JF2129: The 5 Year Multifamily Demand | Syndication School with Theo Hicks
Are you wondering what the multifamily market will do in the next 5 years? Theo shares some of the research he has found in regards to the multifamily market and what we should expect to see for the future of real estate investing for the next 5 years.
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Theo Hicks: Hello, Best Ever listeners. Welcome to another episode of The Syndication School series – a free resource focused on the how-tos of apartment syndication. As always, I am your host, Theo Hicks. As you know, each week, we two episodes of syndication school, and these focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we offer a free resource. These are free PDF how-to guides, free PowerPoint presentation templates, free Excel calculators, something to help you along your apartment syndication journey.
Today I want to give an update on the market, and more specifically, the update on forecasted rental demand. So as you know, before the outbreak of COVID-19, we were doing some episodes focused on different market factors and different markets, top 10 markets for rent growth, for multifamily pricing, for cap rates, market expanding and contracting, and in a sense, all of that has been on pause or more likely reset, and now people are starting to come out with some more studies, some more forecasts on where they see real estate going.
Before I get into that, when I read this article, it had sparked a memory of an episode that I’m pretty sure we talked about on syndication school. I’m not exactly sure when, but the article that syndication school episode was based on, we wrote back in the beginning of 2019. So this was January 2019, and so over a year and a half ago from the recording of this episode. The blog post was entitled, “Why I’m Confident Multifamily Will Thrive During And After The Next Economic Recession,” and in summary, historically, homeownership rates, so people who are owner-occupying a home, decreases during economic recessions, and then once the economy begins to turn around and expands again, people will start moving back in their homes and homeownership rates increase. So historically, over the past nine or so recession/expansion cycles, that has been the case. Homeownership goes up during expansions and down during the recessions. But this was not the case for 2008.
So during the post-2008 economic expansion, which was from 2008 until very, very recently, in this case, 2019 when this was written, the Dow Jones had tripled, the unemployment rate had been cut in half, and the GDP rose by nearly $5 trillion. So during this massive economic expansion, one would expect the homeownership rate to also increase. However, during that period of that economic expansion, the renter population increased nearly every single year over that ten year time period or so. It grew by more than 25% from what it was at the beginning of the economic expansion. So it grew by more than 25%, so the exact opposite of what has happened historically.
Now, there are a lot of reasons why. At the time, others were predicting why people were deciding to rent as opposed to own during the most recent economic expansion and it is because of things like high student debt, things like poor credit, things like tighter lending criteria after the crash, people began to start families later, so they are renting longer, and the overall inability to afford the down payment for a home. Since, at the time, these reasons weren’t going away, we predicted that when the next economic recession occurs, the same percentage of people or more will rent. We actually thought it would be more, but the very least it’d be the same percentage, and then after the economic recession has ended and the economy begins to turn around and expand again, we made the same prediction that the number of renters would either be the same or more. Fast forward a year and a half, and many experts believe that we have entered the next economic recession due in part to the Coronavirus pandemic. So, as I mentioned before, what are people saying about multifamily?
So there’s a study that was recently released by an apartment properties acquisition and management company called the Middleburg Communities, and there was a GlobeSt article – so I found it in GlobeSt – that’s published on June 17th entitled, “As Homeownership Declines, Demand for Rental Housing To Climb.” So I’m just going to read an excerpt from that article:
“The June 11 report projects a decline in US homeownership to 62.1%, the lowest rate in more than 20 years, before a partial recovery to 63.6% in 2025. Depending on the effects of the recession, the demand for rental housing will increase somewhere between 33% and 49% over that time period, the report concludes.”
So over the next five years, they’re assuming that the homeownership rate is going to continue to drop, because they believe we’re in a recession, and then eventually it’ll start recovering by the end of this five year period to 63.6%, and depending on their worst-case scenario or best-case scenario, because of this drop in US homeownership – now the only other thing people can do besides owning is renting – then they expect the demand for rental housing/rentals to increase a maximum of nearly 50%. So obviously really, really good news for people who are in rentals, very good for you who’s listening who is an apartment syndicator, or aspiring apartment syndicator, because you’ve got a huge increase in rental demand being projected. So the reason why, in the beginning, I went over the previous article – not because we predicted this would happen; it was just based off of looking at the trends. But what’s interesting is the reasons why this group, this company, made these projections; why they believe that the rentals are going to decline.
So let me continue reading. “The analysis points to changing demographics playing a role in the changing demands. Married households are more likely to own homes, and their numbers are declining. The numbers of households with incomes of more than $120,000 is expected to drop while those with incomes of less than $30,000 are projected to rise.” So just right there, they said that people are not going to be able– people are getting married later and forming families later, which is one of the reasons we had mentioned year and a half ago. The second reason was no people’s household incomes are expected to decline, which means we’re not going to be able to afford home payments; they’re not gonna be able to afford down payments, which is another factor that we predicted a year and a half ago.
So let’s keep reading. It says, “But demographics alone are a weak explanation for homeownership shifts, according to the report. Student loan debt, inability to make a down payment and tightened lending standards.” So those are the other three things that we mentioned, or three other things we mentioned a year and a half ago, and then, “High rents and a shift in preferences play a role, too. The report also zeroed in on three variables that offer a reasonable explanation for slumping homeownership: lending standards, as measured by the average credit scores of mortgages, median net worth by age of householder, and the previous year’s deviation from the demographic-based projection.” Essentially, he’s calling this inertia or momentum.
So very interesting to see that data; very interesting to see our article we had written a year and a half ago be essentially repeated with different numbers a year and a half later. And then the study also provided extra variables as to why the homeownership rates are expected to decline, and the demand for rental housing is expected to increase.
The last part that I have in here is that “The report notes that additional stimulus packages from the federal government could bolster homeownership rates.” I do know as recently as last week, there were rumblings of an additional stimulus package being created. So it’s too early to tell for that. So as of now, without that– but I’m pretty sure that– I’m sure that this study had taken that into account and still expects the demand for rental housing to decrease.
So during the economic expansion– so during the previous economic expansion, homeownership decreased because of the fact that people are starting families later, student loan debt, inability to make down payments, tightened lending standards… So the study reinforces our thoughts on multifamily investing. It reinforces our prediction that during this recession, demand for rental housing is going to go up, and that we’ve made a change from being a nation of owning to a nation of renting, at least for now.
Now, next week– because I did come across an interesting article today that was talking about where is this demand going to be because the demand for multifamily housing is not going to be increased by 50% everywhere. In some places it’s going to be– it’s not going to increase at all. Some places might go down, some places might go up a little bit; in other places, it’s going to go up a lot, a ton, because this 50% is just an average. So I found an article recently in The Guardian about where people are moving based off of this most recent pandemic, because this– from my reading of this study, it didn’t necessarily take the Coronavirus into effect. So it’s essentially saying that the recession was started by student loan debt, inability to make housing payments, tightening lending standards, things like that. Not necessarily the– in part, at least, in part by that, but not necessarily Coronavirus. So add the Coronavirus into the mix and that shifts demand for multifamily up more most likely, but to certain areas of the country. So we’ll talk about that next week.
That’s gonna conclude this episode — a little shorter one than usual, but still, I think this is very powerful information in case you have not seen this study or heard of this study or have been keeping your finger on the pulse of multifamily demand, of rental demands, forecasts in the future.
So thanks for listening, and make sure you check out some of the other syndication school episodes about the how-tos of apartment syndications. Make sure you check out the free documents we have available. Those are all at syndicationschool.com Thank you for listening. Have a best ever day and I’ll talk to you tomorrow.
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