How Will Demographic Trends Affect Rental Demand?

Washington, D.C.--He emphasized that though population growth drives demand, it does not correlate well with supply.

Washington. D.C.—A recent webinar conducted by the National Association of Homebuilders titled ‘The Demographics of Today’s Renters – Who Are They and How are They Different?’ addressed questions about demographic, generational and lifestyle shifts as well as economic realities, all of which help predict fundamental trends that will unfold in the future for the multifamily market.

James Chung of Reach Advisors, panelist at this webinar, presented several demographic changes that are creating and driving rental demand.

Chung went back to demographic trends from the past several decades. “What we see is starting in the mid 60s and throughout the 70s saw a very powerful population surge-the baby boom and they drove massive growth in demand and supply of multifamily housing product,” explained Chung. “It tapered off in the 90s and then we saw the same trend with Gen X, and now we see same thing with Gen Y. They will be driving the demand.

He emphasized that though population growth drives demand, it does not correlate well with supply. “Basically it is access to capital that drives supply of multifamily product,” says Chung.

While supply plummeted in 2009 and 2010, it will be good for the short term as excess supply that was built up during the boom will get absorbed. This will also buffer the cyclical impact caused during boom. However, going forward, growth is going to look a lot different.

What does population growth look like as we go from 300 million to 400 million? By ethnicity, the fastest growth will be among mixed Americans, second fastest will among the Hispanic (because they already have a large base) and Asian population doubles during that time. Chung said, “America is the only fully industrialized country with positive population growth, which is a very positive thing.”

Population growth is lumpy and isn’t necessarily happening in places with the highest incomes. What kind of product is going to be in demand will be determined by dynamics of population growth. Shifts will have significant impact on preferences for housing, marketing for housing etc. “On the one hand, it will be challenging in the sense that it’s different, but overall it’s positive, especially for multifamily compared with all other commercial sectors. But demand is decoupled with supply, which makes it challenging on market by market basis,” said Chung.

There are four generations in today’s adult marketplace and two are particularly relevant to multifamily development. The Generation Y and baby boomers. The economic environments these two generations go through will shape their choices. The future is looking a lot less like what we have seen in the past.

The Generation Y has a dramatically different view of customization. It is a lot more female—at least in the high-end and higher priced market.

“This trend is going to shape renter demand. Given their incomes, rental product is more likely to compete with homeownership. Various consumer health trends also have a big impact on housing preferences/desires. Consumer attitudes toward health change dramatically. We are at the cusp of another shift and this is the decade of total wellness. I am pretty sure that’s going to drive consumer healthcare demand as well as where people live,” Chung added.

There are a couple of demographic mismatches, according to Chung. 18 percent of the multifamily product is designed for sale and rest is for rental. “Right now, all these trends seem to have little to do with real estate, but when you dig deeper, it has a lot to do with real estate. One in six Americans is unemployed, has stopped looking or is working part time. One in four or five households is affected,” added Chung.

Demographic winds have changed for real estate and there are massive head winds ahead. The good news is that multifamily still has good tail winds ahead—much more than other sectors. As bad as the recession was, it has corrected the market and has presented a window for reinvention. It isn’t all bad news—as long as developers understand the differences, Chung concluded.