By Bill Conerly (Forbes Contributor)
Multi-family housing construction is doing surprisingly well recently. Over the long run, housing units in buildings with five or more housing units comprise about 25 percent of all housing units constructed. So far in 2014, the figure is 35 percent. Why is multi-family so popular now? Before reaching for a major change in attitudes about how we live, let’s consider other possibilities. Part of the story is demographics. Young adults are much more likely to live in apartments than are older adults. And the number of young adults (which I’m defining for this purpose as ages 20-34) is rising, as the children of the baby boomers come of age.
This pattern can be seen in the older data. There were a good many multi-family units built around 1970 and again in the mid-1980s. Some of that second era’s development was encouraged by the Reagan tax laws, which favored real estate investments. The blue line in the chart shows the net increase in 20-34 year olds in the decade leading up to the data point. Demographics isn’t everything, but it appears to be something.
It’s not too surprising to see more rentals, given that the real estate collapse of a few years ago devastated the idea that home ownership is a sure-fire, no-risk way to riches. However, I’m still a little surprised by the soaring multi-family construction, because there is a more vibrant rental alternative now: single family homes.
In my youth, the housing options were simple: a rental apartment with noisy neighbors, or owning a single-family home. With rising home prices of a decade ago, the condominium market surged. So now your multi-family options include not only renting an apartment, but owning a condo with noisy neighbors. On the single-family side, the recession led many owners of upside-down properties to start renting them out to those who had lost their owned homes. The rental market for single-family housing is probably stronger than it’s ever been. Young adults should weigh the advantages of ownership against the disadvantages. I pointed out in my article, “Should You Buy A House Or Rent? The Economics Of Homeownership” that people who are likely to move in the next few years are better off renting. That applies to many young adults. I pointed out that if they wanted to move out of an apartment, they could easily rent a house. However, the strength of the multi-family market suggests that most of them are renting apartments.
Finally we come to lifestyle. My own children sound typical of the trend. When my Seattle son was looking for a job last year, one criterion was that the company’s location would allow him to walk to work. I was stunned that he wouldn’t get in his car for a 30 minute commute if the job was better, but he likes his walking-based urban lifestyle. My Silicon Valley son just moved into central San Francisco, so that he can walk to restaurants, coffee shops and bars. I hear similar stories from many other young people, so maybe there’s something to this urban trend.
However, I’m always skeptical of these big changes which supposedly mark a fundamental change in human character. When the current crop of young adults get married and has kids, and the kids grow beyond toddling to full-blown running, I suspect that the young parents will start looking for a house.
As we move into forecast thinking, let’s look at the demographics going forward. The current decade will have higher growth of the young-adult population than the past decade, which helps to justify our strong multi-family construction. However, look at what happens in the 2020 to 2030 era: virtually no growth of young adults.
Multi-family is strong now, but we will see, sometime in the coming five to ten years, a major shift away from multi-family and back into single-family homes. Real estate investors can enjoy today’s strong apartment market, but at some point in the future they will want to rotate out of apartments. When that time comes, it’s always better to be early than late.