With the uncertainty and economic volatility currently in place, it’s difficult to determine short-term outlooks for commercial real estate. Because of this, Marcus & Millichap’s Senior Vice President, John Chang, opted to focus on the longer-term issues. In a recently released video, “The Forces Driving Long-Term Rental Housing Demand,” Chang focused on one demographic: millennials.
This age cohort is 73 million strong and ranges in age from late 20s to early 40s, putting “the bulk of this generation in the midst of a variety of significant life milestones,” Chang said. The average marriage age is 29 years, meaning this demographic is in the midst of family formation, which is having an impact on the housing market.
Here’s the surprise. “The enormous wave of millennials in their prime household formation years is a core underlying housing demand driver,” Chang said. “Even though the leading edge of this cohort is aging into their 40s, they’re staying in rental housing longer.”
Better Apartments
Chang explained that apartment lease renewal rates have been increasing over the past year and are currently at 55%.
One reason for this is improved living. “The quality of life in apartment rentals has improved tremendously over the years, with more services and amenities, higher-caliber finish levels and better floor plans,” Chang said. Apartment developers have improved their offerings to boost tenant appeal, which has led many young adults to stay put and push home ownership down the road, he added.
Affordability Gap
Then there’s the fact that it’s expensive to buy and maintain a home these days.
“The quality of housing they can rent compared to the quality of housing they can afford to buy has grown wider than it was in the past over the last few years,” Chang remarked.
It’s no secret that the median price of a single-family home has increased, leading to a decrease in homeownership affordability. Given the almost $1,300 gap between owning a home and renting an apartment, “a lot of young adults are choosing to delay their first home purchase,” Chang said.
Specifically:
In 2010, the median age for buying a home was 30 years
In 2020, the median age for buying a home was 33 years
In 2022, the median age for buying a home was 36 years
In 2024, the median age for buying a home was 38 years
What’s the Outlook?
Looking ahead, Chang said he doesn’t see a dramatic change in the fundamentals over the next few years. Homebuilders aren’t adding enough inventory to reduce prices, and mortgage rates aren’t declining, either.
Looking forward five years, “it looks like the U.S. will continue to face a housing shortage, and there will continue to be a significant affordability gap between homeownership and renting,” Chang said.
Meanwhile, as apartment offerings continue to improve, demand for this type of housing will increase. Furthermore, with the slowdown in construction, Chang said multifamily vacancies will likely trend lower as rent growth strengthens.