Long-Term Growth As Sector Adapts to Recent Headwinds

We found a recent report by Marcus & Millichap to be particularly helpful when analyzing various industry headwinds. To understand what’s currently happening, and to get a glimpse into the future, let’s look at the past. From a historical context, vacancy is on par with the trailing 30-year average. Higher availability nevertheless has flattened rents, following record-setting growth during the pandemic. As of the first quarter of 2023, the average effective monthly rate nationally was down about 0.6 percent from 2022’s peak, but still up 6.4 percent year-over-year.

According to Marcus & Millichap, new supply over the remainder of this year will keep vacancy rates on a slight upward path near-term, while also lifting the average rent as new high-quality units come online. The potential for supply overhangs in select markets with large pipelines is likely, yet population and housing dynamics indicate that these deliveries are necessary longer-term. Pent-up household creation will propel the multifamily sector. The share of young adults living with parents surged to new heights during the pandemic amid unique work and education arrangements. That figure has since ticked down, but economic headwinds and inflation are now further stunting household creation in this cohort. Once more young adults gain the financial confidence to move out on their own, pent-up household formation will release, aiding rental demand. Meanwhile, millennials are remaining renters for longer amid homeownership barriers, and immigration is trending up, brightening the entire outlook.

They went on to explain that homeownership hurdles will expand the renter pool. The inventory of single-family homes available for purchase remains less than half the historic average, which is reinforcing elevated prices. Alongside this, the average 30-year mortgage rate is about twice as high as the same point in 2022, making borrowing costly and simultaneously reducing the incentive for owners to sell. Broad inflation has made it harder to save for a down payment as well. None of these obstacles for prospective homebuyers are likely to abate near-term, coaxing the largest population subset, late-20 to early-30-year-olds, to remain renters. Economic and career uncertainty is meanwhile prompting residents to sit tight, evidenced by longer apartment leases and a lack of homes coming to market.

While the focus on this research report was primarily on multifamily apartments for a younger generation, let’s not forget that Senior Living Communities are a subset of the multifamily housing industry, thus many of the factors identified in this report also have positive effects on 55+ age-restricted apartments, assisted living, memory care, and high-acuity communities. For example, someone 60 years old who was planning to sell their single-family home and purchase a condo or townhouse, may now very well elect to rent in an active-seniors apartment building with a myriad of amenities such as a fitness room, rec room, roof top patio, etc. Likewise, an older senior in need of assistance may still need to move into a facility to receive care regardless of the overall economic environment.

In fact, that is exactly what we’re seeing overall in the industry. Apartments remain in strong demand and our aging population continues to require great care as their needs increase.

At Vincent Companies, we are also realists. While everyone on our team is very optimistic, we fully understand that simply being optimistic isn’t enough. Of course, it’s better than being eternally pessimistic, but we know that along with our optimism must come action. Thus, we spend countless hours each month reviewing, researching, and adapting to the real-world changes, good or bad, that remain a moving target. We believe that is the only way for us to remain the go-to leader in this industry for real estate investors.

Sources: Marcus & Millichap: National Report – Multifamily 2Q/23  and   Zillow/Case Shiller/BLS

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