Gimme shelter: the evolution of rental housing

Demographic shifts in the United States over the next 10 years are reshaping the housing markets. The aging of millennials, changing income trends and migration away from cities are fueling demand for apartments and single-family rentals.

Millennials need their space

The older millennials, in their mid to late 30s, have largely married and are starting their families. We estimate approximately 60% of this cohort will opt for home ownership, leaving close to 40%, or one million families, looking for rental options.

Meanwhile, younger millennials in their 20s will generate demand for rental apartments for at least another 7 to 10 years. This group is focused on cities offering tech hubs, high quality jobs and a lower cost of living, such as Charlotte, Austin, Minneapolis and Orlando.

Why this propensity to rent? Key factors include declining home affordability, record student loan debt, stricter lending requirements and delays in starting families.

U.S. homes have become increasingly unaffordable, with home prices exceeding 2006-peak levels. This pricing pressure is compounded by the spike in home prices in early 2021 due to a shortage of inventory amid rising demand.

Focus on middle income

Middle income households of all ages represent a long-term source of demand for apartments. Rental rates are significantly higher in more expensive metro areas like New York or San Francisco, but middle income groups also rent at rates outpacing the national average in more affordable metro areas like Dallas and Atlanta.

Across the country, cost-conscious renters typically avoid the more recently built higher-end rental units, increasing demand for value-oriented class-A and well-located class-B apartment communities. We believe exciting and emerging neighborhoods in select metro areas could prove particularly attractive to younger millennials for at least the next 10 years. Affordability is a key differentiator among the markets we have identified.

Renting the family home

Both millennials and middle income households are also boosting a whole new housing subsector: the single family rental home. These rentals represent only 18% of total occupied U.S. single-family housing stock today, but we expect that percentage to grow.

In a post-COVID environment, many city dwellers have fled for the suburbs and Sun Belt cities. While it is unclear if this trend is secular or cyclical, single-family rentals represent an affordable option for millennial households seeking a permanent lifestyle change who cannot yet afford to own a home.

Further, the permanent adoption of flexible remote work policies could serve as a tailwind for single-family rentals. Home ownership rates have risen to 68%, near the 2008 level but below the 2006 peak. While rising homeownership rates could be seen as a headwind to the single family rental sector, home ownership removes inventory from the single-family rental market, which benefits the sector.

Ownership of these properties is also evolving. Today, the single-family rental market is 98% dominated by noninstitutional owners.¹ However, REITs and other investors have recently entered this market, increasing the institutionalization of this space.