Future Renters and Apartment Demand Factors

As the apartment industry runs through its cycles, changes in apartment demand and demographics are fostered by economic fluctuation. And with the expectation that the economy is on the cusp of a new direction, multifamily strategies are likely to shift.

Various factors dictate apartment demand and how future renters look. In the current cycle, the industry adjusted to historic household changes and embraced young, single renters and empty nesters looking to downsize. But as younger renters finally start to marry, settle down and have kids and the working-age population growth slows, the nation’s apartment makeup is bound to look different over the next few years.

The strength of the economy is sure to be a factor on just how multifamily is reshaped. It’s likely going to be sooner than later that the already softening industry shifts focus with maturation of some demographics and depletion of others.

Economists predict the economy will recede by 2020

Economists say conditions for a recession are edging closer and that markets will start feeling the squeeze in earnest by 2020.

A signal, notes RealPage Chief Economist Greg Willett, is that the gap between interest for long-term and short-term treasury notes is tightening. Typically, long-term rates are higher than short-term but when the two intersect conditions have historically been ripe for a recession.

The gap has steadily closed since the fall of 2013, according to the Federal Reserve Bank of St. Louis, and dipped to its tightest in July. This fall, when the Federal Reserve is expected to boost interest rates by 25 basis points, it could get even tighter.

“In the best case, that’s going to put us at even at that point,” Willett said at RealWorld. “For the last seven times you’ve had this inflection between these two measures, we’ve had a recession within 18 months.”

Willett said it’s not a guarantee but multifamily investors and operators should nonetheless be prepared that one of the longest, most fruitful cycles the apartment industry has enjoyed is approaching the finish line.

“You can make arguments why it doesn’t matter to the degree this has occurred in the past, but I think if you’re planning for business strategies, given indicators out there at this point, it’s irresponsible to assume everything is still hunky dory two years from now.”

For the short term, indicators point to healthy apartment market

Willett said indicators continue to point to a healthy apartment market at least for the short term. A large block of additional apartment deliveries lies ahead and apartment demand appears favorable to cover the new inventory.

New supply volumes are likely to continue at an annual pace above 300,000-320,000 units through mid-2019, levels last seen in the 1980s, according to RealPage Analytics. RealPage analysts expect that plateau to remain for the foreseeable future.

Helping to fuel demand is that employment growth is pointing to new household formation. U.S. monthly job production, is healthy and on pace with 2016-17 levels despite tapering from its peak in 2014 when 2.5 million jobs were added.

Willett notes that the return of manufacturing growth is a key storyline in the recent overall employment picture but another is that increased investment by smaller businesses points to significant confidences in the economy’s direction.

A National Federation of Independent Business survey that measures small business expansion and investment posted its highest readings beginning in the fall and they’ve carried into 2018.

“Jobs being created now are actually coming in small businesses rather than corporate employment,” Willett said. “Small business owners tend to like some of the policies we’re seeing now and expanding.”

Also, solid consumer confidence is helping to spur retail spending, a key component of economic expansion.

Demographics and misaligned employer needs could signal change

But the demographics and misalignment of employer needs could make it tough to maintain today’s economic expansion pace in the next couple of years.

AARP and the Census Bureau report that 10,000 Baby Boomers are turning 65 each day, which means growth in the working-age population is slowing meaningfully. Also, today’s 6.7 million job openings slightly exceeds the number of unemployed people who are looking for work.

In addition, wage growth at 2.7 percent, as reported by the Bureau of Labor Statistics, is topping rent growth.

Willett reminds that a growing segment in rental housing is single-family homes. Build-to