Simply put, real estate is the best way to grow wealth. There are many indications that multi-family apartment investments will continue to be great: 75 million Baby Boomers are headed into retirement; many millennials aren’t buying homes; and it’s getting more expensive to build new apartment units. Multi-family will be one of the best drivers for investment success and wealth development for the next 25 years.
Many Echo Boomers & Millennials aren't buying homes
New households aged 18 to 30 are being driven by the second largest demographic wave in US history: the Echo Boomers: the 76 million children and grandchildren of the Baby Boomers. In addition to this demographic group’s sheer size, Echo Boomers are disenfranchised with the concept of home ownership; 75% of them are more likely to rent than to own.
Baby Boomers are headed into retirement
The largest demographic group in US history, the Baby Boomers, is 78 million strong. As this group transitions from homeownership to renting, they are likely to never own again. Additionally, the average lifespan continues to increase, thus extending this generation’s rental demands.
Steep decline in homeownership
Home ownership has rapidly declined from 69.2% in 2004 towards the mean of approximately 64% today. This homeowner displacement has driven, and will continue to drive, households out of residential owner-occupied property to renter-occupied apartments. Experts estimate that more than 5 million households have moved from ownership to renting already and that this impact will last for decades. The net effect of the supply and demand imbalance is a strong, and long-term upward, trend in renter households.
It's getting expensive to build new apartment units
It starts with the cost of construction, including the hard costs (such as wood, steel, and plaster), the soft costs (such as architects, attorneys, and financing), the land, taxes, and permits. As all these costs have risen over the past 10 years, it's become more expensive to build new units and still provide investors with a healthy profit.
Rent up 3.8%
Low vacancy supports a 3.8 percent increase in the average effective rent to $913 per month this year, a slowdown from last year’s 5.0 percent gain.
Construction 1,600 units
Completions are on course to reach a cycle high this year with nearly 1,600 units. Approximately 700 apartments came online in 2016.
Employment up 1.8%
Employers in Cleveland will expand payrolls 1.8 percent this year, or by 19,100 workers. In 2016, 13,600 jobs were created.
Vacancy up 60 bps
A surge in construction will raise the vacancy rate to 3.9 percent. Nearly 1,500 units were absorbed in 2016 to slice vacancy 50 basis points.
Sources: Real Capital Analytics; CoStar Group, Inc.
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