Back By: Steven Iannaccone and Erin Elferdink
Last month we released a thought leadership piece on the evolution of build-for-rent housing. Now, let us explore who has been driving demand for the product type.
In our view, build-for-rent demand is being driven by households that are entering a stage of life where single-family housing better suits their needs, but during a time where housing affordability challenges are keeping many would-be homebuyers out of the for-sale market. The COVID-19 pandemic further exacerbated this shift by increasing consumer demand for less dense housing and subsequently amplifying the strain on available and affordable living options. In fact, the national for-sale inventory reached record-lows during the pandemic, specifically during the period of July 2020 through January 2021, when the housing supply ratio fluctuated between 3.5 to 4.0 months of inventory, representing the lowest amount on record since the U.S. Census Bureau began tracking the metric in 1963.
The result is increased demand for rental housing that meets the needs of both maturing renter households ready to move up from traditional apartments but not ready or able to buy and already mature households that are seeking the convenience and affordability of renting.
Build-for-Rent Innovation
At Halstatt, we view build-for-rent housing as an elegant solution to the overwhelming demand for living accommodations that are located outside of large city-centers, provide easy access to outdoor spaces and luxury amenities, and offer larger floor plans that accommodate working or learning from home.
In addition, BFR housing provides an affordable alternative for price-sensitive, would-be home buyers that are unable to purchase a home due to significant home price appreciation that occurred because of sustained low interest rates and overall lack of supply within the residential for-sale market.
Millennials Driving the Market
The demand for affordable housing is most apparent within the Millennial age group, which is also the largest existing generational cohort.
Over the last several years, older Millennials transitioned into their household formation years, where moving out of an apartment and into a single-family residence has historically been a part of the American dream, albeit with homeownership attached. As reported by RCLCO, the homeownership rate of Millennial households is below that of Gen Xers and Baby Boomers at the same age, in part because they’ve saved less for a down-payment due to economic circumstances, student loans, and other consumer debts. While many lack the resources to purchase, they are attracted to the lower density and private outdoor spaces that single-family rentals offer, but without the down payment and commitment of ownership.
According to CNBC, 61% of Millennials between ages 25 and 34 have less than $10,000 in their savings accounts, and 43% have saved less than $3,000 for a down payment, as stated in a Unison Home Buyer Survey. Looking at Lee County in Florida as an example, the current median home price is $369.5K, which when using a customary 20% down payment, would require $73,900 to be paid upfront – much more than what the average millennial can afford. Minimal savings, rising inflation, stagnant wages, paired with growing student loan debt have all caused many millennials to be priced out of the for-sale market, which in turn has increased the need and the demand for BFR products.
Lifestyle Renting
It is also important to note that many households, including millennials, make a conscious decision to rent not simply because it is more affordable, but because they prefer the intangible benefits of renting, like the low maintenance, high flexibility, and access to community amenities. Those who rent out of choice rather than circumstance are considered lifestyle renters, which are defined by Yardi as households with above-average incomes that have the capability to buy a home but prefer to live in amenity-rich, high-quality apartments.
According to Harvard University’s 2022 rental housing study, higher-income households have increasingly turned to the rental market in recent years, driving nearly 70% of total renter household growth between 2009 and 2019. Until 2020, the share of higher-earning Millennial rental applicants was rising slowly, but as seen in a recent RentGrow Survey, 2021 marked a significant spike, when 43% of all lease applications were done by individuals within the cohort.
Lifestyle renters are attracted to properties that offer quality finishes and attractive common area amenities, and these renters typically focus on an environment providing a more social experience – all defining qualities of the emerging build-for-rent product type.
Millennials Age into Build-for-Rent
It should not be a surprise that Millennials are the target renters for build-for-rent communities. As many will remember the Class A multifamily boom spurred by Millennials over a decade ago – when most apartments were in-line with what we would consider workforce housing and there were few true Class A+ luxury apartments within desirable urban locations. As evidenced in the chart below, the number of Class A multifamily construction starts in the U.S. was below 120,000 units per year from 2000-2011, However, in 2012, construction starts began to greatly exceed historical levels, which correlates to when the average Millennial was 24 years old, becoming a young professional, and searching for housing solutions.
Millennial preferences for ample community amenities, state-of-the-art technology, and walking distance to retail and entertainment hubs all heavily shaped the Class A multifamily product type being delivered. Now, as this generation enters the next phase of life their needs have evolved to include demand for larger living spaces to start families, while still expecting the same living standards to which they have grown accustomed. Build-for-rent communities meet these growing needs and provide an elevated product type that is differentiated from the existing traditional multifamily supply.
Demographic Shifts & Lifestyle Preferences Drive Demand
Of course, there are other demographic segments that we expect will be renters of the BFR product type. For example, households with shifting preferences that are used to living in a detached home may also find single-family rentals attractive – that may be empty nesters who are looking to downsize or a newly divorced individual with children who is in need of a new living situation. Conversely, there are others who simply prefer the flexibility that comes with renting, some who value the ability to try out an area before making a home purchase, others who are professionals that often need to relocate for work, and those that are new grandparents who wish to be near their grandchildren. Therefore, even though Millennials’ needs may have been heavily influential on shaping the BFR product type, there are certainly many other demographic cohorts that view build-for-rent communities as an ideal rental offering for their needs.
Halstatt’s first and second pieces defined build-for-rent communities and discussed who these communities are expecting to have as residents – don’t miss our next and final piece in the series, where we’ll take a closer look at the institutional investor frenzy that has further accelerated the BFR trend.
