APARTMENT DEMAND FOR THE NEXT 15 YEARS · APARTMENT DEMAND * FOR U.S., STATES & 50 METROS Hoyt...

APARTMENT DEMAND

FOR THE NEXT 15 YEARSCANWEMEET THENEED?

#LiveAtUrban

U.S. APARTMENT DEMAND– A FORWARD LOOK

Prepared by: Hoyt Advisory Services, Dinn Focused Marketing Inc.,

Whitegate Real Estate Advisors, LLC

July 2017

APARTMENT DEMAND* FOR U.S., STATES & 50 METROS

Hoyt Advisory Services Team:

*Defined for this study as rental apartment buildings that include 5 or more units.

7/13/2017 2

Dr. Norm Miller Dr. Jeffrey D. Fisher Michael J. Dinn, CRE® Paige Mueller, CRE®

University of San Diego

Ernest Hahn Chair and

Professor of Real Estate

Finance

Indiana University

Professor Emeritus

Whitegate Real Estate

Advisors, LLC

Dinn Focused Marketing, Inc.

KEY FACTORS AND ASSUMPTIONS

▪ Study focuses on Properties with 5+ Units▪ Population, households, size & headship rates (at US, State & MSA level)

Renter vs OwnerBy age, race & nationality

▪ Components of change: natural increase, migration & immigration

▪ Tenure: The Rent vs Own Decision (Forecast at US, State and MSA level)Public PoliciesInflationAge, race & nationalityHousehold balance sheetsHousing prices & costsOther economic & capital market factors

7/13/2017 3

KEY FACTORS AND ASSUMPTIONS, CONTD.

▪ Homelessness

▪ Natural vacancy

▪ Obsolescence

▪ Characteristics of Renters and Rental Housing

▪ What is the size of the current stock?Which data source is more complete?Size & quality variancesConsistency among geographies and between real estate to demographic data

▪ Given the mature nature of the economic cycle, we assume two recessions occur by 2030

7/13/2017 4

March 2, 2017 5

O: 1 Detached52%

O: 1 Attached4%

O: 2-41%

O: 5+2%

O: Mobile Homes / Other

4%

R: 1 Detached10%

R: 1 Attached2%

R: 5+16%

R: Mobile Homes / Other

2%

RENTAL BUILDINGS WITH 5 OR MORE UNITS ACCOUNT FOR 16% OF TOTAL U.S. HOUSING INVENTORY

US POPULATION IS AGING

7/13/2017 6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1960 1970 1980 1990 2000 2010 2016 2020 2030

Perc

ent

Ho

use

ho

lds

Households by Age of Householder

Under 25 25 to 29 years 30 to 34 years 35 to 44 years

45 to 54 years 55 to 64 years 65 to 74 years 75 years and olderSource: U.S. Census Bureau

65% OF THE RENTAL POPULATION IS 35 YEARS OR OLDER

7/13/2017 7

9%

26%

20%

17%

13%

8%

4% 3%

Renter Population by Age

15-24 25-34 35-44 45-54 55-64 65-74 75-84 85+Source: U.S. Census Bureau

YOUNGER HOUSEHOLDERS CONTINUE TO DELAY MARRIAGE

AND …

7/13/2017 8

20

21

22

23

24

25

26

27

28

29

30

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

r2

01

22

01

32

01

4s

20

15

20

16

Age at First Marriage

Men WomenSource: U.S. Census Bureau

YOUNGER HOUSEHOLDERS CONTINUE TO DELAY CHILDBIRTH

7/13/2017 9

Mean Age by Birth Order 2010-2014

Source: CDC/NCHS, Natl Vital Statistics System

7/13/2017 10

MULTIFAMILY DEMAND CONCENTRATED IN HOUSEHOLDS

OVER 35 YEARS

(1,000)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2000-10 2010-20 2020-30

00

0s

Change in Rental Households by Age Cohort

<25 25-34 35-44 45-54 55-64 65+Source: U.S. Census Bureau

DEMOGRAPHIC FUNDAMENTALS: SLOWING GROWTH, MORE

DEPENDENT ON IMMIGRATION

7/13/2017 11

0

500

1,000

1,500

2,000

2,500

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

20

15

20

18

20

21

20

24

20

27

20

30

US Natural Internal Population Increase vs Immigration (000's)

Net International Migration Natural Increase

forecast

Source: U.S. Census Bureau, Moody’s, U.S. Dept. of Homeland Security, Hoyt Advisory Services

INTL IMMIGRATION CREATES MORE OF THE GROWTH IN

SLOW-GROWTH STATES

7/13/2017 12

5 % - 10%

INTERNATIONAL IMMIGRANTS MORE LIKELY TO BE RENTAL

HOUSEHOLDS

7/13/2017 13

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Renter Rates in 2015 by Select States

Moved from Abroad Domestic RentalsSource: U.S. Census Bureau

HOMEOWNERSHIP RATES ARE LOWER FOR NON-WHITE

HOUSEHOLDS

7/13/2017 14

0

10

20

30

40

50

60

70

80

Non-Hispanic White Alone Black Alone Asian/NativeHawaiian/Pacific Islander

Hispanic (of any race)

Per

cen

t

Homeownership Rate 2016 Avg

Source: U.S. Census Bureau

7/13/2017 15

MULTIFAMILY OWNERS MUST CATER TO A CHANGING TENANT BASE

Hispanic households will account for 55% of all population growth through 2030

(500,000)

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2015 2017 2019 2021 2023 2025 2027 2029

YoY

Pop

ula

tio

n C

han

ge

White Non-Hispanic Black, not Hispanic All Other Hispanic, any Race

Source: U.S. Census Bureau

WHILE HOUSEHOLDS ARE SMALLER FROM DELAYED

FAMILIES AND AGING …

7/13/2017 16

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1960 1970 1980 1990 2000 2010 2016

% o

f To

tal H

ou

seh

old

s

Number of People in Household

Households by Size

One Two Three Four Five Six Seven or moreSource: U.S. Census Bureau

AVERAGE HOUSEHOLD SIZE IS LARGER FOR NON-WHITE AND

HISPANIC SECTORS

7/13/2017 17

1.00

1.50

2.00

2.50

3.00

3.50

White Non-Hispanic Black, not Hispanic All Other Hispanic, any Race

Household Size

2014 2015

Although household size is declining even in the Hispanic sector

Source: U.S. Census Bureau

THE OWN VS. RENT DECISION:POLICY CHANGES DRIVE 70% OF VARIANCE IN HOMEOWNERSHIP

7/13/2017 18

59

60

61

62

63

64

65

66

67

68

69

-5%

0%

5%

10%

15%

20%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Ho

meo

wn

ersh

ip R

ate

%

U.S. Homeownership Rate

30 yr Mortgage Rate GDP Growth Home Ownership Rate

Lines indicate a change in national legislation that impacted lending and/or housing markets factored into the homeownership estimation model

Hangover from 2008 Recession: Slow recovery for first-time homebuyers

▪ Highest unemployment rates in under 35 age cohorts

▪ 15-24 and 45-54 age cohorts had the slowest recovery in median household

income from 2005 to 2010

▪ Student loans as % of GDP doubled from 2006 to 2012

Long-term factors slowing homeownership rates:

▪ Household Income growth since 1970 is only occurring in households in the 80th

percentile and higher of incomes

▪ Age at first marriage up from 25 in 1980 to 29 in 2016 for men

▪ Women’s age of first childbirth has increased to over 26

▪ International immigrants are much more likely to rent

7/13/2017 19

DEMOGRAPHICS DRIVING HIGHER RENTERSHIP RATES

STEEP DOWNTURN IN HOME OWNERSHIP SINCE 2005 FOR

YOUNGER HOUSEHOLDS

7/13/2017 20

HAS notes cyclical pressures are easing with unemployment rate relatively low and more stabilized homeownership rates for younger householders.

30

40

50

60

70

80

90

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

U.S. Homeownership Rate by Age Segment

Under 35 35-44 45-54 55-64 65+

Source: U.S. Census Bureau

7/13/2017 21

HOMEOWNERSHIP RATES WILL CONTINUE TO DECLINE SLIGHTLY

Upward Pressure:

▪ Aging population

▪ Low jobless rate

▪ Rising inflation?

Downward Pressure:

▪ Pop growth from immigration

▪ Higher rental rates for non-white households

▪ Delayed family formations

▪ Lower inflation rate

▪ Inevitable rise in interest rates

▪ Low housing affordability in many sectors

Uncertainties:

▪ Public policy on lending and immigration

55%

57%

59%

61%

63%

65%

67%

69%

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

7/13/2017 22

4.6 MILLION MULTIFAMILY UNITS NEEDED BY 2030

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

Apt 5+ Units Needed

7/13/2017 23

> 1 MILLION UNITS NEEDED IN TOP 5 MARKETS

- 50,000 100,000 150,000 200,000 250,000 300,000

PhiladelphiaRiversidePortlandChicago

San AntonioDenverBoston

MinneapolisCharlotte

San FranciscoSan Diego

TampaRaleigh

Las VegasSeattleAustin

Washington, DCOrlandoPhoenix

Los AngelesAtlanta

Miami-Ft. LauderdaleHouston

Dallas-Ft. WorthNew York

# Units Needed 2016-2030

7/13/2017 24

NEW UNITS NEEDED THROUGH 2030

0-10

11-10

21-40

41-80

80+

000s

7/13/2017 25

NEW UNITS NEEDED THROUGH 2030 % GROWTH

0-0.5

0.6-1.0

1.1-1.5

1.5-2.0

2.1+

% pa

7/13/2017 26

TOP LINE NUMBERS HIDE IMPORTANT NEEDS:BOOMER MARKETS: GROWTH DOMINATED BY 65+ AGE GROUP

7/13/2017 27

GROWTH DOMINATED BY 65+ AGE GROUP

-8

-6

-4

-2

0

2

4

6

8

10

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

Tho

usa

nd

s

Detroit - New Rental Households

15-24 25-34 35-44 45-54 55-64 65+

Source: Moody’s Analytics, U.S. Census

• Generally low growth markets - but will be need for 65+ renter housing

• Growth in 65+ group is nearly the same or larger than growth in all other age segments

• Outmigration of young workers (15-34)

• Often heavily dependent on international in-migration for growth

• Often high homeownership rates

• Generally high proportion of renters have incomes < $25,000

• Often older housing stock

GEN – Z MARKETS

March 2, 2017 28

7/13/2017 29

GEN-Z MARKETS

Source: Moody’s Analytics, U.S. Census

0

2

4

6

8

10

12

14

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

Tho

usa

nd

s

New Rental Households

15-24 25-34 35-44 45-54 55-64 65+

• >30% of renter HH growth will come from 15-34 age group

• High growth markets

• Generally 65+ group is small part of renter household growth

• Generally newer rental stock in place / lower STAR % markets

• Land available for new development

• Less dependence on international in-migration as markets have strong domestic migration and natural growth

• More affordable markets (as measured by % of income paid for rent)

COASTAL MARKETS MORE LIKELY TO HAVE SUPPLY POLICY

RESTRICTIONS

7/13/2017 30

RENTAL PROPERTIES LESS AFFORDABLE IN MARKETS WITH

SUPPLY RESTRICTIONS

7/13/2017 31

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30% 35% 40% 45% 50% 55%

Sup

ply

Re

stri

ctio

n In

de

x

% Households Spending 35%+ of Gross Income on Rent

Supply Restrictions and Affordability

SUPPLY RESTRICTED MARKETS TEND TO HAVE LESS

INVENTORY GROWTH

7/13/2017 32

RENTERS IN SOME AREAS SPEND SIGNIFICANT SHARE OF

INCOME ON RENT

7/13/2017 33

7/13/2017 34

AFFORDABILITY ISSUES VARY

Low Income

High Income

Regulatory

Land Availability

SAMPLE – HIGH PRODUCTIVITY / LOW AFFORDABILITY

MARKETS

March 2, 2017 35

0%

5%

10%

15%

20%

25%

30%

35%

40%

< $20 $25-49.9 $50-$74.9 $75-$99.9 $100 to$149.9

$150+

% o

f To

tal R

ente

r H

ou

seh

old

s

Houshold Income (000s)

San Francisco Renter Households by Income

US San Francisco

• 43% of San Francisco renter household incomes are > $75,000

• At 35% of gross income = $2,187 monthly rent for a household earning $75,000

• 31% earn < $35,000 = $1,021 monthly rent for a household earning $35,000

NEW CONSTRUCTION UNAFFORDABLE TO MOST HOUSEHOLDS

March 2, 2017 36

• No listings in San Francisco SOMA market for < $2,000 per month.

• 2 listings less than $2,200

AVERAGE RENTS REQUIRE HIGH INCOMES

March 2, 2017 37

SubmarketRent per

Unit $

Central San Mateo 3,025.48

Civic Center/Downtown 3,110.60

Haight Ashbury/Western Addition 4,060.86

North Marin 2,753.09

North San Mateo 2,608.75

Russian Hill/Embarcadero 3,402.46

South Marin 3,274.63

South of Market 3,848.47

South San Mateo 3,567.09

West San Francisco 3,458.93

Total: San Francisco 3,279.57

Average San Francisco rent requires a household income of $112,000 = < 30% of households

Source: CBRE Econometrics

SERVICE PROVIDERS CANNOT AFFORD HOUSING IN LOW

AFFORDABILITY AREAS

7/13/2017 38

▪ A Redfin study found that only 17% of California homes for sale were affordable to an average teacher in 2016, down from 30% in 2012.

▪ Affordability is worse in major metro areas

Teacher Salary % of Income Needed for Average RentSan Francisco 48%Alameda 67%Contra Costa 69%

▪ With average incomes of just over $71,000 in the San Francisco Bay Area, teachers can afford rents that are 48% of average rents in San Francisco and about 67% of average rents in the East Bay*

Sources: Redfin, CBRE Econometrics, HAS. *Assumes paying 35% of after-tax income on rents in Walnut Creek, San Ramon and East Alameda Co.

WHEN OWNED AND RENTAL HOUSING IS UNAFFORDABLE, STATES RISK OUT-MIGRATION

March 2, 2017 39

Los Angeles New York

31% OF RENTERS EARN LESS THAN $20,000

7/13/2017 40

RENOVATION NEEDS: 11.7 MIL UNITS BUILT BEFORE 1980

7/13/2017 41

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

O: 1 O: 2-4 O: 5+ O: M / OTH R: 1 R: 2-4 R: 5+ R: M / OTH

Housing Stock Composition by Age and Type of Property

B1939 1940-59 1960-79 1980-99 2000s 2010+

O: owned, then by unit count

R : rented, then by unit count

Source: U.S. Census Bureau

7/13/2017 42

OLDER RENTAL STOCK CONCENTRATED IN THE NORTHEAST

1-4 UNIT BUILDINGS NOT PART OF INSTITUTIONAL STOCK = 24% OF

RENTAL MARKET, ALMOST AS LARGE AS SINGLE-FAMILY RENTALS

March 2, 2017 43

Single-family Attached

6%

2 Rental Units8%

3-4 Rental Units10%

5-9 Rental Units12%

10-29 Rental Units11%

20-49 Rental Units8%

50 or more Units12%

Mobile Home or Other

5%

2015 National Distribution of Occupied Rental Housing Stockby Type

Source: U. S. Census Bureau, 2015 American Community Survey 5-year Estimate

SECOND TIER AFFORDABLE RENTALS

7/13/2017 44

Better rental data reveals a large share of smaller rental housing found in older neighborhoods. Design and age often obscure this stock from survey, yet it remains an affordable choice for less affluent renters. Estimates of up to 44% of all existing national rental stock are STAR units, led by California, New York, Michigan and Ohio.

First Tier Multifamily39%

Second Tier Affordable Rentals

25%

Rental Homes36%

Second Tier Affordable Rentals: STARSource: U.S. Census Bureau, CoStar

STAR UNITS > HALF OF MARKET IN SOME CA MARKETS

March 2, 2017 45

APARTMENT DEMAND

FOR THE NEXT 15 YEARSCANWEMEET THENEED?

#LiveAtUrban

Affordable Apartment Demand: A Practioner’s Perspective

Priya Jayachandran

Senior Vice President, Housing Development

Volunteers of America

July 13, 2017

• Introduction

• Context

• Subsidized Housing Experience

• Workforce Housing Experience

• Ideas for Future

Agenda

Context: Affordable rental units are disappearing

Housing Units (Thousands) % of Housing Stock % of Rental Stock

2001 2013 Yearly change 2001 2013 2001 2013

Non-market, extremely low rent, and very low rent 21,597 19,218 -198.25 18.3% 14.5% 57.8% 43.1%

Extremely low rent and very low rent 13,264 11,680 -132 11.2% 8.8% 35.5% 26.2%

All rental units 37,392 44,564 597.67 31.6% 33.5% 100.0% 100.0%

Housing Stock 118,196 132,832 1,219.67 100.0% 100%

Source: Eggers, Frederick J., and Moumen, Fouad. “American Housing Survey Rental Market Dynamics: 2011-2013”

3

Subsidized Housing (Section 8, 202, LIHTC, etc)

• All federal rental assistance programs (but for a small 811 program) have

been repealed or unfunded

• Current funding supports renewals of existing contracts which serve only 1

in 4 families who need assistance

• LIHTC is the single largest driver of new affordable housing production but

has not kept pace with growth in demand

• Increasingly competitive landscape for new construction and preservation

• Challenges:

• Outcomes

• Scarcity

• Perception

Workforce Housing• aka Natually Occuring Affordable Housing (NOAHs)

• Typically defined within range of 60% to 120% AMI

• Predominantly Class C properties

• Hyper competitive landscape for acquisitions

• Challenges

• Quality

• Permanent Affordability

• Competition

• Outcomes

Ideas• Branding

• Innovation

• Questioning status quo

APARTMENT DEMAND

FOR THE NEXT 15 YEARSCANWEMEET THENEED?

#LiveAtUrban

1

Multifamily Market Response

July 2017

2

Take-aways

1. The Great Recession led to twin shocks (demand and supply) that stretched

and tightened multifamily rental markets.

2. The market has responded -- new construction is slowing rent growth and

slowing property value increases.

3. Today’s low yield environment (particularly in multifamily) is helping the

situation — spurring development at lower rent levels than would otherwise

be the case.

4. Over time, housing costs rise faster than inflation and incomes. Given

history we should expect and plan for that.

5. The market reaction only reaches a portion (and likely shrinking portion) of

overall demand.

3

The Great Recession led to twin shocks

(demand and supply) that stretched and

tightened multifamily rental markets.

4

Number of Owner and Renter Households, by Income and Level of

Housing Cost Burden, Selected Years (millions)

Source: MBA and Harvard’s Joint Center for Housing Studies

15 10 5 0 5 10 15 20 25 30 35 40

20 1520 1420 1320 12

20 0820 0320 01

20 1520 1420 1320 12

20 0820 0320 01

20 1520 1420 1320 12

20 0820 0320 01

20 1520 1420 1320 12

20 0820 0320 01

20 1520 1420 1320 12

20 0820 0320 01

No burden

Moderate burden

Severe burden

Less than

$15,000

$15,000 -

$29,999

$30,000 -

$44,999

$45,000 -

$74,999

$75,000

and over

Renters Owners

5

The market has responded -- new construction

is slowing rent growth and slowing property

value increases.

6

Multifamily Vacancy Rates and Units Under Construction

Source: Census

7

Multifamily Market Fundamentals

(generally professionally managed properties)

Source: REIS, NCREIF, Moody’s/Real Capital Analytics

Vacancy Rates (Percent) Year-over-year Asking Rent Growth

Year-over-year NOI Growth Among NCREIF Properties Property Prices (Index: 2007Q3 = 100)

0

1

2

3

4

5

6

7

8

9

20

01

Q1

20

02

Q1

20

03

Q1

20

04

Q1

20

05

Q1

20

06

Q1

20

07

Q1

20

08

Q1

20

09

Q1

20

10

Q1

20

11

Q1

20

12

Q1

20

13

Q1

20

14

Q1

20

15

Q1

20

16

Q1

20

17

Q1

Apartment

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

20

03

Q1

20

04

Q1

20

05

Q1

20

06

Q1

20

07

Q1

20

08

Q1

20

09

Q1

20

10

Q1

20

11

Q1

20

12

Q1

20

13

Q1

20

14

Q1

20

15

Q1

20

16

Q1

20

17

Q1

Apartment

-10%

-5%

0%

5%

10%

15%

20

03

Q1

20

04

Q1

20

05

Q1

20

06

Q1

20

07

Q1

20

08

Q1

20

09

Q1

20

10

Q1

20

11

Q1

20

12

Q1

20

13

Q1

20

14

Q1

20

15

Q1

20

16

Q1

20

17

Q1

Apartment

0

20

40

60

80

100

120

140

160

180

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Apartment

8

Today’s low yield environment (particularly in multifamily) is helping the situation — spurring development at lower rent levels than would

otherwise be the case.

9

10

Capitalization Rates for Apartment Properties

(4 quarter moving average, current value cap rates)

Source: NCREIF

11

Capitalization Rates in Selected Markets, H2 2016

Class A CBD Office (blue) and Class A Multifamily Infill (red)

Source: CBRE

12

Over time, housing costs rise faster than

inflation and incomes. Given history we should

expect and plan for that.

13

Annualized One and Ten Year Change in Shelter Costs

Source: BLS

14

Ten Year Change Shelter Costs and All Items Less Shelter

Source: BLS

- Population growth

- Urbanization & land costs

- Quality improvements

- more

15

Ten Year Change in Shelter Costs and All Items Less Shelter

– And Median Household Income

Source: BLS

16

The market reaction only reaches a portion (and

likely shrinking portion) of overall demand.

17

Number of Owner and Renter Households, by Income and Level of

Housing Cost Burden, Selected Years (millions)

Source: MBA and Harvard’s Joint Center for Housing Studies

18

Contact Information

Jamie Woodwell

Vice President | Commercial Real Estate Research

MBA

202-557-2936

jwoodwell@mba.org

APARTMENT DEMAND

FOR THE NEXT 15 YEARSCANWEMEET THENEED?

#LiveAtUrban

APARTMENT DEMAND

FOR THE NEXT 15 YEARSCANWEMEET THENEED?

#LiveAtUrban