By: Robert Strachota
The Minneapolis-St. Paul apartment market is currently in a period of rapid expansion, with 2017 anticipated to bring more of the same. Deliveries are expected to easily exceed 2016 figures, while rents will continue to expand, with growth rates rarely seen in the local market. At the same time, vacancy levels are near local historic lows. This has been going on for several years, with vacancy rates declining sharply in 2010 and 2011, followed by a steady decline through 2016. Responding to tightening vacancy rates, rental rates have trended steadily upwards since 2011, as seen in the chart provided by Colliers.
Three major factors in the local market have pushed this expansion of the apartment market in recent years, both on the local and national level. Demographic trends, student loan debt, and the changing makeup of families have all helped steer possible homebuyers into the apartment market, strengthening demand, pushing rental rates upward, and dictating the need for a building surge. What follows is a closer examination of those three factors:
-An Aging Population
The generation known as “Baby Boomers”, which until recently made up the largest portion of population in the United States, has now advanced in age to between 53 and 71 years old. For many people in this age bracket, this means a time for downsizing, as children are now entering or fully at adulthood. Beyond the lack of a need for the physical space often sought to raise a family, houses often come with a set of chores and responsibilities that become less desirable as people age, pushing people toward apartment living. New apartments are now being built that look to capitalize on this trend, offering amenities such as a rentable guest suite for family visits, common spaces for hobbies or activities, and connectivity to walking trails and parks.
-Student Debt Levels
Normally, the Baby Boomer generation aging into the empty nest phase of life would not have that large of an impact. After all, we just mentioned above that Baby Boomers are no longer the largest segment of the population, that distinction now belongs to the Millennial generation, generally defined to be comprised of people between ages of 13 and 35 years old. As the Millennial generation ages into adulthood, it would be expected that it gradually moves into the housing market, as most generations previously have. However, this has not been the case thus far. Many theories have been floated for this generation being slow to buy homes, from a wholesale change in values to an unwillingness to settle down. At Shenehon, we believe that there are many factors that influence this trend, but the clearest to identify is the amount of student debt with which many college graduates are now saddled. Recent research done by the Wall Street Journal states that the average member of the Class of 2016 graduated with $37,172 in student debt. This means that the portion of the population (college graduates) that is best positioned for future income growth and potential home buying enters their working life in no position to save money. Even with a high-income job directly out of college, it could take years to dig out from under the financial hole of student debt and save for a down payment, while monthly rental payments (even high payments) may be far easier to make.
-The Changing Family
According to a recent study done by John Burns Real Estate Consulting, the 2010 United States Census revealed that 32.1% of households with a child (or children) were single-parent households. This is a figure that has risen in every census taken since 1960, when the rate of single-parent homes with children was just 8.5%. Needless to say, high barriers into the housing market become more difficult to achieve with just one income, as opposed to two.
So, now that we have lain out some reasons we believe the apartment market to be will remain strong, let’s take a step back. Given the boom-and-bust nature of the real estate market, it is reasonable to ask, are we on a bubble?
Here at Shenehon Compnay, we do not believe that we are, as of yet. Besides the three factors listed above that bode well for the future of the apartment market, we point to five more common-sense indicators of a bubble:
Raw data from Google on searches for the phrase “how to flip a house” show that public interest in learning how to flip a house, while higher than in the depths of the most recent economic recession, still remain well below the peaks recorded during the housing bubble that preceeded that recession.
-Homes for All
As of this point, we have not seen the widespread availability of lending dollars that was so noted during the subprime mortgage crisis. Barriers to entry remain high, keeping the for-sale housing market stable and pushing more potential home buyers into renting.
As of right now, and perhaps as a result of hard lessons learned in the previous decade, the industry has shown considerable discipline. Thus far, development has not occurred, at least locally, in a number of small, calculated short-term bets that rely on rapidly-escalating prices. This has kept vacancy low while allowing rapid expansion in rental rates, and has limited the amount of long-term risk absorbed by developers.
It would be easy to speculate that, based on the rapid growth seen in the apartment market in the Minneapolis-St. Paul area, we are currently on a bubble that is due to pop at any moment. However, at Shenehon we believe that when you take a close look at the factors pushing the market to expand, sustained growth is viable for at least the next few years. Additionally, we have not seen any of the warning signs that were apparent in the last housing bubble. Based on these factors, we do not expect the bubble to burst anytime soon in the local apartment market.