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Millions Of Americans Are Still Sharing Apartments And You’re Worried About A Bubble?

Though the number of apartments under construction has reached a cyclical high, fears of an approaching bubble may be premature.  

Those wary of the impact on fundamentals of 480,000 units under construction this year can be assuaged by the fact that apartment demand in the U.S. is still exorbitant, National Association of Real Estate Investment Trusts Senior Economist Calvin Schnure said.

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“Whatever level of supply there has been so far, it hasn’t been enough to meet population pressures and is nowhere near beginning to address the past buildup of population pressures,” Schnure said.

Developers would need to build 4.6 million apartment units by 2030 to meet renter demand. That is at least 325,000 apartment units needed a year — and even then, that number will only apply if population growth maintains the same pace as this year.

The trend of shared housing indicates how burdened renters are. Schnure said an abundance of millennials still live in their childhood homes, and an overwhelming number of Americans live with roommates instead of attaining their own residences. 

The number of Americans sharing homes has risen to 25 million this year, Schnure said, up several million from pre-crisis levels and a signal there remains pent-up demand in the market from renters who are not in a position to live on their own. 

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“This is actually a sign of stress in the housing markets,” Schnure said. “There are always some people living with roommates, whether temporarily or a lifestyle choice … but when it is this elevated that means people in a normal market condition would want a place but can’t find or afford one right now."

Though U.S. job growth remains strong (not counting last month's net loss), stagnant wage growth is contributing to the shared-housing trend, Schnure said. 

Also worth noting is the fact that many millennial renters are burdened with thousands of dollars in student debt. That, in addition to stricter mortgage underwriting standards following the Great Recession, is keeping many out of the homeownership market.

Millennials, known as Generation Rent, are expected to drive apartment demand through 2024. In its economic outlook report for the year, Yardi Matrix reported the number of millennials expected to hit the prime renting ages of 20 to 34 will exceed 2 million this year. That is nothing compared to the whopping 70 million expected to peak in 2024 — which means multifamily can expect solid demand from millennials for at least seven years.

“The water is still rising behind the dam, not being let out yet,” Schnure said. “The only way that gets relieved is if you have a high level of construction.” 

What Do The Fundamentals Tell Us?

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Though apartment rents are still growing nationwide, the pace at which they are growing has slowed considerably compared to record rent growth in 2015 and 2016. Rents were an average $1,354 nationwide in September, down 2.2% year-over year, according to Yardi Matrix’s monthly survey of 121 markets.

Apartment supply has been soaring since the Great Recession. After the housing market burst, apartments were in high demand for investors looking for a safe and sturdy place to hide their cash, resulting in robust construction.

Though developers are building like crazy, the pace at which new supply is being delivered has slowed this year. Hurricanes Irma and Harvey have forced builders to pause their efforts on new supply to aid in the rebuilding of hundreds of thousands of homes and commercial property in the affected areas. 

As a result of delayed construction, national occupancy in stable assets was 95.5% as of August, down 20 basis points year-over-year. Yardi predicts the slowdown in deliveries will give the market time to absorb the new supply, leaving vacancies stable.

“It would be wrong to say [new supply] won’t impact fundamentals at all,” Schnure said. “But the market is going to get through this with rents moving upward.”