The Rise of the $100K Renters and What it Means

The Wall Street Journal has an in-depth article about the continued strength of the rental housing market in America, which is related to the explosive growth in households that earn $100,000+ and rent their homes. From the article:

In 2019, about 19% of U.S. households with six-figure incomes rented their homes, up from about 12% in 2006, according to a Wall Street Journal analysis of Census Bureau data that adjusted the incomes for inflation. The increase equates to about 3.4 million new renters who would have likely been homeowners a generation ago...

It isn’t unusual for high-earners to rent in pricey coastal cities like New York and San Francisco, where sky-high real-estate prices have long limited homeownership. Yet these markets account for less than 20% of the new six-figure renters, according to the Journal’s analysis…

Why are high-income households renting at a higher rate? One reason is debt:

A $100,000 income is still comfortably in excess of the median U.S. household income, which was $63,179 in 2018, according to the Census Bureau. But many Americans these days are mired in debt. They have car payments, credit-card debt, health-care bills and college loans. Student debt is particularly vexing for the younger Americans who are starting families.

There is a connection between student loans and the housing bust, which isn’t lost on young home buyers. Many students took out loans because the housing crisis wiped out the equity in their parents’ homes that would have helped pay for college. Since then the amount of student debt outstanding has tripled, to more than $1.6 trillion. A couple of years ago Fannie Mae, the government-sponsored mortgage giant, made it easier for borrowers with higher debt levels to qualify for a mortgage, though recently Fannie tightened its lending standards.

These higher levels of debt also make it difficult for potential home buyers to save up for a downpayment:

“The lack of savings for a down payment in this country is grossly underestimated,” said John Pawlowski, a housing analyst at Green Street Advisors, who estimates that the typical renter’s net worth is about $5,500. “Consumer balance sheets are not good.”

Finally, new home construction has not kept up with demand so that creates the added pressure of rapidly increasing home prices, which for many people makes it more attractive to rent:

Jacob Neuberger, a 30-year-old who works in Denver for an investment firm, considered buying when he moved out of his one-bedroom downtown apartment. He and his girlfriend opted to rent a townhouse for $2,700 a month. The one next door sold for $550,000. Mr. Neuberger estimated that his costs to own would be about 20% higher than renting and that he would need the townhouse to appreciate by about 10% to cover transaction costs if he needed to sell to buy a bigger home or if he had to move for work. “The price appreciation can’t go on forever,” he said.

While this story is focused on high earner households it actually does a very good job of explaining what is going on in the housing market in general: not enough new housing supply + higher household debt + lower household savings levels + a tighter mortgage lending environment = many more renters (especially higher-income renters).

The New Rentonomics

The September issue of Units Magazine has an interesting article about understanding the emerging trends that will affect the apartment industry in the near future. Based on a panel presentation at the 2019 Apartmentalize conference, the article looks at ” who the new renter is, how amenities need to change to meet new renter demand, government involvement and their predictions for the future of renting.” Here’s an excerpt:

“The multifamily housing industry is more dynamic and more diverse than ever before,” said Igor Popov, Ph.D., Chief Economist for Apartment List. “Seniors are entering at 40 percent and high-income renters have been growing at almost 50 percent.”

Adding to that dynamic is that renting no longer carries a negative stigma, says Jennifer Staciokas, Senior Vice President of Marketing, Training and Pricing for Pinnacle. Citing a New York Times article, Millennials like that they rent. It is becoming the option of choice, she said...

Choice and mobility were common themes throughout the conversation with much of the discussion evaluating how the subscription economy plays into both.

“It’s sexy to not own anything and not be tied down to anything,” Staciokas said. “This new generation saw their families lose their housing and clothing. They want it and enjoy it but they don’t want to have to buy it.”

You can read the full article here.

The Demographic Trend Apartment Owners Need to Watch

NAA recently interviewed economist Ryan Severino about what he’s seeing in the apartment market, and he had some interesting things to say about the demographic measurements that apartment owners should keep an eye on. Here’s his reply to the question, “What concerns do you have for the apartment market over the next couple of years?”:

Severino: Certainly, affordability is an issue. This is years down the road, but I wonder what happens when Gen Y is not the prime rental cohort anymore. What happens during that change over? Even though we make the blanket assumption that the propensity to rent isn’t going to change, the shrinking of that generational changeover from Gen Y to Gen Z will mean significantly fewer renters during that period, especially if Gen Y starts to transition a little more seriously out of renting into homeownership.

Because of that, I wonder what happens to some of these new apartment communities that are expensive because the land is expensive and material costs are expensive and labor is expensive. What happens to that stuff when you start to get a pullback as a demographic changeover occurs? That’s a little bit further down the road than just the next couple of years, but it’s something that I’ve been thinking about because of demographics.

Read the full interview here.

Student-Style Living for Everyone?

It was only a matter of time: some developers are interested in taking the apartment model familiar to everyone in the student housing sector and opening it up to the masses. There are challenges, not the least of which are local zoning ordinances, but at a time when affordable market-rate housing is at a premium, this approach might actually have a chance of catching on. The Atlantic has the story of one company’s effort to introduce co-living in a Rust Belt city’s downtown:

On Friday, on the top two floors of the building, he’s starting construction on a space he envisions as a dorm for Millennials, though he cringes at the word “dorm.” Commonspace, as he’s calling it, will feature 21 microunits, which each pack a tiny kitchen, bathroom, bedroom, and living space into 300-square-feet. The microunits surround shared common areas including a chef’s kitchen, a game room, and a TV room. Worried about the complicated social dynamics of so many Millennials in one living unit? Fear not, Evans and partner John Talarico are hiring a “social engineer” who will facilitate group events and maintain harmony among roommates.

Forget communes or co-ops. Millennials, Evans says, want the chance to be alone in their own bedrooms, bathrooms, and kitchens, but they also want to be social and never lonely (hence #FOMO)…

The building even appeals to people outside the “Me Generation.” Evans says he’s had interests from all age groups, including empty nesters looking to be more connected to the city.

Michelle Kingman is one of the Syracuse residents interested in Commonspace. Kingman considers herself a minimalist—until she rented an apartment in February, all of her possessions could fit into her car, she told me. Now she and her husband Julian live in a two-bedroom downtown, and have turned one of the bedrooms into a pristine meditation space. They’d have to give that up if they moved into a tiny Commonspace apartment, but Kingman, who is working on her own startup, likes the idea of being part of a big neighborhood community in one building. And when she wants to escape that and retreat into her tiny microunit, she says, she’ll be able to.

“It’s the best of both worlds,” she told me. “You have roommates, but they’re not roommates.”


“Workforce” Apartments Gaining Investors’ Interest

High-end apartments have attracted most investment dollars during the almost 10-year bull run that began at the end of the Great Recession, but now more affordable units are getting attention from investors. From the Wall Street Journal:

A venture led by Prudential Financial Inc. is spending nearly $600 million for 4,000 housing units aimed at lower-income workers, the latest sign that investors see bigger gains in lower-rent apartments than in the upscale ones that have led the recovery.

These so-called workforce housing units usually are in older buildings that cater to price-conscious renters, paying about $1,000 a month for a one-bedroom unit. Around 6.3 million units, or about 41% of all the rental apartments in the U.S., fall into the workforce category, according to CoStar Group Inc., which tracks buildings that are five units and greater…

Workforce housing rents are increasing at a faster rate than upscale units because of high demand and the dearth of new supply. Meanwhile, most of the 100,000 units that become obsolete annually fall into the workforce and affordable category, according to a report set to be released by commercial real-estate-services firm CBRE Group Inc. later this week.

Mr. Munk, of PGIM, pointed out that investing in relatively small improvements to workforce housing units —like a new carpet or a washer and dryer—can produce a big payoff in a higher rent. “If we can spend $10,000 to improve a particular unit, that could potentially bring in $200 a month more in rent,” he said.

Co-Living Not Just for Students Anymore

With the growing popularity of shared workspaces (think We-Work) it probably shouldn’t surprise anyone that shared living spaces are beginning to catch on. Of course, the student housing sector has been using this model for years, but in the market rate apartment world it hasn’t been seen until very recently. One issue is that local ordinances often prevent them, but as the affordable housing issue becomes more prevalent in virtually every city and town across the country, both housing providers and municipal leaders are looking for creative solutions and co-living looks like a good option. The Wall Street Journal recently ran an article that had some interesting data about this new housing approach:

This product, which is less than 10 years old and found primarily in large U.S. cities, represents only a tiny niche in the multibillion-dollar apartment industry. But developers are now preparing to build some of the largest new co-living properties in North America, a sign that the appeal of this type of housing could be broadening…

San Francisco-based co-living startup Starcity last week agreed to purchase a development site in downtown San Jose where it plans to build a 750-unit co-living building…

Rents at the company’s properties range from about $1,600 to $3,100 a month—not cheap but less than the average studio apartment rents in the Bay Area. Half of the rents at the new San Francisco property will be even further below market, affordable to people making as little as $35,000 a year, under new state legislation that streamlines the permitting process for projects with an affordable component.

“To tackle our affordability crisis we need both private sector solutions and public sector solutions,” said San Jose Mayor Sam Liccardo, referring to his city’s new co-living project.


Carroll at Bellemeade (Baby) Booming

The Triad Business Journal has a story about Greensboro’s newest downtown apartment community, Carroll at Bellemeade, and how it is attracting more Baby Boomers than you’d expect. From the article:

Carroll at Bellemeade tenants all won’t be millennials, a.k.a. young professionals. In fact, millennials might be in the minority, according to Carroll, who told Triad Business Journal that baby boomers have shown more interest as the project approaches an anticipated early 2018 opening.

The apartments at Carroll at Bellemeade will range from 679 square feet to 1,403 square feet with monthly rent ranging from about $1,000 to about $1,800.

“Seventy percent of the people who have inquired about Carroll at Bellemeade are older than me,” the 54-year-old Carroll told Triad Business Journal. “They like the idea that it’s going to be gated parking and convenient to things downtown. It’s a rental. When they get to the end of the lease term, they can do whatever.”

That supports a trend that’s been developing in the apartment world over the past couple of years: empty nesters opting for the convenience (or necessity) of apartment rental living, and living shoulder to shoulder with folks their kids’ age or younger.

Mr. Carroll ends with this observation: “We love the empty-nesters,” he said. “They’ll stay there as long as they enjoy it and as long as we treat them right — they won’t leave for a $10-a-month rent increase.”

Banks Not Feeling the Love for Apartments

More apartments are expected to be completed nationwide in 2017 than any other year since 1987, which is contributing to a situation in which supply will exceed demand for the first time in years and rents appear ready to stall or decline. That has banks nervous and they’re beginning to keep the industry at arms length. From the Wall Street Journal:

Now banks are in retreat, forcing developers to look to nontraditional lenders and seek more expensive types of financing to complete projects, said apartment executives, industry analysts, mortgage brokers and bankers.

 “We had fairly robust growth in our construction, real estate construction book, and that’s slowing now,” said P.W. Parker, chief risk officer of Minneapolis-based U.S. Bancorp, during an earnings call last month. “Multifamily is an area that, if you look at the forecasts, there are forecasts pretty broad-based of potential rent declines in a lot of the major cities. So we’re being more cautious there.”

Executives at North Carolina-based BB&T Corp. and Pittsburgh-based PNC Financial Services Group Inc. in December said they, too, are being more conservative about apartment loans…

Even builders with proven track records are getting smaller loans than they used to, said Peter Donovan, executive managing director of multifamily capital markets at real-estate brokerage CBRE. While a couple of years ago most could get loans for about 65% of the cost to build a project, today they are getting closer to 55%, said Mr. Donovan.



Notes from Charlotte Multifamily Forecast Breakfast

Our friends at the Greater Charlotte Apartment Association hosted their annual industry forecast breakfast on January 26, and it generated some great coverage in the Charlotte Business Journal. Here’s an excerpt:

The general sentiment among panelists was that Charlotte’s multifamily market is dropping off from 2015, when it hit an all-time high, but the current pace of growth is more in line with the national rate of growth and historic norms. And, because of strong population migration and demographic shifts, demand for apartments will be sustained over the long term, especially as members of the generation after millennials graduate from college and land their first jobs.

Charlotte continues to be well-positioned with steady job growth, though Porter cautioned that our housing market — for-sale or rental — is so reliant on corporate relocations that stalled or canceled relocations as a result of state law House Bill 2 will eventually have a meaningful impact if it’s not resolved…

  • Homeownership is expected to pick up, but younger demographics won’t abandon renting altogether. In fact, as Olsen pointed out, the for-sale housing market at price points affordable for first-home homebuyers is very competitive. As a result, many younger populations — who are already delaying homeownership — will likely end up renting for longer, until they can save up to spend more on a house or until the for-sale market offers more affordable options. “Even if I hit those major life events as a millennial and want to buy a home, I have incredible barriers,” Olsen said. “If I’m a first-time homebuyer, there’s even less for me. This inventory constraint (means) the housing market ins’t friendly to the first-time homebuyer, putting pressure on the rental market. It goes to show how much extra room we have in housing, both for-sale and rental.”
  • Rental rate is growing faster than median income for the renting population. Amon said the average median household income for Charlotte’s renting population is $36,500 — with current rental rates, apartment dwellers are putting an average of 34% of their income toward rent every month. That in itself isn’t alarming but, Amon noted, that rate has increased dramatically in the past few years, meaning rental growth is outpacing wage growth for many renters.
  • When designing new apartment communities, stay flexible and think about generational needs. Zella led a presentation about the latest in multifamily unit and community design — what renters today and in the next few years are seeking and how to design a property to maximize those desires. Staying on top of technology and “going green” when possible are known to most, but Zella also advised incorporating unique unit features (such as a wine cooler in the kitchen or a built-in valet bench in the entryway) and keeping color palettes neutral and design flexible — after all, trends are changing more rapidly than ever. “We have the broadest array of ethnicities and generations vying to live in the same spaces,” Zella said. “Having the broadest generational appeal without being generic provides challenges but a great opportunity.” Boomers are seeking social spaces and pet amenities (much like their younger counterparts), while those in Generation X value design, convenience and healthy living. Millennials, many of whom work remotely or from home, are looking for spaces for productivity, so Zella encouraged developers to think about adding micro-offices or smart conference rooms in clubhouses.

Vacancy Rates Rise in Downtowns, Fall in Suburbs

USA Today ran a story about the glut of “glitzy” downtown apartments and a dearth of new, less expensive suburban apartments in metro areas around the country. From the article:

Since 2012, the nation’s supply of apartments has swelled 16.6% in central business districts and 13.5% in “secondary core” areas surrounding the downtowns, but just 5.5% for mid-priced suburban units, according to real estate research firm CoStar…

Over the past four years, the vacancy rate in downtowns and adjacent districts has climbed from 3.4% to about 5.5%, CoStar figures show…

“These new flashy, splashy downtown buildings — they have a vacancy problem,” Nordby says. “They are too expensive to rent” and there are too many of them. At the same time, he says, “There’s not much supply of new apartments in the suburbs.”

As a result, since 2012, average rents have risen 12.3% in downtowns and 18% for mid-level suburban apartments, CoStar says.

The city-suburb split is playing out in metro areas across the country but it’s particularly acute in large cities such as Los Angeles, Washington and Chicago. In Los Angeles, about 5,500 apartments have opened downtown the past 3 ½ years, with typical rents of about $6,500 a month, and the district’s overall vacancy rate has climbed from 4.5% to 9.9%, according to CoStar data.

Here in the Triad two of the hottest development areas have been the downtown cores of Greensboro and Winston-Salem, but to date the “city/suburban” split hasn’t been as pronounced. And of course we haven’t seen anyone who can pull $6,500 a month in rent either.