It is well-documented that the millennial generation has been driving much of the demand for new apartment units in the U.S. As millennials get older, however, the housing needs of this massive generation are changing. Many millennials are becoming parents.
In a recent study, the Urban Land Institute (ULI) predicted an explosion in demand for rental housing that is suitable for families. There also are considerable roadblocks in building family-friendly rentals, including a lack of financing, that have limited the supply of these units. Christopher Ptomey, executive director of ULI’s Terwilliger Center for Housing, spoke with Scotsman Guide about the family-rental sector and its challenges.
What is the extent of the shortage of affordable family-rental housing?
The scope is national, but the nature and extent of housing shortages varies according to where you are. According to the National Low Income Housing Coalition, there are about 35 million renter households in the country earning 80% of (area) median income or less. That’s about the same number of total rental units that exist in the country that are affordable at that price.
At first blush, that might not sound that bad. It’s actually really troubling. First, many of these units are occupied by households that could afford more expensive units, and so lower-income households that can access those units are forced to have more expensive units that take a higher percentage of their income.
And you see this particularly at the extremely low-income level. You have 7.3 million units that are affordable for those households that are occupied by higher-income earners. And so, as you go lower down the income scale, the shortages get worse. If you focus particularly on the family (rental units), which are about a third of the overall rental pool, a substantial majority earn less than $50,000 a year.
Why do you say that the need for family housing is growing?
Primarily because we see the millennial generation reaching a demographic tipping point. Many members of that generation are poised to have children in the years to come. And we know this because of the immediately previous generation. Almost 56% of households in the Generation X cohort have children today. We are expecting that, ultimately, you’ll have a similar rate, but you have a much bigger generation in millennials.
It is always more of an issue when you’re looking at serving lower-income populations than when you’re looking at the luxury-class end of things
Why aren’t developers building more units targeted for families?
This market has either been ignored or vastly underplayed. The narratives that you see in the media, and within the industry pre-COVID, have really focused very strongly on urbanization and on the influx of millennial into cities and their preferences. Secondly, you have to look at the capital markets and their appetite for more conventional products that target younger renters.
Probably the most important piece is public policy, such as [the elimination of] exclusionary zoning. In places like Minneapolis and Oregon, they’re dismantling some of those exclusionary practices that have been a major barrier to building this type of housing. Secondly, there are fiscal policies, particularly related to schools. It’s a lot easier to sell the development to a city council if they’re not expecting a new demand on their school system and the costs there.
Are there issues for financing these projects?
It is always more of an issue when you’re looking at serving lower-income populations than when you’re looking at the luxury-class end of things. You’re dealing with lower rents and so you’re usually going to have to have a higher and more complex capital stack in order to make the development pencil out.
Both debt and equity are more cautious in light of the slimmer margins. The rates of return tend to be significantly lower than what you would see in an investment in a Class A luxury property. So, financing is almost always a concern. ●