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Commentary Multifamily and Single-Family Rentals to Continue Outpacing the Rest of the U.S

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Commentary Multifamily and Single-Family Rentals to Continue Outpacing the Rest of the U.S Commentary Multifamily and Single-Family Rentals to Continue Outpacing the Rest of the U.S. Housing Market DBRS Morningstar DBRS Morningstar Perspective June 14, 2021 As the U.S. economy rebounds from the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar expects multifamily and single-family rentals to remain the fastest growing segment of the U.S. housing Contents market. From 2000 through 2020, the inventory of combined single-family and multifamily rental units 1 DBRS Morningstar Perspective 1 Declining Mortgage Affordability and grew by 26.0%, compared with just 21.2% for owner-occupied units, according to the U.S. Census Falling Household Formation Bureau. Hampered by rising home prices, high debt burdens, and wage levels that haven't kept up with 4 Rental Demographics: Rising Inventory inflation, an expanding swath of households are priced out of homeownership, fueling demand for and Grayer Occupants 6 Single-Family Rental Growth rentals of both single-family homes and multifamily apartments. 9 Multifamily Growth 12 Issues to Face Declining Mortgage Affordability and Falling Household Formation Lack of mortgage affordability is the primary driver of growth in both single-family and multifamily Steve Jellinek rentals. High debt burdens (student loans and credit card debt) and wage levels that lag the cost of Vice President living make it difficult for many potential homebuyers to afford a house, making single-family and North American CMBS +1 312 244-7908 multifamily rentals an attractive alternative. Further, although the U.S. homeownership rate in Q4 2020 [email protected] was 65.8%, more than 30 basis points higher than the first quarter and the highest it has been since Q2 Adler Salomon 2012, it still sits nearly 400 basis points below the all-time high set in 2004, per the U.S. Census Bureau. Senior Vice President U.S. RMBS Home prices increased markedly since the subprime mortgage crisis, with the U.S. Median Home Price- +1 203 883-5857 to-Median Income Ratio rising to 4.29x in 2019 from 3.27x in 2011 (Exhibit 1). The S&P CoreLogic Case- [email protected] Shiller index of property values climbed 12% in February 2021 compared with February 2020, the biggest Stephen Buteau jump in 15 years. Managing Director Global Esoteric Finance +1 646 560-4557 [email protected] Page 2 of 13 Multifamily and Single-Family Rentals to Continue Outpacing the Rest of the U.S. Housing Market | June 14, 2021 Exhibit 1 U.S. Median Home Price-to Median Income Ratio: 1990-2019 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: JCHS tabulations of National Association of Realtors, Metropolitan Median Area Prices, and Moody's Analytics Forecasts. In addition to affordability, slowing household formation is a drag on homeownership. Between 2000 and 2010, the number of households increased by roughly 10%, according to the U.S. Census Bureau. But household growth rates declined during the Great Recession of 2007 to 2009 and the slow economic recovery that followed. Between 2010 and 2017, the number of households increased by only approximately 6%. The Census Bureau data suggests that the pandemic hammered household formation in 2020, following a brief spike in 2018 and a tick down in 2019. Household formation in the U.S. dropped to 128 million in 2020, after averaging a 1.1 million increase per year in the previous decade. Exhibit 2 Household Formation Total Households % Change 135,000 0.020 130,000 0.015 125,000 120,000 0.010 115,000 (Thousands) 0.005 110,000 105,000 0.000 100,000 95,000 -0.005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: U.S. Census Bureau. Page 3 of 13 Multifamily and Single-Family Rentals to Continue Outpacing the Rest of the U.S. Housing Market | June 14, 2021 The number of single-family rentals in the U.S. increased by 27% from 2004 to 2019 (the latest available), according to Harvard Joint Center for Housing Studies (JCHS) tabulations of U.S. Census Bureau, American Community Survey One-Year Estimates. Multifamily inventory climbed 22.9% from 2004 to 2019. Further, the Census Bureau reported there were 402,000 multifamily housing units started in the United States in 2019, which was a 20-year peak for the nation and an increase of almost 30,000 over the previous year. The continued expansion of both single-family and multifamily rentals comes as the homeownership rate stands well below its peak, hampered by the rising cost of homes, particularly for first-time homebuyers. The precipitous drop in rental growth rate in 2020 reflects the effects of the coronavirus pandemic and mortgage rates falling to historical lows. But signs of a recovery in rental growth are on the horizon. Expected job growth as the pandemic wanes will fuel household formations and propensity for rent given the lack of affordability for first-time homebuyers. Exhibit 3 Housing Breakdown Total Owner Rental Owner Growth (%) Rental Growth (%) 140,000 0.08 120,000 0.06 100,000 0.04 80,000 0.02 60,000 Rate Growth Thousands of Units of Thousands 0.00 40,000 -0.02 20,000 0 -0.04 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: U.S. Census Bureau. Page 4 of 13 Multifamily and Single-Family Rentals to Continue Outpacing the Rest of the U.S. Housing Market | June 14, 2021 Rental Demographics: Rising Inventory and Grayer Occupants As shown in Exhibit 4, the U.S. housing inventory has risen 21.1% to approximately 140.8 million units in 2020 from about 116.3 million units in 2000. In 2020, renters resided in 33.4% of the occupied housing inventory, down from a 20-year high of 36.6% in 2016. Exhibit 4 Housing Inventory Exhibit 5 Rental Inventory Housing Units Vacant Occupied Rented Total Rental Vacant Rental Occupied Rental % Vacant 160,000,000 37.0% 50,000,000 12.0% 45,000,000 140,000,000 36.0% 10.0% 40,000,000 35.0% 120,000,000 35,000,000 34.0% 8.0% 100,000,000 30,000,000 33.0% 80,000,000 25,000,000 6.0% 32.0% 20,000,000 60,000,000 31.0% 4.0% 15,000,000 40,000,000 30.0% 10,000,000 2.0% 20,000,000 29.0% 5,000,000 0 28.0% - 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: U.S. Census Bureau. However, the total single-family and multifamily rental inventory has risen faster than the overall U.S. housing inventory, up 23.5% to approximately 44.9 million units in 2020 from about 36.3 million units in 2000. Another sign of the strong demand for rental units, nationwide vacancy for all rental units has dropped to a 20-year low of 6.4% in 2020, down from a high of 10.8% in 2009. The demographics of today’s rental tenants look surprisingly different than rental tenants in 2000. As shown in Exhibit 6 below, the older cohorts (55 to 64 years and 65 years and older) make up a much larger proportion of the total rental tenants in 2020 than they did in 2000. The 55 to 64 years old cohort increased to 13.3% of all rental tenants today from 8.0% in 2000, and the 65 years and older cohort increased to 16.1% today from 12.4% in 2000. Exhibit 6 below also shows the younger cohorts (less than 35 years and 35 to 44 years) make up a smaller proportion of the total renter tenants in 2020 than they did in 2000. The less than 35 years old cohort dropped to 36.9% of all rental tenants today from 42.8% in 2000, and the 35 to 44 years old cohort dropped 19.1% today from 22.7% in 2000. Page 5 of 13 Multifamily and Single-Family Rentals to Continue Outpacing the Rest of the U.S. Housing Market | June 14, 2021 Exhibit 6 % of Renters by Age Cohort Less than 35 years 35 to 44 years 45 to 54 years 55 to 64 years 65 years and older 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: U.S. Census Bureau. The larger proportion of older cohorts making up today’s pool of rental tenants is even more interesting when looking at the population growth of the cohorts from 2000 through 2020, as shown in Exhibit 7 below. While the total number of rental tenants increased 26.0% during that time, the 55 to 64 years old cohort rose the fastest (109.1%) followed by the 65 years and older cohort (63.8%). The slowest growing age cohorts were 35 to 44 years old (6.2%) and less than 35 years old (8.6%).
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