The economist and CPE columnist explains how the changing U.S. population is shaping the sector’s prospects.
To borrow a quote that popped up frequently during the latest election cycle, “Demographics are destiny.” As we approach the ten-year mark of the post-recession recovery, concerns over population growth and its impact on real estate markets continue to cast a shadow over the economy. The U.S. population exceeded 324 million in 2016, a 9.1 percent increase over the past decade. The curve has trended steadily upward, even through the Great Recession.
Even as the population has grown, the number of households has declined, especially in the wake of the recession. This is both noteworthy and concerning, since household formation (HHF) is an important factor in demand for both single-family and multifamily properties. From 1958 to 2007, household formation averaged 1.3 million per year. Between 2008 and 2013, the average annual number of new households dropped by more than half, to 579,000. That statistic underscores the severity of the Great Recession and the slow recovery that followed.
In 2014, new households jumped noticeably, to 2.2 million, then moderated to only 225,000 in 2015. During the first three quarters of 2016, the trend bounced back toward the long-term average, with 1.3 million new households formed.
Generation Gaps
More importantly, when HHF data is considered by generation, Baby Boomers are the cohort that has generated the most growth. According to a study from the University of California at Berkeley, the 65-to-74 age bracket accounted for the highest gains in household formation, followed by those 55 to 64. The group with the third-largest HHF rate comprised people the 75-plus segment. Meanwhile, the younger set posted mixed HHF numbers. In the 20-24 range, there was negative net HHF over the past couple of years. The 25-to-34-year-olds provided the only bright spot, with positive HHF gains.
In addition, a recent study from the Federal Reserve Bank of Kansas City outlines several important trends in HHF and its impact on real estate. The share of the U.S. population living with parents rose across the age spectrum from 1980 to 2013. For the 25-to-29 group, the share of those living with parents increased from slightly more than 10 percent in 1980 to 25 percent in 2013. Older cohorts posted smaller gains, but the trend remained noticeable.
Adding texture to the changes, marriage patterns have also evolved. In 1980, about 70 percent of those 25 to 29 either were married or had been married in the past. By 2013, only 40 percent had. The decline in the marriage rate persisted in every group up to age 65.
Mapping Change
Further complicating this shifting puzzle is geographic dispersion. The revival of the nation’s downtowns and the growth of its urban settings has been the subject of much discussion in recent years. While employment growth and the affiliated real estate development has certainly focused on central business districts, suburban areas continue to be strong growth centers.
As the Urban Land Institute notes in a 2016 report, suburbs account for 79 percent of the population in the 50 largest metropolitan areas. Tellingly, they also generated 91 percent of the population growth in those metros during the preceding 15 years. And 75 percent of metropolitan area residents age 25 to 34 lived in the suburban parts of those metropolitan areas.
The Millennial generation caught up to the Baby Boomers in numbers this year, and is projected to become the largest cohort in the history of the U.S. Numerous as they are, though, Millennials are certainly underrepresented in household formation, posing a challenge to the housing market.
Feeling the Squeeze
On the residential side, housing starts and home sales failed to keep up with population growth. Sales of existing homes have rebounded, but a dearth of inventory has pushed supply to historically low levels and driven prices steeply upward. When you factor in tighter post-recession mortgage underwriting standards and flat income growth, it becomes clear why home ownership has remained out of reach for so many young buyers.
At the same time, the trends have been a boon for the multifamily sector. Demand for apartments remained positive through the Great Recession, and has continued advancing during the ensuing eight years. Over the past decade, apartment net absorption has averaged about 30,000 units per year, according to data from CBRE Econometric Advisors.
That figure obscures a dramatic post-recession change, however. During 2006-07, net absorption averaged slightly over 13,500 units. Demand dropped to about 4,700 units during the recession, then rebounded strongly, to 44,200 units per year from 2010 to 2016. In the first three quarters of 2016, apartment net absorption totaled 183,300 units, more than the 166,000 units that were completed during the same stretch. Development of new supply has been accelerating during the past four years, and is expected to begin outpacing absorption in 2017 and 2018.
Slowdown Ahead? Not So Fast
At the dawn of 2017, many analysts are looking at the current real estate cycle with wary eyes, reckoning that as we approach the eighth year of recovery, we may be closing in on the peak of the cycle. A growing number of voices are expressing concern about a slowdown in the multifamily sector.
Judging by where investors have been placing their bets, however, these concerns may be misplaced. In the first three quarters of 2016, investment sales of apartment properties totaled $111.5 billion, according to Real Capital Analytics, the largest volume of any real estate asset category. Multifamily also stood alone as the only sector to escape a decline in deal volume last year; sales of apartment properties posted an 11 percent year-over-year gain.
And so, closing the book on 2016 and opening it on 2017, I can point out that the outlook remains upbeat. For multifamily housing, the Baby Boom generation represents a store of immense wealth and demand for apartments, as evidenced by the outpouring of new Class A, urban luxury product over the past few years. This generation is expected to continue playing a dominant role in the multifamily sector and will continue to drive new development.
In addition, the growing power of the Millennials reinforces the silver lining in this outlook. While slow employment and income recovery have kept their HHF numbers low, this cohort of young adults represents a significant source of pent-up demand. Once unleashed, that demand is likely to drive renewed growth for commercial real estate in general, and for apartments in particular.
George Ratiu is director of quantitative and commercial research for the National Association of REALTORS and a regular columnist for CPE.
