Real estate is a vast and dynamic industry that encompasses a wide range of property types, each with its own unique characteristics, investment potential, and market trends. Understanding the different types of real estate is crucial for making informed decisions and navigating the complexities of this ever-evolving landscape.
In the coming section, Three River Group focuses on two of the most consistent sectors within the vast industry: Multi-family, and Commercial RE.
Three River Group leverages it’s network within the industry to get unique feedback when approaching new deals, that aligns with different goals and risk profiles. Our board has extensive background with commercial, and multi-family investing, which allows us to receive niche advice when approaching these sectors in specific.
Our real estate network allows us to stay informed on market trends and emerging opportunities that puts us in a position to succeed when the right deal comes along.
Opportunity
2021 was a year like no other as multifamily drew more than 41 % of total commercial real estate investment. With favorably low interest rates and heightened demand for affordable rents, an increasing amount of capital targeted the multifamily market. Growth in 2021 was record breaking and the trend is forecasted to continue into 2022 and beyond.
Investors poured an annual record of $335.3 billion into the nation’s apartment market, an increase of 128.2% year-over-year. Investors in the U.S. hit the gas particularly hard in the last three months of 2021, investment volume increased to $148.9 billion, in the fourth quarter. That’s the highest quarterly total on record. In fact, it was heftier then the investment volume in all of 2020, a year racked by coronavirus disruptions. The U.S. average price per unit rose nearly 9% in 2021 to over $180,000. Cap rates have compressed as a result, with the national mean dropping to 4.93 percent. Best-in-class assets in the most sought after markets have changed hands at initial yields as tight as the mid- 2% range, with historically low interest rates assisting with deal flow. Rates are expected to rise to some degree this year, which may restrain the downward pressure on multifamily yields. Paired with competition from other parties, this trend will likely drive investors to widen criteria this year, bolstered by a generally recovered economy. Supply and demand was responsible for driving the record breaking 2021 investment. Developers delivered 274,500 multifamily units nationwide in 2021. Another 400,000-plus in the process of being developed although supply chain difficulties may delay full development until 2024. However demand remains so strong that these top markets are absorbing the new supply as it comes on. Almost all markets across the U.S. saw positive rent growth in 2021. Many saw rents jump by double-digit percentages during the year. National asking rents rose 13.5 percent on average in 2021. Anticipated rent growth for 2022 is optimistic but will likely not repeat the record breaking growth seen in 2021. A record number of units were absorbed in 2021, driving the national multifamily vacancy rate down to the lowest year-end level in more than two decades. Fundamentals are projected to improve vacancy even further in 2022.
America Becoming a Renter Nation
There are more U.S. citizens renting now than at any point since 1965. The shift towards renting vs owning is transforming the landscape of the multifamily market.
In 2021, Bloomberg had published an opinion piece, that suggested America should become a “Renter Nation”. The discussion today is more relevant that ever.
Simply put, the renter households are rising while homeownership is contracting. And to understand where we are headed as a country, we need to know where we have already been, and how we got here.
After World War II, the homeownership rate increased markedly over time until it settled at around 65%. And for decades, the U.S. was roughly a 65% owner, 35% renter nation. In the Mid-1990s, questionable public policy was enacted and encouraged the expansion of home ownership. this was accomplished by eroding mortgage lending standards. by 2004, home ownership rates peaked at nearly 70%, and in those days it was very easy to get a loan.
By 2008, millions of people now owned a home that they would not typically qualify for. This is ultimately what caused our recession of 2008.
Housing Affordability Index
Understanding the Conditions
With home prices up and affordability down, it becomes very clear why homeownership rate is declining. Will this trend continue?
5 Most popular reasons why the trend of a “Renting Nation” will continue.
1). The High Cost of Housing
Homes have never cost more than how much they do right now. in Q2 of 2020 the U.S. median home price was $322,000. Just two years later in the same quarter respectively, the average home price had risen to over $425,000. The rise in housing costs, accompanied with inflation, and income growth is putting people in a bind when trying to afford a home. The houses are far out of reach.
2.) Lack of Supply
From 1968 to 2008, an average of 1.53 million houses were constructed annually. However, this figure has plummeted by 39% since then, with an average of only 936,000 homes built per year from 2009 to 2021.
The scarcity of single-family homes is becoming increasingly dire, as highlighted in a 2022 Forbes article titled "Homebuyers Running Out Of Options As Housing Supply Hits An All-Time Low." This shortage underscores a fundamental principle of Economics 101: when demand surpasses supply, prices surge. Consequently, as home prices rise, more individuals opt for renting over homeownership.
While the solution may seem straightforward—construct more houses—numerous challenges hinder new construction. Rising costs of land, labor, materials, and gasoline present formidable barriers. Moreover, these expense escalations are compounded by higher interest rates and the specter of an impending recession, rendering new construction ventures exceedingly risky.
3.) Higher Interest Rates
In 2021, the average 30-year fixed mortgage rate hit 2.96%, representing one of the most historically low rates for home loans in the United States. However, by June 2022, the Federal Reserve initiated a significant increase of 75 basis points in the federal funds rate, marking the largest hike since 1994. Consequently, interest rates across the board surged.
Presently, 30-year mortgage rates are nearly at 6%, with numerous economic forecasts suggesting that the Federal Reserve will persist in raising rates to combat inflationary pressures.
Experts predict that the return to low mortgage rates could be several years away. As interest rates climb, so do monthly mortgage payments. For instance, calculations for the principal and interest payment on a median-priced U.S. home of $428,700 reveal the impact of these rising rates. This trend is pushing many potential homebuyers away from purchasing homes and towards renting accommodations.
Additional research indicates that the housing market is experiencing increased competition due to a shortage of available homes for sale, further exacerbating the challenges for prospective buyers. Moreover, the evolving economic landscape, including factors such as employment trends and government policies, is expected to continue influencing mortgage rates and housing affordability in the foreseeable future.
4.) Inflation
Inflation has surged significantly, with various essential expenses witnessing substantial increases. Gasoline prices have soared to unprecedented levels, while electricity costs have risen by 12%. Airline fares have skyrocketed by 38%, and even everyday items like eggs have surged by over 22%. Dining out at your preferred restaurant now comes with a noticeably higher price tag compared to just a year ago.
The current inflation rate stands at a 41-year peak, placing added financial strain on consumers who are grappling with elevated costs across the board. Discretionary spending is dwindling, forcing individuals to make difficult decisions regarding their financial priorities.
Financial advisors typically offer two key guidelines for homebuyers:
Allocate no more than 30% of gross income towards housing payments.
Ensure the price of the house doesn't exceed three times the annual salary.
With the median household income in the United States hovering around $75,000, adhering to these recommendations suggests that someone earning this amount shouldn't purchase a home priced above $225,000. However, the median home price currently stands at $428,700, nearly six times their annual salary. Assuming a 10% down payment and a 6.0% interest rate, the resulting monthly mortgage payment would consume almost 50% of their gross income.
Renting presents a more financially viable option for many individuals, allowing them to allocate less towards housing expenses and freeing up funds for other necessities, which have become more expensive due to inflationary pressures.
5.) Existing Debt
Non-mortgage debt poses a substantial burden for numerous Americans, hindering their ability to save for a down payment on a home. The collective burden of non-mortgage debt in the United States is staggering, with nearly $800 billion owed in credit card debt and an additional $1.75 trillion in student loan debt.
Unlike mortgage debt, which often features relatively low-interest rates, much of this non-mortgage debt carries high-interest terms. Consequently, individuals who maintain a balance on their accounts each month incur significant interest expenses. Moreover, in the current interest rate climate, where rates may fluctuate, the challenge of paying off such debt becomes even more daunting.
“Renting Nation” Trajectory
Whether one supports the idea of America transitioning into a nation primarily comprised of renters or not, the trajectory is unmistakable. While homeownership will always remain a significant aspect of the housing landscape, its decline is expected to persist for the foreseeable future.
Several factors contribute to this shift: rising interest rates, as emphasized by Federal Reserve Chairman Jerome Powell's commitment to continued increases until inflation stabilizes; soaring home prices coupled with limited supply and decreased affordability; and the burden of existing debt, which impedes many from pursuing homeownership.
The current environment of escalating inflation further strains household budgets, exacerbating the challenge of achieving financial stability.
Given these circumstances, it's unsurprising that the number of renter households is on the rise, with no indication of slowing down soon. A 2021 research report by The Urban Institute titled "The Future of Headship and Homeownership" forecasts a continued decline in homeownership rates across various age groups through 2040, with renter growth outpacing homeownership growth.
Regardless of personal sentiments, the trend towards a rental-centric nation is underway, and it's still in its early stages. The demand for rental housing, particularly apartments, is poised to surge in the coming years.
For those considering investment opportunities, now is an opportune moment to explore multifamily real estate. Apartments offer a unique position to meet the increasing demand for rental housing while providing investors with consistent returns. Reach out to schedule a discussion with a team member to learn more about capitalizing on this growing rental market.