Bluerock continues to hold high conviction in the residential rental sector due to:

  • National housing shortage
  • Steep increase in the cost of housing and homeowner’s insurance coupled with a doubling in mortgage rates
  • Aging of the millennial cohort

“The affordability spread should favor apartment demand relative to single-family home purchases as household formation recovers.”

JOHN CHANG, MARCUS & MILLICHAP

The United States continues to struggle with a national housing shortage providing support for residential sector fundamentals. According to PGIM Real Estate, the United States will need an additional 15 million housing units over the next decade. As shown below, existing home inventory is 50% below the trailing average from 2011 through 2023, putting additional stress on potential home buyers.

Housing Shortage

TTM Average National Existing Home Inventory (MM)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0.8 1.3 1.8 2.3 Existing home inventory ~50% below 2.8

Source: National Multifamily Housing Council, December 2023
Chart Source: National Association of Realtors. TTM = Trailing 12 Months

Green Street expects this housing shortage to continue with supply being hampered by the unfavorable capital market conditions. As shown below, new supply is forecasted to fall sharply after 2024, when projects with prior financing have been completed. This is supported by a sharp 40% year-over-year decline in starts in January 2024.

Multifamily Supply Growth
2006 1.1% 0.9% 1.2% 1.3% 0.7% 0.7% 0.9% 1.1% 1.5% 1.8% 1.7% 1.9% 1.7% 1.7% 1.7% 1.7% 1.6% 2.0% 2.2% 1.6% 1.1% 1.4% 1.5% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026* 2027* 2028*

* Outlook estimates

Source: Green Street, Residential Sector Update March 2024

Unaffordable Homeownership

The cost of owning a home has never been higher. Mortgage rates have more than doubled since 2021, making monthly payments unaffordable for many first-time homebuyers. As shown below, the median cost to rent vs. owning a home is at its widest gap on record, reaching more than $1,300 per month, four times higher than historical averages.

Affordable Gap Between Home Payment & Average Rent Widest on Record
$3,200$2,600$2,000$1,400$800 $3,119 $1,805 $300 $1,314 2011 2012 2013 2015 2016 2014 2017 2018 2019 2020 2021 2022 2023 Home Payment Apartment Rent Monthly Payment

Source: What the Affordability Gap Means for Investors, May 2024

These conditions have made it so that only 25% of households can afford to buy a home due to the median household income to own a median priced home eclipsing $130,000. (Source: Marcus and Millichap, How Does the Housing Market Impact CRE?)

Residential: Single Family Rentals (SFR)

As folks decide on a housing option, many decide between an apartment, a single-family home for rent, or a home purchase. Looking at the relative value between the three, renting a home provides more value on a per month basis. Assuming no changes to the cost of apartments and ownership, SFR rents could climb 50% higher to return to its historical relationship.

Monthly Cost/Rent*
2019 $1,750 $0 $500 $1,000 $1,500 Monthly Cost $2,000 $2,500 $1,400 $1,260 $2,240 $2,380 $1,540 Apartment Rent* Today Total Monthly Ownership Cost** Single-Family Rentals Average 2015-2019 Avg. Spread BetweenOwnership Cost and SFR Rents Per Ft.: ~5% Today’s Spread BetweenOwnership Cost and SFR Rents Per Ft.: ~55%

* Based on 1,400SQFT
** An estimate based on REIT disclosure and Green Street assumptions. Representative of Top 25 SFR Markets.
*** Based on avg. monthly payments for a home across the Top 25 SFR markets after a 20% downpayment. Assumes a high-6% and high-3% mortgage rate today and ‘19, respectively.

Source: Green Street, Residential Insights, July 2023

The Millennial Cohort

The millennial cohort is in their prime household formation years, driving additional demand for homeownership and the single-family rental sector due to the need for more space and starting families. As shown below, the generation is growing in the 35-49 age bracket at more than twice the pace of the younger generation entering their 20’s and 30’s. Additionally, according to Bridge Investment Group, this age group is expected to expand 3.8 times faster than the broader US population over the next five years.

Millennials in Prime Household Formation Year are Driving SFR Housing Demand

Projected Population Growth %

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Ages 20-34 Ages 35-49

Source: National Association of Realtors, December 2023

Demand from Millennials in their prime household formation years is expected to reach an all-time high. Most of the ~14M SFR households are 25–34 (3.2M) and 35–44 (3.4M).

Single-Family Renter Households by Age Cohort
Under 25 1.0M 3.2M 3.4M 2.6M 2.0M 1.2M 0.8M 0.0 0.5 1.0 1.5 2.0 Number of Single-Family Renters (Millions) 2.5 3.0 3.5 4.0 25-34 Millennials Gen Z Gen X Boomers Greatest Generation 35-44 45-54 55-64 65-74 75+ There are nearly as many single-family renter households over age 55 (4.0M)as those under age 35 (4.2M).

Source: John Burns Real Estate Consulting, May 2024

Despite a mean-reversion from Pandemic Era performance, the residential sector is forecasted to provide positive returns due to the national housing shortage, strong fundamentals, unaffordable homeownership, and demographic shifts.