According to a May 2022 study commissioned by the National Apartment Association (NAA) and National Multifamily Housing Council (NMHC), the U.S. needs to build 4.3 million new apartments by 2035 to satisfy demand. While apartment demand ebbs and flows, apartment supply is anchored by long-term structural challenges. New housing requires the clearing of a myriad of hurdles, from land acquisition, to regulatory requirements, to vendor and materials challenges. The completion of a new project can last over 2+ years. The construction market was slow to return after the 2008 financial crisis and now there is evidence of shortage of housing. Builders ramped up apartment construction in 2022, but increasing costs, continued material and labor shortages, and hard-to-find multifamily construction debt are making it hard to keep up the pace.

On the demand side, we are seeing societal and demographic changes influencing apartment demand as we previously wrote here, and homeownership levels never quite recovered from the 2009 recession and foreclosure crisis. The COVID-19 pandemic further decreased the homeownership levels, as many people put off home buying as they weathered the uncertain economy and job losses. Pent up demand for residential housing eventually caused a run-up on the market in 2021, with more prospective homebuyers priced out by ballooning home prices. There are many families and individuals that would love to buy a home but simply are not able to do so. The cyclical forces that drive single-family home prices down to a more affordable level seem to be fundamentally different this time. Even with rising interest rates, it appears that home prices are not having a substantial effect. Furthermore, builders have become far more pessimistic on the housing market as mortgage rates rise and fewer potential buyers visit their models, leading them to hold off on new construction. In July, single-family housing starts fell to an annual rate of 1.1 million units from a recent peak of 1.2 million units in April. And housing starts will likely pull back even further. The National Association of Home Builders (NAHB) sentiment index, designed to correlate with housing starts six months out, fell to 46 in September from a recent peak of 84 in December. Housing supply reduction will continue to keep home prices up or limit their decline, driving more and more people to be renters for longer periods of time.

Inflation, the war in Ukraine, Federal rate hikes and the potential recession have created a lot of uncertainty. And when people are uncertain, it is human nature to put plans on hold. Therefore, in the third quarter this year, we saw a softening of apartment demand, which is dependent on household formation. Renters seem to be taking a collective breath on the housing search for now. If jobs and wages continue to not be materially affected and inflation is managed to some degree, we should see pent-up rental demand unlocked ahead of the spring 2023 leasing season.

It is important to distinguish short-term and cyclical volatility from structural and long-term needs when evaluating multifamily investing. The rental market is cyclical, reaching its highs in the summer months (third quarter of the year), as people take advantage of school breaks and warm weather to move. While demand softened during a typically high demand period this year, rental prices continued to grow. Rents have increased over 24% since pre-pandemic levels. The higher lease payments coupled with the high level of uncertainty might be having some effect on potential renters. However, renter’s average incomes are still growing, payment collections have not experienced a dip, and there is no current trend of renters fleeing more costly units in search of cheaper living situations. All signs point to renters staying the course during this economic inflection point.

While market uncertainty softened consumer demand for apartments in the third quarter, the long-term problem of supplying enough apartments for a growing housing need still looms. It is evident that maintaining our eyes on the horizon is important when considering multifamily investing. Although short-term volatility may occur, multifamily real estate remains an asset class with long-term growth. A solid asset in a growing market positions us well to weather any changes, allowing investors to benefit from the fact that the value of real estate is built over time, not overnight.

Let’s connect to see how Bluefox Ventures can help you diversify your portfolio by investing in alternative assets like multifamily real estate.