Multifamily Marches On

Even with thousands of units in the pipeline, demand greatly outpaces supply.

With some analysts warning that multifamily will soon reach a point of over saturation due to the significant amount of new product slated for delivery in the next couple of years, it may seem as though the sector has lost much of its investment potential. However, once we examine the demographic factors that are fueling demand for multifamily supply, it is evident that this market will remain strong in the immediate future and beyond.

Even with thousands of multifamily units currently in the pipeline, demand continues to outpace supply by a vast margin. The CoStar Group, a provider of commercial real estate research and information services, forecasts that more than 203,000 new units combined will be delivered to the market over the course of 2012 and 2013. Yet, even this tremendous uptick in development will not be enough to meet the substantial demand for product, which is being driven by a burgeoning pool of renters nationwide. Hundreds of thousands of new renters are pouring into the market due to recent demographic shifts and economic trends.

One segment of the population that is contributing to the increased demand for multifamily product is the group of young professionals coming out of the echo boom generation. Many of them have been living with their parents due to financial constraints caused by the tough economic climate. However, job growth is on the upswing, with the U.S. Department of Labor reporting steady gains in employment across the private sector. A total of 1.9 million jobs were added to the private sector in 2011 and an additional 243,000 were added this past January (up from 212,000 in December), according to the Department of Labor’s statistics. Echo boomers are benefiting from this rise in employment and have begun to move out on their own as they secure jobs, opting primarily to rent and not own.

In addition to the echo boomers, recently arrived immigrants are also ratcheting up demand for multifamily product as they become first-time renters in the U.S. market. Seven million foreign-born people moved here between 2005 and 2010, according to the U.S. Census Bureau, with many settling in the gateway markets of California, New York, Texas and Florida. This continuous flow of new arrivals into major cities such as Los Angeles, New York, Houston and Miami is a major boon to the multifamily market, since many immigrants take the better part of a generation before they become homeowner candidates.

While recently arrived immigrants and echo boomers are increasing the absorption of units by entering the rental pool for the first time, baby boomers are also driving demand with their return to the multifamily market. Many are empty nesters who no longer need a big house in the suburbs and are attracted to the stimulation of modern urban living, so they are seeking out rental properties in cities.

Baby boomers are not alone in returning to the multifamily market as they are being joined by sectors of the population who took a run at home ownership and concluded that it was not the right time for them. Some returning renters are being forced into multifamily as a result of the foreclosure crisis, but others are electing to downsize due to the need to remain mobile for their jobs. They are also contributing significantly to multifamily demand, as every 1 percent drop in homeownership generates 1.1 million households who become renters.

Many of these returning and first-time renters form the demographic base for workforce units, which are currently in short supply. With demand expected to continue unabated into the foreseeable future, supply will inevitably lag behind, even as an increasing number of new units are delivered to the multifamily market over the next several years.

Additionally, much of the aforementioned renters are opting for urban housing as it puts them near the heart of employment centers. A diverse population is streaming into the country’s metropolitan areas, including young professionals who are seizing employment opportunities at medical centers and universities in the urban cores. This influx marks a great resurgence in the metropolitan areas and brings with it an urgent necessity for the right mix of multifamily stock in urban markets. Cities need a combination of affordable, workforce and upscale product in order to adequately house the expanding urban population.

It seems the world is poised on the brink of a golden era for cities, as last year marked the first time in history that more people across the globe lived in urban areas rather than rural communities. This urban renaissance, coupled with the unabated demand for rental product driven by demographic shifts and economic trends, will continue to fuel growth in multifamily and create new investment opportunities over the long term.

Henry Cisneros is the executive chairman of CityView and former HUD Secretary. Cisneros served as Secretary of the U.S. Department of Housing and Urban Development and was Mayor of San Antonio, Texas.