Cracks Begin to Form – July 8, 2024
The mid-year outlook for housing-related asset classes from Cushman & Wakefield shows strong demand across various housing sectors continuing to fuel growth. That being said, persistent inflation continues and ongoing moderation in overall economic and labor conditions is impacting affordability. Combined, these factors create a complex and mixed outlook for housing assets, according to Cushman & Wakefield.
“Cracks are forming beneath the surface, as consumers and businesses remain under pressure from the cumulative effects of higher interest rates and inflation,” said Rebecca Rockey, deputy chief economist and global head of forecasting at Cushman & Wakefield.
Let’s take a sector-by-sector look, starting with multifamily. Here, Cushman & Wakefield reports that the vacancy rate nationwide has risen from a low of 5.1% in mid-2021 to its current rate of 8.7% as of the first quarter of 2024. The baseline forecast calls for vacancy to peak at the end of this year at 8.9%, before adjusting lower to 8.3% in 2025 and 7.3% in 2026.
“The new construction pipeline is thinning out due to market conditions and challenging financing conditions,” said Sam Tenenbaum, Americas head of multifamily insights. “Multifamily permits as of the first quarter 2024 are down 38% from their peak, so we expect that deliveries are past their peak. Forecasted deliveries total 400,000 units this year, but that total will be roughly halved in 2025.”
He added, “While it will take several quarters for these new units to be leased, demand is clearly on a solid trajectory as evidenced by the first quarter, where the 85,900 units absorbed was the strongest in two-and-a-half years and the second highest first quarter total on record.”
Build-to-rent: The U.S. population of 40-49-year-olds is expected to grow by more than 10% in this decade, the fastest of any age group outside of 65-plus. Given affordability challenges in the single-family market, this demographic will likely rent at an outsized pace, gravitating toward BTR product.
“The build-to-rent sector, while currently in its infancy, has outperformed nationally. BTR is poised to become more interesting to institutional investors, but will require more development to cement that path,” said Tenenbaum. “Because of this, we expect to see significant construction activity – potentially leading to uneven performance over the next few years as supply and demand find balance.”
Student housing: A steadily growing population of university-aged students offers relatively more surety in outlook. Forecasts suggest that the total number of students will approach 20 million by the end of the decade.
“Student housing assets have outperformed the broader multifamily market over the past few years, thanks to strong enrollment growth across most top-tier student markets which far outpaced a diminished development pipeline, with an approximately 40% decline in current and projected deliveries from the previous five-year average,” said Travis Prince, executive managing director, student housing capital markets. “As a result, occupancies have improved and rent growth should continue to outperform the broader multifamily sector through 2025-2026.”
Seniors housing: In common with student housing, the seniors sector went through a rough patch during the pandemic. However, it has demographics on its side for the long term.
The fastest-growing age cohort in the population is those over the age of 75, which is expected to increase by more than 50% in the next 12 years. This demographic shift will provide substantial demand for senior living over the next 10-20 years, a sector already experiencing significant tailwinds with occupancy levels increasing for the past 12 consecutive quarters.
“Occupancies have fully recovered from pre-pandemic levels and rent growth remains strong in almost all U.S. markets,” said Zach Bowyer, executive managing director and head of living sectors. “To meet this growing demand, we estimate the need for an additional 35,000 to 45,000 units of new supply per year through 2045, well ahead of the current pace of roughly 25,000 units.”
In the years to come, he added, “we expect renewed interest from investors across the sub-sectors like active adult, independent living and assisted living, as construction will race to keep up with growing demand and operators find ways to temper operating expenses.”