Investments in Private Real Estate

Fundamentals remain positive for multifamily, but a supply increase in recent years has put pressure on rents and occupancies.

2017 saw a 30-year high delivery of 360,000 units across the top 150 US markets. The record-high delivery however, does not tell the whole story. Half of the new units delivered in 2017 were concentrated in just 15 metro areas. Positive fundamentals for multifamily still exist to varying degrees across markets.

As of April 2018, the home ownership rate reached 64.2% after steadily increasing since its 50-year low of 62.9% in the second quarter of 2016. It remains below the pre-Recession peak of 69.2%.

Demand for multifamily continues, however, because the barriers to home ownership remain high and keep homeownership out of reach for many Americans. Wages have not kept up with home prices, which have increased nearly 50% on average since Great Recession lows, or 6.7% annually. At the same time, average wages have only increased 15% for the same period, or 2.4% annually.

Stricter lending requirements since the Great Recession make it harder to qualify for a loan. Federal Housing Administration (FHA) loans, more accessible to many Americans, declined in 2017 to 20% from a peak of 37.6% in 2009. FHA loans reduce down payment requirements for qualified buyers to as low as 3.5% versus 20% for traditional loans.

Student debt levels continue to rise. Second only to mortgage debt, student loan debt has increased 170% from 2006 to $1.3 trillion at the end of 2016, driven by higher borrowing and slower repayment. The average student with loans is carrying approximately $34,000 in loans, up nearly 70% from ten years ago. And while college attendance is associated with higher homeownership rates, student debt has the opposite effect and is associated with lower homeownership rates.

New tax policy has reduced some homeownership benefits. Decreased allowed deductions for property, state, and local tax as well as the scaled-back mortgage interest deduction have taken some of the sheen off of home ownership.

The self-storage sector has seen significant rent growth in the current cycle, although recent new supply is putting pressure on the pace of rent growth. The underlying fundamentals of this recession-resistant asset class remain positive.

The current low homeownership rate of 64.2% means more people are living in apartments, indicated by the strength of the multifamily sector. Apartments come with less space and renters move more frequently, driving increasing demand for self-storage facilities.

Small businesses are using business self-storage units for their operations to keep overhead low and maintain flexibility not found in office leases.

Today, one in 11 households rents a self-storage facility. This is up from one in 17 in 1995 according to surveys by the Self Storage Association.

This asset class has also proven recession-resistant, with demand drivers during both economic growth and recessions. In a strong economy, higher rates of employment and more disposable income lead people to purchase more consumer goods, often driving a need for more storage space. During a recession, some individuals and families are forced to downsize or relocate, also driving a need for more storage space.

During this recovery cycle, from May 2007 to April 2017, self-storage was consistently among the strongest segments of the REIT sector and had the highest five-year average total annual returns through the Recession, from 2007 to 2011.

Cost-burdened wage earners are seeking affordable alternatives.

The lack of affordable housing has gotten worse as home prices and rents continue to rise at a rate far outpacing wage growth.

Wage growth hasn’t kept up with home prices or rent growth. Since 2012, wages have only grown 2.4% annually, while U.S. home prices have increased 6.7% annually and multifamily rents have increased 5.4% annually.

Stricter lending requirements make it harder to qualify for a home loan, and there is a lack of affordable housing options. The majority of new construction is Class-A luxury apartments because scarce labor, more expensive building materials, stricter land-use regulations, and increasing land prices are driving high costs for developers and making it hard to build less-expensive units.

Approximately 50% of U.S. wage earners make less than $30,000 a year. In 2016, nearly a third of U.S. households (38.1 million) were qualified as “cost-burdened,” meaning that they paid more than 30% of their incomes for housing.

U.S. renters are particularly cost-burdened, with 47% of renters, or 20.8 million spending more than 30% of their monthly income on housing. Of those cost-burdened renter households, nearly 50% are severely burdened and pay more than half of their incomes for housing.

Finally, there is a high cost of moving from one community to another. The cost to relocate manufactured homes ranges from $5,000 to $10,000 on average. This results in a more stable tenant base with longer-than-average tenancies and less turnover compared to multifamily.

According to the 2010 census, the U.S. population over the age of 65 is the largest in terms of size and population percentage compared to any previous census. This sizable demographic will drive demand for senior housing for decades to come.

Aging demographics drive growing demand. As of 2016, 15% (49.4 million) of U.S. residents were 65 or older. This population is expected to increase another 50% by 2030, reaching 75.5 million people when the remainder of the baby boomers turn 65.

For those seniors who don’t already own homes, the high cost of ownership and a lack of affordable housing will make it harder to purchase homes.

Improved healthcare services and investments in medical research have increased life expectancy. The downside of longer life expectancy, however, is the increased prevalence of chronic diseases, which often affect independence and mobility. This puts increasing emphasis on the availability of quality, nearby amenities.

Compared to older generations, newer generations of senior housing residents are starting to demand the increased services and amenities available at senior living facilities, according to Beth Burnham Mace, chief economist and director of outreach with the National Investment Center for Seniors Housing and Care (NIC).

As college enrollment continues to rise, the underlying fundamentals for student housing remain positive.

Demand is tied to stable institutions, colleges and universities, which makes student housing resilient to more changes in the economy. Often during recessionary periods people look toward higher education as a way to improve their employability and earning power.

Increases in the college-age population and rising enrollment rates have contributed to the increase in college and university enrollment. Between 2000 and 2015, the 18- to 24-year-old population rose from 27.3 million to 31.2 million. In the same period and population, enrollment in colleges and universities increased from 35.5% in 2000 to 40.4% in 2015. That’s a market of more than 12.6 million enrolled 18- to 24-year-olds.

At the same time, universities have failed to keep pace with providing student dormitories. Universities lack available capital and, in many cases, available land. Additionally, financial constraints following the Recession have forced public institutions to delay or cancel plans for new student housing. Regardless, students attending universities need somewhere to live. Amenity-rich student housing options are meeting the need.