Rental Housing Sector Worth $8T: Berkshire Group

According to the company’s newest report, the sector is larger than office, industrial and retail combined, with multifamily accounting for $2 trillion of that total.

The housing market is transforming by a shift in demographics, with a vast majority of people under the age of 35 continuing to rent and those over the age of 60 deciding to trade in their single family homes for the ease of a multifamily rental. According to Berkshire Group’s newest report, these groups will be among the dominant players in the market going forward. Rental housing as a whole has grown significantly, with apartments only occupying less than 5 percent of a real estate portfolio 30 years ago, whereas now that has grown to 24 percent. 

“Despite the clear advantage of rental housing based on property income growth, it remains significantly underweighted in institutional portfolios relative to its share in the investable universe of U.S. real estate,” noted Gleb Nechayev, senior vice president, head of Economic & Market Research for Berkshire Group, in the report. 

Although it may seen undervalued, the total U.S. rental housing stock comprises around 47 million units, with a current market value of $8 trillion. With numbers like these, the size of the rental housing sector should account for at least a third and potentially up to a half of a diversified real estate portfolio. 

Constant Market Growth

The U.S. rental housing market is larger than office, industrial, and retail combined, due to the fundamental need of people requiring shelter. From 1980 to today, housing increased 3.9 times compared to 3.1 times for overall consumer inflation. When looking at industrial and office, those sectors only grew by 2.2 times and displayed an inflation-adjusted decline over the last 30 years. Even over the last 10 years, which includes the recession, rental housing in privately-owned real estate continued to outperform other markets, with a growing NOI of 4.1 percent per year compared to retail (2.4%), office (1.8%) and industrial (1.2%). For publicly-owned real estate, NOI growth averaged a total of 15.4 percent for rental housing, whereas retail was at 4.9 percent, office (2.6%) and industrial (1.8%). 

The housing demand has undergone a large shift when it comes to who is renting. Over the past 10 years, rental demand has expanded by nine million households, while owner demand has decreased. At one point owners accounted for 60 percent of overall growth, but now that has changed with the increase in single-person households to 28 percent, the rise in the amount of young adults still living at home and the drop in the rate of homeowners over the age of 60. Millennial households and those over the age of 65 contribute about 20 percent each to overall renter demand. For young adults in the age range of 18 to 34, they are delaying decisions to get married and have kids, which postpones the transition to homeownership. The amount of young adults still living at home hit a record high of 32 percent in 2017. Overall housing growth has slowed, averaging 900,000 per year instead of the expected 1.2 million. 

As people move into the retirement stage, they are likely to seek more manageable living arrangements to be on their own, as well as having access to certain amenities, nearby services and not having to deal with the continued responsibilities of owning a home. “While about two-thirds of seniors have already paid off their mortgages, the hardship of maintaining single-family homes, burden of property taxes, and need for health services is prompting many to consider apartment living or even more specialized housing such as senior housing,” explained Nechayev in the report.

Data courtesy of Berkshire Group