Could Homeownership Derail the Rental Market In Secondary Cities?

During the pandemic, people fled the urban core for secondary metros across the country. The great relocation, as some have called it, wasn’t necessarily a new trend; people had been slowly leaving big cities in favor of affordability in smaller cities, and last year, the trend exploded. In response, apartment markets in these cities are seeing high double digit rent growth, record low vacancy rates and new construction activity—but if these new folks in town are headed for homeownership, does the apartment boom already have a ticking clock?

The short answer is no. “This has been a question since I have been in the industry: Is there a binary relationship between rentership and homeownership. It really hasn’t emerged. Both have benefited together,” Blake Okland, vice chairman and head of multifamily investment sales at Newmark, tells GlobeSt.com.

In some small markets, Okland can imagine a future where there could be some crossover, but for the majority of the market, he says there is little overlap. “The conventional multifamily for-rent product, the single-family for-rent product and for-sale product can co-exist in an ecosystem that is relatively in balance,” explains Okland. “In low-barrier-to-entry ex-urban locations, it might be a threat in the future, but it has not manifested itself yet.”

However, Okland says there is a growing relationship between single-family rental housing and apartment product, and it is something that new entrants into the single-family rental market should track. “The real dislocation in single-family rental housing is the same problem that has happened in multifamily housing,” he says. “There was intense development in specific submarkets at the higher end of the quality spectrum and cost spectrum in multifamily, and now that is happening in single-family. There is not a lot of affordable stock, and it is very difficult to build.”

Single-family rentals will also face near-term challenges with new construction, making it hard to meet new demand. “The single-family rental market is historically very scattered, so it is very hard to aggregate. There is so much capital that wants to be in this space, and the quickest way to get there is to build it,” he says, adding that the pandemic has dramatically changed supply chains and construction costs. “Supply chains have been transformed in a slightly negative way, and that elongates supply delivery timelines. That impacts costs,” says Okland. “Infrastructure spending on the supply chain is another challenge because it could take construction capacity out of the market.”

The single-family rental market is expanding alongside apartments in many markets across the country, but ultimately there is enough market demand to meet the supply in all of these housing segments.