LOS ANGELES—Tuesday's announncement that New York-based alternative asset management firm Premium Point Investments was making its first foray into the rental housing sector, via a majority stake in Atlanta-based Residential Capital Management, helps illustrate the continuing appeal that single-family rentals hold for investors. And a new report from CBRE Group, headquartered here, makes the point that the dynamics fueling the sector's growth will be with us for awhile yet.
“It has now been 10 years since the homeownership rate peaked in the United States,” according to the report, prepared by Gleb Nechayev, senior managing economist with CBRE Econometric Advisors. “The rate has dropped by more than 450 basis points since then, and rental demand has grown by more than 7.5 million households—more than in any other decade over the past half century.”
The shift from hme ownership to rental, he writes, “has been so dramatic and persistent that it increasingly looks and feels more like a structural change than a prolonged cyclical one. While it can be debated how much further we might see the rate drop, homeownership currently faces a number of headwinds that make a shift back toward owning unlikely in the near term.”
Stirring up the headwinds, Nechayev writes, are factors ranging from slow recovery in employment after the Great Recession to “long-term socio-demographic shifts that include a large population of baby boomers approaching and entering retirement, and large numbers of echo boomers, or Millennials, joining the labor force and beginning to form households. New patterns of consumer behavior in the wake of severe shocks to housing and the economy further complicate the picture.”
The bright side to all this, however, is that the US labor market, which has now fully recovered the job losses it sustained during the Great Recession, has been in expansion mode for the past several months. “With incomes and home prices continuing to rise, one can expect that a steady drop in foreclosures and increased activity among the first-time home buyers will eventually help owner demand resume its growth,” writes Nechayev.
However, it's dificult to say whether this would be enough to stabilize the homeownership rate in the coming year. “The job market and income growth for younger workers would likely have to improve much more quickly than they are anticipated to, and credit standards would need to ease,” according to Nechayev.
While the shift away from ownership has been a boon to multifamily, “the main beneficiary of this trend has actually been the single-family rental market, which has expanded rapidly in recent years,” Nechayev writes. Single-family homes comprised 35.1% of the rental market at the end of 2013, up from 30.8% in 2005.
How much of rental demand growth's upside potential is captured by multifamily properties will depend on how competitive their rents over the next 12 to 24 months. That's true, writes Nechayev, “not only in relation to the costs of buying a single-family home or a condominium, but also in relation to single-family and condominium rents, particularly in markets that have experienced high volumes of residential sales to investors in recent years.”
The report predicts that rental demand should remain “robust” in the near term, thanks both to a relatively weak for-sale housing market and an increase in total household formation. However, Nechayev cautions, “with rents also rising rapidly, it will not be long before young households become more selective and begin exploring the possibilities of homeownership.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
