National commercial real estate brokerage Marcus & Millichap just released its Research Brief on apartment construction and absorption trends plus the status of millennial generation homeownership and renting profiles. Here are key takeaways for investors:
- Millennial Demand: Although Millennials have slightly increased their appetite for purchasing homes recently, there are still many reasons that most of them prefer to rent. This includes lifestyle flexibility, lack of home inventory to purchase, lack of affordable entry level new home construction options (due to both high land costs and high construction costs), low savings rates, and substantially increasing student loads that hinder their ability to qualify for home mortgages plus have their associated down payments.
- Home Ownership: Percentage of home owners was recently at its lowest level since 1999, meaning that there continues to be more renter demand than prior norms.
- Home Listings for Sale: Supply of home listings also remains at one of the lowest levels since 1999. This has increased prices in response to demand, constrained potential first time home buyers from competing for homes, and restricted home owners from selling since they do not have as many good options to move and buy after selling.
- Apartment Construction: New apartment construction appears likely to peak this year, exceeding last year’s delivery of new product. The construction pipeline is beginning to thin moving forward. The majority of supply is concentrated in luxury Class A properties [especially because this class is the only type that can provide a return in the current high construction cost environment]. This points to potential coming over-supply in Class A properties but opportunities for Class B and C properties to meet demand at more reasonable rental rates.
- Apartment Absorption: Absorption of vacant apartments is at a 30 year high and national vacancy is below 4%. Rent gains continue due to increasing renter population demand, with rents rising an average 4.3% over the past year.