Friday, March 27, 2009

Building Down, Rents Up: Multi-Family Fundamentals Shine

1807 Edgecliffe Schindler Apartments Silver Lake Los Angeles
The demographic patterns in this and next decade dictate that there will be strong demand for apartments that will outstrip supply.

The number of new renters will exceed the supply of apartments by as much as two times.

The homeownership rate is about 65 percent currently, and the total number of households in the US is about 120 million. “If 35 percent of the population rents, we are talking about 40 million households that are renters.”

According to the census bureau, there will be 15 million new households over the next 10 years, translating to about 1.5 million new households per year. If only 30 percent of these households rent, this will mean there will be 450,000 new rental households per year in the next 10 years.

However, apartment starts have been hovering at around only 200,000 units from the supply standpoint. “We know there is no overbuilding if this pattern holds, In fact, there will be half as many new apartments built as new renters coming into the market.” [Source]

Multi-family fundamentals are looking excellent in 2009 – for those who can afford to purchase properties.

Investors should see solid, long-term returns as household formation drives the demand for rental property. The percentage of Americans owning homes will continue to fall as downpayment requirements and lending underwriting guidelines limit the pool of homebuyers.

In the current market, buyers of apartment buildings small and large will benefit from historically low interest rate and prices that have fallen dramatically since peaking in 2007. Investors can expect price appreciation of their investments, and also increases in income as the rental market tightens and demand forces up rents.