Many different variables drive the demand for apartment housing. Tenants consider location, tax policy, employment, tenant age, location of family members, availability of healthcare and education when making housing decisions.
Most importantly, tenants look at affordability (of apartment housing). In other words, can a tenant live in a city with great transportation infrastructure and not own a car, and maybe bike or motor scooter to work? If so, tenants can fold this savings (lack of car payment, insurance, fuel expense) into a higher rental budget. For an older tenant, the location of age specific infrastructure is more important. If you are older than 55 you may want to choose a community that is modern and handicap accessible, in a warmer climate close to shopping, medical services, and age specific activities.
Migration of tenants to the south and coastal communities reflects the shifting landscape of housing demand. Cities, multifamily landlords and developers are being challenged to keep housing habitable, modern, affordable and suitable to the appropriate age groups. The need for habitable, modern, affordable and age-specific housing continues to challenge cities, developers, and multi-family landlords. In this article we organize future housing demands into seven sections.
- Over 65 age group
- Generation Y
- Sunbeltpopulation increase
- Soaring construction costs
- Rising Cost of Health Care
- Housing Affordability
- Taxation Climate
Over 65 – Baby Boomers
The 65+ demographic will increase from a current 13% of totalU.S.population to 19% by 2030. As aging populations increase, senior citizens will continue to make difficult choices between rent, food, housing and medical care. Especially hard hit are the very low income senior citizens.
As a result, the demand for government-subsidized low income housing will increase
A 2013Galluppoll found that 38% of non-retirees, a new low (down from 42% in 2012) say they will have enough money in retirement. WhenGallupfirst asked the question in 2002, 59% thought they would have enough savings for retirement. The percentage dipped below 50% during the 2008 recession and has remained below since (keep in mind; this will inch up as the stock market regains some of its recession induced losses).
The growing over-65 demographic will want to move to warm climates, into age-appropriate communities that feature lower fuel and heating expenses (higher air conditioning and water expenses), great medical care, modern infrastructure and safe housing, and communities for those that are over 55.
The nation’s 77 million baby boomers are reconsidering their housing needs as they move to the “empty nester “stage of their lives. According to data from the US Department of Housing and Urban development, 52% of seniors between 65 and 80 who recently moved became renters after moving, compared to 36%that rented before they moved.
Based on this trend, apartment firms are targeting this population segment. In 2011, 12% of completed apartment units were age restricted, meaning that residents had to meet a minimum age threshold, most often 55 years of age, to qualify. This is an increase from 8% in 2010.
Although Medicare will cover the majority of health care costs for this demographic, which may give them more financial flexibility to pay higher rent from funds set aside to pay for retirement, very low income seniors will be seeking tax credits developed for low income housing (like section 42).
The 20 to 35 Year Old Workforce – Generation Y
Studies indicate home ownership ties employees to a market place and makes it difficult for them to move. In contrast, younger Americans want to live in apartments to protect their economic freedom, as they find their niche in life while moving frequently in search of the “perfect” job.
Looking at homeownership in 2010, The US Census found that less than 40% of Americans under the age of 35 own their own homes.
Men and women graduating college on average have one child, compared to their high school educated, or GED recipient, peers who have at least two children.
Young workers are staying single longer than ever, extending their time as renters into their late 20s. Only 51% of adults over the age of 18 are married, so for many building a family is not a priority in their 20s.
Population increases inSunbelturban areas will drive more apartment and home construction.
Lower income (less than $55,000/year) Americans are more likely to be renters than upper income Americans.
Demand for apartments remains highly concentrated in urban areas close to employment centers, public, transportation and cultural outlets.
In 2013, 71.4% of all apartment permits issued were in the 50 largestUSmarkets.
Builders and bankers have been hesitant to build or approve loans in second or third tier marketplaces, if job opportunities do not exist. Construction costs soar.
As the economy rebounds, the cost of construction has increased due to shortages from 2012 to 2013:
- Softwood lumber costs are up 30%
- Drywall is up 17.9%
- Tar roofing is up 8.6
- Insulation is up 5.3%
- Concrete is up 2.2%
Labor shortages (for those with construction skills), are increasing as permits increase and construction volume grows. Finding experienced contractors and sub-contractors will become more challenging, driving up the price of construction, and therefore rents.
Building-material manufacturers “are raising prices dramatically, and once they’re convinced that these prices are going to stick, they’ll start reinvesting in those plants,” helping ease supply constraints, said John Burns, chairman of Irvine, California-based John Burns Real Estate Consulting.
Health Care Affordability
The rising cost of health care is affecting the ability to pay rent. The promise of potential cost savings with Obamacare looks like a boon for apartment tenant. Current renters are struggling with paying for the rising cost of health care necessities. Those with health care coverage experienced a 7.2% increase in costs between 2011 and 2012. Health care costs for American families in 2012 exceeded $20,000/year for the first time ever.
Housing Affordability
Currently, the average wage amongst renters nationally is $14.32/hr. In 2013 however, the housing wage, the amount a full time worker must earn per hour in order to afford a two-bedroom apartment in a given area, is $18.79/hr.
In 2011, for every 100 ELI (extremely low income) earners there were only 55 units they could live in without spending more than 30% of their income on housing and utility cost. Approximately 11.2 million renters have a severe housing cost burden. Western states, like Nevada, California, Arizonaand Coloradoare seeing an absolute shortage of affordable units.
The most expensive states for Housing Wage for a two-bedroom unit at fair market rents are in the north eastern part of the country.
- #3New York– $25.25
- #4New Jersey-$24.84
- #5Maryland– $24-47
- #6Massachusetts– $24.05
- #7Connecticut– $23.22
- #8Delaware– $20.63
Of the 13 states considered to make up the American south,Virginiais the most expensive state in the south for two-bedroom housing wage average at $20.72. This is $12 cheaper than the leader,Hawaii.
The 14 states of the American South have an average two-bedroom housing wage of $14.79/hr., significantly less than other high population regions, such as the north east.
The South’s affordable conditions are becoming an attractive destination for tenants, both young and old.
Taxation Climate
With renters looking to maximize their income potential, many are moving to states with lower individual tax burdens. A favorable tax climate is a major part of the success story for high growth states, likeTennesseeandTexas, when attracting a young and mobile workforce.
With the exception of California, (registered as a top 10 state in growth percentage), states with tax burdens above 11% of income grew no more than 1.5% of GDP, and Connecticut’s actually receded last year by 0.1%.
Of the top states with the lowest tax burdens, half of them are in the southern region of theUS. Percentages to the right indicate the growth in GDP for fiscal 2012.
States with Lowest Tax Burden:
| State | % of Income Taxed |
| South Dakota | 7.6% |
| Tennessee | 7.7% |
| Alabama | 7.8% |
| Louisiana | 7.8% |
| Texas | 7.9% |
States with Highest Tax Burden:
| State | % of Income Taxed |
| New York | 12.8% |
| New Jersey | 12.4% |
| Connecticut | 12.3% |
| California | 11.2% |
Conclusion
The demand for apartments will coincide with the growth of young couples without children, single parents, single individuals and retiring baby boomers. Each one of these groups will be seeking a different kind of apartment and surrounding infrastructure. Older individuals will want handicapped accessible units close to shopping, medical care and entertainment and younger single tenants will be searching for the typical pool side amenities. However, the demand for single family homes both owned and as rentals and apartments, will continue to grow along with population increases for young families.
Demographic growth and development is going to be most successful in cities with lower costs, typically located in the Southeast Sunbelt andTexas. The phenomenon is being driven by sustained economic growth, low density and affordable housing. Why would you live in the megacities that you can’t afford, likeLos Angeles,San Francisco,New YorkorChicago? The cost of housing and the affordability of Sunbelt areas likeHouston,Raleigh,MiamiandSan Antoniocombined with low population density attract both young and old. (Note also that these cities are gateway cities to international immigration, which reduces the cost of labor, for new construction and for basic unskilled labor.)
The future for apartments looks strong, as long as cities carefully manage their cost structures, such as systems development charges and local taxes, and the growth of their municipalities. Cities and states understand that they need to offer modern and safe urban environments, including inducements for businesses to create jobs; the more likely residents will show up. This is where opportunities lie for apartment and rental housing development.
Affordability and accessible health care are crucial to the continued apartment demand growth. Lower taxes and inexpensive housing, which are becoming popular in theSunbeltregion, can’t be ignored as more young and aging citizens, as well as businesses, travel south. Snow and ice might have been last year’s excuse for a move south, but in the years to come economic and housing trends will be fully responsible for more future southern migration.
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company.. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).