By choice and by necessity, Americans will continue to escalate the demand for rental housing in the years ahead — creating opportunities in professionally-managed properties across formats, generations, and geographies.
More and more, the U.S. is a nation of renters
The U.S. rental housing market has seen a significant run-up in demand. Over the past decade, occupied apartment units rose by 20% above the prior ten-year period.1
A major and unprecedented structural shift has occurred due to a variety of demographic and socioeconomic factors. Real estate investment managers’ allocations to institutional-quality multifamily product have risen given the ongoing strength in property fundamentals. The sector is viewed as having a steady income stream with rents that adjust with inflation annually. In the coming years, the current conditions will offer new opportunities in professionally-managed rental housing across different formats, generations, and geographies. Clarion Partners believes that renters, both by choice and by necessity, will continue to escalate the demand for rental housing.
Multifamily's Share of NPI over three Decades
Favourable demographic and sociographic conditions
All forms of U.S. housing report low availability and high pricing amid a strengthening economy and rising household formation. Over the next decade, the U.S. is poised to add over 10 million new households, which will benefit both owner and renter occupied housing.2 A range of housing options in diverse settings will be needed to accommodate households of varying ages and incomes.
The recent expansion of the multifamily market has been driven by renter households across the six largest living American generations. In 2018, total housing units (or households) reached 120 million — about 77 million owner and 43 million renter households (now approximately 65% and 35%).3 Today the homeownership rate across all ages is near historic lows. In the future, for-sale housing may make a greater recovery; however, a full return to the prior peak homeownership rate is not anticipated.
- Recent and Future Renter Household Formation: In the past ten years, the number of new renter households rose by nearly 10 million, significantly outpacing the owner segment, which reported minimal growth. We expect steady growth in renter households to continue in the future. Industry estimates anticipate another 500,000 new rental households per annum through 2025.4
Total U.S. Owner versus Renter Households
- Changing Lifestyles: Over the past decade, the single population rose by a whopping 15 million, now above married individuals. The shift in independent living is attributed to lifestyle changes in both younger and older American households. More young adults are postponing marriage, while older adults divorce more frequently.4 All have led to a rise in apartment living, generally a more manageable expense and flexible living arrangement than a single-family home.
U.S. Singles Outpace Married Population
Today the cost of living is one of the most significant challenges facing many cities across the nation. As U.S. housing prices have surged, wealth and income gains have been modest for most. These combined circumstances have led to the recent surge in rental housing demand.6 Nationwide, it is now cheaper to rent than buy in more than half of all counties.7
Prices in Top Employment Hubs
- For-Sale Housing. The accleration in for-sale housing appreciation is pronounced in the top U.S. employment hubs with a high concentration of office-using jobs. Over the long term, a well-paid and educated workforce has generally been linked to expensive real estate. Outsized pricing gains have been reported in San Francisco, Los Angeles, New York, Seattle, and Boston, where there are nodes centered around thriving industries. Over the past ten years, the affordability of buying a home has worsened for many Americans, as home prices have appreciated much faster than inflation and mortgage rates have risen to a seven-year high.
Median Home Price: U.S. vs. Top Employment Hubs
- Rental Housing. Currently, 24% of U.S. renter households (about 20 million) spend more than 50% of annual income on housing.8 Across some U.S. cities, rent-to-income ratios are well above the U.S. average. The Department of Housing and Urban Development (HUD) identifies households spending over 30% of income on housing as cost burdened.3
U.S. Rent-to-Income Ratios by Selected Metro
Large Generational Financial & Wealth Accumulation Differences. The primary renter base is largely young adults. This group holds the smallest share of American net worth and has seen income growth fall significantly short of apartment rent escalations over the past decade. Consequently, the wealth disparity by age has widened, and the financial demands of homeownership (e.g. saving for down payment) are out of reach for many, so much so that about 30% of millennials (24 million) currently live with family.9 Furthermore, the wealth accumulation model may be changing. In the past, Americans’ net worth was largely concentrated in property ownership; now many young adults hold a large share of wealth in defined contribution (DC) plans, which may make buying a house a less important life milestone.
Student Record Student Debt a Huge Challenge for First-Time Homeowners. Student loan debt is a unique problem to the U.S. and, in particular, the Millennial generation, now standing at $1.5 trillion. The average student loan debt for the Class of 2017 was $39,400, up 6% year-over-year. Today the average net worth of younger millennials is negative. A home mortgage requires top-tier credit and conservative debt-to-income ratios. The current system for rating credit and qualifying for a home loan may continue to be restrictive. Consequently, first-time buyers now represent only 30% of all sales, down from the long-term average of 39%.7
U.S. Student Loan Debt Outstanding (Trillions)
Rental Housing: Demand Outpaces Supply
In this real estate cycle, total absorption has outpaced overall completions. The sharp expansion of new rental housing has been met with high ongoing demand (Figure 7). Across the entire rental housing universe (totaling approximately 43 million units), there are 28.9 million multi-unit apartments and 13.2 million single-family homes.3 Institutional-quality multi-unit rentals represent only 15 million total rental units.10 Professionally-managed multifamily is still a relatively small share of overall inventory. Clarion Partners believes that there is still a scalable opportunity in institutional-quality housing investment.
Recent growth in rental stock has been most pronounced in the Class A and single-family segments.
Class A Boom in Big Cities. Rentership rates and multifamily as a percentage of all housing are generally highest in New York City, Los Angeles, Washington, D.C., San Francisco, and Dallas. In the past decade, millions of high-quality Class A rental units have delivered in the biggest U.S. cities. Much of this new inventory has targeted higher-income professionals and is located in high-rise buildings in downtowns or urban neighborhoods. Today just under half of all renter households reside in principal cities — the main core of metropolitan areas.11 These areas also tend to be the costliest, and generally have large young and single professional populations, yet many renter-by-choice millennials pay a premium for a ‘live, work, play’ lifestyle with easy access to restaurants, cultural and recreational activities, and work.
Growing Popularity of the Sun Belt. Relatively less expensive cities in the Sun Belt have high domestic migration from both Millennials and older adults. These regions tend to have more low and mid-rise rental housing. Much of the future new household growth may be in the South and West.12 Several areas, such as Austin, Dallas, Atlanta, Denver, and South Florida, are experiencing faster-than-average employment and population growth.
The Rise of Single-Family Rental Homes. Less than one-third of rental households are living in detached, single-family homes; however, this segment has reported considerable growth (up by4 million since 2006).13 Recently, suburban household growth has picked up, offering the lure of larger living space, superior schools, and a better environment for older Millennials.
In select markets, we see a sizeable opportunity in these multifamily housing segments:
Class A in Largest & Most Expensive Metros. With the acute cost of housing in the largest and most expensive metros, there is an ongoing opportunity to develop and invest in Class A rentals in these markets. The ongoing savings crisis amongst younger adults is likely to sustain a large stream of demand for entry-level rental housing therein.
Apartment Buildings in Town Centers in Premier Suburbs & Edge Cities. As more Millennials age, we expect an even greater migration to premier suburbs and edge cities, as well as more demand for apartments in town centers throughout the outer limits of the most populous U.S. metros.
Renovate Well-Located B Apartments to Class A. Existing Class B properties in strong submarkets and path of growth neighborhoods are prime for redevelopment. There is a tremendous amount of aged inventory in urban downtowns and premier suburbs still in need of renovation.
Improve Mid- and Low-Cost Inventory. The vast majority of rental property serves mid-to-low income households. In contrast to the high-end market, affordable rental supply has not kept pace with demand. There is now a shortage, which has contributed to housing cost burdens. Lower availability of low-cost rentals has forced millions of lower- and middle-income households to spend an outsized share of income on housing. There is a large opportunity to provide better quality, moderately priced rental housing in densely populated areas.
Given the current U.S. socioeconomic environment, there is rising interest in high-quality rentals across all price points and regions. The composition of rental households is a broad cross-section of categories that will demand a well-diversified inventory. Baby Boomers, Millennials, and Gen Z will have many similar housing requirements; going forward, the primary differences will mainly be regional and related to proximity to central business districts (CBDs). Multifamily housing will likely thrive most in markets and submarkets where for-sale housing is prohibitively expensive.
Clarion Partners recommends an investment strategy targeting mainly professionally-managed, high-quality multifamily in and around both the largest and most expensive U.S. metropolitan areas. As rental demand remains robust, build-to-core and value-add approaches are expected to be attractive, especially in costly and high-growth metros and submarkets. We believe there is still a significant opportunity to improve the quality of the nation’s rental housing stock, as well as create more dynamic mixed-use living communities. The American dream of buying a home may prove challenging to many younger and middle-income households in urban areas. The growing renter cohort groups -- both renters by necessity and renters by choice -- should offer a steady tenant base for many years ahead.
Investment in real estate entails significant risks and is suitable only for certain investors as part of an overall diversified investment strategy and only for investors able to withstand a total loss of investment.
1 U.S. Census Bureau. Q3 2018.
2 John Burns Real Estate Consulting. Demographic Strategies for Real Estate. 2016. Note: Based on 2016 to 2025.
3 JCHS. Nearly Half of American Renters Are Cost Burdened. December 2017. Note: Data as of year-end 2016.
5 Pew Research Center. Led by Baby Boomers, Divorce Rates Climb for America’s 50+ Population. March 2017.
6 S&P CoreLogic Case-Shiller Home Price index. CBRE-EA. Q2 2018.
7 National Association of Realtors. Q2 2018.
8 U.S. Census Bureau. Q2 2018.
9 U.S. Census Bureau. Jobs, Marriage and Kids Come Later in Life. August 2017.
10 CBRE-EA. Q2 2018
11 JCHS. Nearly Half of American Renters Are Cost Burdened. December 2017. Note: Data as of year-end 2016.
12 John Burns Real Estate Consulting. Demographic Strategies for Real Estate. 2016. Note: Based on 2016 to 2025.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors and eligible counterparties in EU and EEA countries:
In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.
In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.
Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.