Rising Costs Exacerbate Rental Shortage, Walter Cautions
NMHC’s vice president of research warns that development delays have increased an already large shortfall in apartment supply. And the supply/demand ratio for affordable and essential housing is even further off.
It’s tough to make affordable housing pencil, and even tougher with essential housing—the so-called “missing middle.” Yet as rental rates continue to rise, so too does demand for lower-cost rental housing. And due to those rising rates, availability continues to shrink.
From 2015 to 2020, the nation lost 4.7 million affordable and missing middle rental units due to a filtering up above a threshold of $1,000 per month, according to National Multifamily Housing Council vice president of research Caitlin Sugrue Walter, speaking at the National Association of Real Estate Editors 2022 Real Estate Journalism Conference in Atlanta.
That’s part of an overall shortage of rental housing that has been exacerbated by construction delays. In fact, according to NMHC’s most recent quarterly construction survey, 85 percent of respondents reported construction delays, thanks to rising costs, labor shortages and improved but still persistent supply-chain problems. Since construction delays are costly, they are driving down the ratio of in-pipeline to delivered properties. “We’re not seeing the under-construction numbers turn into completions,” Walter observed.
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And areas with the greatest need are presenting additional, costly challenges. Still highly prevalent NIMBYism delays development by 7.4 months and increases development costs by 5.6 percent, Walter said. And a study performed in conjunction with the National Association of Home Builders found that 47.9 percent of respondents will avoid jurisdictions with inclusionary zoning, while a whopping 87.5 percent will avoid those with rent control.
Demand also rises
But demand is significant. Most immediately, 600,000 units are needed to meet the existing housing shortage, with anywhere from 175,000 to 344,000 further units needed per year to address population growth, based on an average yearly population increase of 0.4 percent and immigration levels that could range from 562,000 to 1.2 million per year.
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While households currently appear frozen in place, with move decisions perhaps delayed as consumers wait to see how mortgage and rental rates will be impacted by economic shifts and how employers’ requests for in-office work will change, demand for rental housing will also be exacerbated by a number of demographic shifts, Walter said. Among them:
- Household size is shrinking due to an aging population, and as Baby Boomers enter this pool, more may opt to rent rather than own.
- The growing diversity of the U.S. population is likely to drive a greater shift to renting, given the greater preference to rent among non-Whites.
- Increasing costs will drive down the pace of individual home purchases, which remain well below 2008 levels. The rising cost of living has made it more difficult to save for a down payment.
- The 35-to-44-year-old cohort, historically the prime ownership group, has exhibited a preference for renting in recent years.
- Increasing development costs have resulted in an increase in the size of homes built, making it more difficult to find starter homes.
With the affordable and essential housing shortage particularly difficult to surmount, NMHC has been reaching out to policymakers to fully fund the Section 8, voucher and LIHTC programs as well as other subsidies to drive affordable housing development, Walter said. Essential housing may also require a tax credit to make development more viable, JLL senior managing director Doug Childers noted during a previous panel discussion on affordable housing development.