4.3 million units by 2035: Supply and demand trends favor multifamily investment
- December 1, 2022: Vol. 9, Number 11

4.3 million units by 2035: Supply and demand trends favor multifamily investment

by Loretta Clodfelter

With many Americans delaying homeownership — given low supply, high pricing and rising interest rates — that has in turn created a growing demand for rental housing. This is contributing to rising rents and presenting opportunity for investors to capitalize on the abundance of new renters, increased competition and demand that is outpacing supply, says Larry Jacobson, president and CEO of The Jacobson Co.

Jacobson pointed to a new study commissioned by the National Multifamily Housing Council and the National Apartment Association, which found the United States needs to build 4.3 million new apartment units by 2035 to keep up with this increasing demand. “Texas, Florida and California account for 40 percent of future demand and will require 1.5 million new apartments by 2035,” adds Jacobson.

But even with these positive demand trends, construction has been limited, which is likely to keep rental rates elevated.

“According to a recent report from Moody’s,” says Jacobson, “the limited multifamily construction will likely keep multifamily supply and demand in balance for some time, even during a recession. Although a recession might cause housing prices to decline, history shows that multifamily rents are generally slower to respond to rising interest rates and remain elevated.”

Jacobson also predicts the increased rental income is likely to exceed the inflationary growth in building operating costs and expenses, even as higher rental rates also lead to increased asset values. He does, however, caution that prospective buyers should carefully assess any capital expenditure requirements, given rising costs.

Investors’ risks may be more political than economic in the current environment, as rapid rises in apartment rents can spark backlashes on the local or statewide level.

“With the increased potential for rising rental costs, investors will want to consider if rent control in the area is being considered, or if it has been implemented in the past. Rent control policies, as we have seen throughout Los Angeles, will make properties more difficult to operate and will limit potential returns,” adds Jacobson.

According to Jacobson, political considerations have become increasingly relevant for investors. “At a local level, a sponsor should consider the cost, time and intricacies required to facilitate permitting new apartment buildings,” says Jacobson. “Ideally, an investor who buys existing product will want to buy a property in an area where demand is high, supply is low, and permitting new development is politically challenging. Areas that are more development-friendly are at greater risk of seeing an influx of new construction that could have downstream impacts on existing owners.”

And, he adds, “at both a state and local level, investors will want to consider whether rent control or other affordable housing policies are being considered — something that increased especially throughout the pandemic — as this may make it more difficult to increase rents and will limit potential returns.”

At the market level, notes Jacobson, “we are moving money away from markets like Seattle and Los Angeles and redeploying capital into markets such as Denver, Salt Lake City and areas in Texas.” Those latter markets have demonstrated strong in-migration patterns, healthy economies, and a superior quality of life, he explains.


Loretta Clodfelter is senior editor of Institutional Real Estate Americas.

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