Economy Watch: More Evidence of Apartments Still Having Long Runway

The future looks bright for the apartment market for several years to come.

Any time a boom lasts more than a short while, the question naturally surfaces: How much longer can this go on? Doesn’t the party have to end sometime? All good times do come to an end, but in the case of the running boom for U.S. apartment properties, demographic data (demand) and development data (supply) are still on the landlords’ side and likely will be for at least another decade, if not longer. In short, there are a whole lot of renters in the market or preparing to enter the market, which is the demand side; but not as much development as one would expect, considering that demand.

A relatively youthful population bulge forms the demand side. Young adults have long been predominantly renters, and that might be even truer now, since young renters of today lived through the housing-led recession, and might (possibly) be more inclined to rent than buy. But even if they want to own property as much as their parents, the Millennials and their successors will still be a formidable renting class over the next decade. Put all Americans from age 20 to 34 together, and the total is more than 66 million in 2015, up from 60 million 2005. By 2025, that age cohort’s going to number more than 68 million; and in another 10 years, nearly 70 million.

As for the supply side, the Census Bureau reported this week that December apartment starts (for government purposes that means buildings with five or more units) came in at an annualized rate of 339,000 units, down 4.2 percent for the month, but up slightly (0.3 percent) compared with a year ago. Yet the monthly movement of apartment starts tends to be noise, since development in the sector is so volatile. A look at long-term trends in apartment development – the bureau’s been tracking housing starts since the Kennedy administration – reveals that apartment building in the 2010s is, historically speaking, anemic.

For most of the late 1990s and the 2000s, apartment starts hovered around 300,000 units a year, so in one way, the recent numbers are a recovery from the slump caused by the Great Recession, when starts dropped below an annualized 100,000 units at one point in 2010. The current rate’s also high compared with the early 1990s, when there was a recession and a dearth of demand because members of the smaller Gen X were apartment renters, while a large number of baby boomers had already moved on to homeownership.

The current rate is not high, however, compared with starts in the 1960s and ’70s and even ’80s, when (except for recessions), annualized starts tended to be more than 400,000 units. The reason was twofold: high demand from baby boomers, and the fact that the government wasn’t encouraging ownership as much as it would in the 1990s and into the 2000s. In short, it looks like demand is now a replay of the heady days when boomers wanted to be renters, but supply isn’t going to match that demand this time around, for various reasons, such as that it’s simply harder to find places to build apartments these days because of land constraints and nimby attitudes in established communities. So it’s going to be a good decade for apartment landlords.