Despite variability in the commercial real estate market, Bluerock still maintains high conviction in the residential sector. We hold confidence in the sector due to:
“The U.S. still faces a long-term housing shortage that should bolster rental demand over the next five years.”
JOHN CHANG, MARCUS & MILLICHAP
The residential sector is still on solid footing despite a large amount of supply that was delivered during 2022 and is expected to be delivered in 2023. CBRE states that over the next two years, a near-record 716,000 new multifamily housing units will be delivered. Despite this large increase in supply, CBRE forecasts national vacancy to peak at only 5.2%. As shown below, CBRE contemplates there is still a more than 3.0-million-unit housing shortage at the end of 2022. Additionally, CBRE projects the market will need an additional 3.5 million units by 2035 to keep up with demand, while Green Street believes an additional 4.7 million units over the next five years will be needed. This delta in supply and demand is a key driver of the residential sector’s resilient performance and is pushing the sector’s fundamentals.
Source: CBRE, Looming Multifamily Oversupply Likely Will Be Short-Lived, March 2023
Green Street expects this supply shortage to be exacerbated by the unfavorable capital market conditions stifling development economics on a go-forward basis. As shown below, new supply is forecasted to fall sharply after 2024, when projects with prior financing have been completed.
Source: Green Street, Residential Sector Update, March 2023
Multiple sources including Green Street, Marcus & Millichap, CBRE, and Axiometrics are forecasting healthy occupancy and positive rent growth into the foreseeable future. As shown below, Axiometrics projects 17.9% cumulative rent growth and 95.1% average occupancy through Q2 2028.
Source: Axiometrics National Market Trends, Q1 2023
Historically high homeownership prices continue to keep renters out of the housing market. As shown below home prices have reached record price appreciation…
Source: Marcus & Millichap 2023 Multifamily National Investment Forecast
…which has led to the national affordability gap hitting extreme levels. The national affordability gap doubled year-over-year in Q3 2022. This significant difference in costs drives renter demand at a time when inflation has eroded household budgets.
Additionally, according to Green Street, the homeownership rate will decline over the next several years. They say this is being caused by median home prices escalating 40% over the past three years, coupled with mortgage rates doubling into the mid-6% range. An aging renter base should be expected to move into their homeownership age, but due to the unaffordability of homeownership, will be forced to rent longer.
Source: Green Street Apartment Outlook 2023
Rental demand is also being driven by a change in demographics. According to Green Street, The 25–34-year-old cohort is shrinking and many people in this age range are now choosing to live alone. This is caused by strong wage growth and the need for more space driven by work from home becoming commonplace. Additionally, multifamily’s darling generation, the millennials, has just surpassed the median age of marriage and is now approaching the median age for purchasing their first home. Due to higher barriers to homeownership, demand that would have gone toward owning will be forced to continue seeking rental options. Even when economic headwinds abate, these considerations will direct more residents to apartments and encourage tenants to rent longer into life.
Source: Marcus & Millichap 2023 Multifamily National Investment Forecast
According to John Burns Consulting, almost all single-family rental homes are owned by mom-and-pop investors. As shown below, only 3% of the single-family rental market is owned by institutional investors. This provides a significant opportunity for institutions to earn economies of scale and outsized growth in the subsector.
Source: John Burns Consulting, Single-Family Rental Analysis, and Forecast, December 2022
Despite a mean-reversion from Pandemic Era performance, the residential sector will continue to provide positive returns due to the national housing shortage, strong fundamentals, unaffordable homeownership, demographic shifts, and institutional opportunity in the single-family rental sector.
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