ULI Special Report: Strong Rental M-F Market Driven by Record Student Debt, Cautious Millennials

By Veronica Grecu, Associate Editor

New York—“Do we have a boom or do we have a bust in the multifamily industry?” John Healy Jr., co-founder & principal of Hyde Street Holdings LLC, asked that question as he opened the “Rental Multifamily Housing: New American Dream or Classic Bubble?” panel at the Urban Land Institute’s Fall Meeting, held in Manhattan last week.

The response from the audience was unequivocal—and clearly anticipated the course of the discussion—as the overwhelming majority voted in favor of a “housing boom” that we will continue to witness over the next two to five years.

In support of this opinion, REIS vice president of research and economics Victor Calanog outlined a few economic aspects of the current state of the multifamily industry in the United States: The vacancy rate in rental multifamily housing in the country’s 50 key markets was at 4.2 percent in the third quarter of 2014, he noted. And while the vacancy rate is starting to show signs of improvement for the first time since 2009, it remains well below the long-term vacancy rate of 5.4 percent nationally.

In Calanog’s opinion, consistent job creation is one of the key factors leading to housing stock that can actually be absorbed by the market—as exemplified by San Francisco, Seattle and Manhattan, all of which have consistent employment growth. On the other hand, Washington, D.C., is seeing housing units being completed at record rates but will likely weaken, since “they are not expecting all of these units to be absorbed because vacancies are rising,” Calanog observed.

Though the national economy is on the rise, one of the population segments clearly impacted by unemployment is the Millennials, the group considered to be the driving force behind the recovery in multi-family development. As outlined by Charles Hewlett, managing director of RCLCO, the so-called Millennial headship rate has been quite weak compared to the large size of this group.

“It’s important to understand that the job market inflicted the worst damage on Millennials,” Hewlett said. The 18-to-34-year-old age bucket had a peak unemployment rate of 14 percent, compared to the historical average of only 7.2 percent for 2001-2007, with the poor and chronic underemployment of the Millennials compounded by high levels of student debt. In 2005, the student debt was $500 billion, but by 2013 the debt had more than doubled, reaching $1.1 trillion.

These factors—high unemployment and record levels of student debt—have forced the Millennials to be very cautious regarding their housing options. In 2013, many were still unable to buy or rent a home, and nearly one third in the 18-to-34 age bucket were still living with their parents. Furthermore, Hewlett pointed out that the decline in the headship rate among the Millennials has contributed to the loss of 1 million households that should have been formed over the past 10 years.

Another influencer on the Millenials is their marriage rate, Hewlett noted. Historically, marital status has been one of the best predictors of residential product preferences, with married couples demonstrating a taste for single-family residences. The Millennials’ marriage rate continues to decline and direct this segment’s housing preferences toward rental units, so the level of homeownership for the 18-to-34 age group has declined from 43 percent in 2005 to 37 percent in 2013.