Apartment Demand for the Next 15 Years: Can We Meet the Need?
On July 13, 2017, the Urban Institute hosted a panel discussion at its headquarters in Washington, DC, to evaluate the affordability of the multifamily housing market and its ability to respond to demand. Moderated by Laurie Goodman, codirector of the Housing Finance Policy Center at the Urban Institute, the speakers discussed the demographic, economic, and geographic distribution of apartment demand; projections for future apartment demand; current trends in the production of apartment housing and barriers to development; and future opportunities and challenges for apartment production. The panelists largely agreed that although the demand for rental housing is stronger than ever, regulatory barriers, a lack of government subsidies, and local antidevelopment sentiment have limited developers’ ability to meet this demand. Developers and policymakers will need innovative strategies to reduce these constraints.
The Current Nature of Housing Demand
Shifting demographics have created new trends in housing needs and tenure choices. Panelist Paige Mueller, chief executive officer of Whitegate Real Estate Advisors, described two submarkets dominated by certain age groups: “boomer markets” and “Gen-Z markets.” Boomer markets are characterized by a growing number of people aged 65 and over and significant outmigration of younger individuals. These markets, located primarily in the nation’s Midwest and Northeast regions, typically have higher homeownership rates, a higher proportion of low-income renters, and an aging housing stock. These markets generally reflect the nationwide trend of an aging population that constitutes a significant portion of overall apartment demand; 65 percent of the rental population is older than 35.
Conversely, Gen-Z markets are high-growth markets in which residents under the age of 34 make up more than 30 percent of the population growth. These markets are located primarily in the Southeast and West, in areas with substantial developable land. The housing stock in these markets tends to be newer and more affordable. These markets typically have higher rentership rates because these younger residents overall are “getting older later,” starting families later in life and therefore renting for longer periods.
The 2008 recession affected tenure choices nationwide. According to panelist Jamie Woodwell, vice president of the research and economics group at the Mortgage Bankers Association, the recession caused a “demand shock” in the housing market, in which many families switched from homeownership to renting. Mueller described the current market as suffering from a “hangover effect” — younger Americans who would normally be eligible to become first-time homebuyers have seen only slow recovery of their income and employment status, causing the homeownership rate to remain low and rental demand to remain high.
Future Trends in Housing Demand
Looking forward, the panelists expect the need for new apartment units to grow. Mueller estimates that by 2030, 4.6 million new multifamily units will be needed. More than 1 million of these units will be needed in the top five housing markets of New York, Dallas-Fort Worth, Houston, Miami-Fort Lauderdale, and Atlanta. This demand can be attributed partly to trends in population growth. Based on Mueller’s projection, 49 percent of this growth through 2030 will be from international immigration. Markets that depend on immigration for growth should expect higher demand for rental units, as rentership rates tend to be higher for immigrants than for other population sectors.
Several factors influence the market’s ability to respond to demand for apartments. Woodwell described how housing production also suffered a “shock” from the recession, with new construction nearly coming to a halt. The market, however, has since responded to increasing rentership; although the overall multifamily vacancy rate is currently at its lowest point since the mid-1980s, the number of multifamily units under construction is at its highest point since the mid-1970s. Investors are experiencing historically low yields in the housing market, which has spurred apartment development at lower rents than would otherwise be possible. Woodwell noted, however, that housing market reactions only reach a portion of overall demand; the market itself fails to address the needs of lower-income households, whose housing cost burden is significantly higher than for other income groups.
Because the market is unable to meet housing demand for all income levels, subsidies, a scarce resource, are needed. Panelist Priya Jayachandran, senior vice president for affordable housing development at Volunteers of America, discussed the continued loss of affordable housing despite increasing need. The federal government no longer funds any new rental assistance subsidies, and although the Low-Income Housing Tax Credit (LIHTC) program is by far the largest source of new affordable housing, it has not kept pace with population growth and demand. Tax credit pricing has dipped recently, and many LIHTC projects are currently stuck in the pipeline.
Housing developers may encounter another obstacle in the form of local regulations. Mueller described how extensive permitting processes and overly restrictive zoning can have a chilling effect on housing production, which inflates rent costs. According to Jayachandran, these regulatory restraints artificially reduce the amount of developable land. Jayachandran also raised the issue of NIMBYism. Because of the stigma surrounding affordable housing, many communities will either fight to prevent a low-income housing development or allow such projects to be built only “on the other side of the railroad tracks” — in areas with high concentrations of poverty.
Meeting Demand for the Future
To meet the demand for 4.6 million new multifamily units by 2030, policymakers must adopt new approaches to overcome some of the current barriers to new development. Jayachandran recommended that jurisdictions free up their air rights to add density by building up and loosen zoning restrictions, which would reduce land costs and expand opportunities for affordable housing. To overcome the stigma attached to labels such as “low income” and “subsidized,” affordable housing projects could be rebranded as “workforce” housing, a term more palatable to the public. Finally, the housing market must innovate to keep up with changing demographics and consumer needs. The panelists spoke optimistically of future opportunities for innovation but stressed that the challenge would lie in finding the resources to leverage these opportunities.