An Exodus from Multifamily housing?

Hot off the presses in January 2017, the newest data hints to what the future might hold for multifamily rental rates, and implies that developers might be “banking on” (pun intended) one very key group of residents moving back to the single family market.

The data: 

In 2016, more than 800,000 multifamily units were added to the market. This supply absorbed some of the incredible demand that existed in key markets. If your assets are located in these markets, you might be saying – “the demand still exists, and we’re running 90%+ occupancy”. So what do the developers know that might make you change your tune? 

To answer this question, we need to investigate a few key trends. We all know Millennials are now entering the work space, which is great. This group is winning great jobs, and beginning to enjoy the benefits of becoming a “consumer”. They seem to be drawn to apartment living for many reasons: No children, minimalist lifestyle, transient desires for adventure, too much uncertainty with the economy, and the hangover from the real estate market collapse of 2008 they witnessed their parents suffer through.

The main problem (a benefit for multifamily developers) is that they are laden with student debt. They are unlikely to qualify for “stricter than previous” bank lending standards. New borrowers have to come up with a more meaningful down payment, have strong credit, and worst of all – a debt to income ratio of 1:3. In other words – the total value of a home loan cannot be greater than 33% of their income. Total debt load, that includes student loans, will limit borrowing power for this group until salary slowly advances.  Herein lies the main challenge that will keep a large percentage of Millennials in apartments for a while.  

What about Gen X and Baby Boomers? About 10 years ago, America found itself amidst one of the greatest economic meltdowns – maybe ever. The rate of bankruptcy hit an all-time high. Many Gen X’ers and Baby Boomers have a “black mark” on their credit report that lenders do not like. UNTIL this year.

That’s right – it’s been about 10 years (the amount of time until Bankruptcy clears credit reports), and hundreds of thousands of borrowers are getting out of “bad credit jail” and are now more attractive to lenders. Is it possible that developers are anticipating an exodus of apartment tenants back into the single-family product? Single-family builders have been busy! Very busy. Could this mean the days of 95% occupancy and impossibly high rental rates are at risk for multifamily managers?

Finally – The de-corporatization of America is well underway. Fastcompany.com suggests that 50% of the workforce will be working remotely by 2020. It is certainly feasible with improved track-ability and accountability performance reports from employers. The truth of the matter is that the growing millennial workforce is focused on work life balance and flex schedules. This trend allows the workforce to leave the bustle of expensive urban markets for quiet suburbs to raise a family. Make no mistake about it; The American dream is alive and well. It's only suffered minor setbacks from the recent financial crisis.