New Household Formation Driving Multifamily Demand

In 2Q 2023, household formation in the U.S. reached its highest point since Covid struck, according to a new study of the multifamily capital markets by Newmark. The number of new households established rose by 1.2 million in the quarter, increasing the total for the year to 2.1 million.

“Household formation is thus trending upwards and running consistently above the pre-pandemic average, which should support housing demand,” Newmark said.

Some other studies of household formation have been less optimistic about future trends. A Harvard report on the state of the nation’s housing issued in July recognized a surge in growth from 2019 to 2022, especially among younger households, but predicted total household growth is likely to slow in the next few years. And an analysis by Marcus & Millichap cautioned that the end of the student loan repayment pause could delay household formation and homeownership.

Whatever the future holds, Newmark foresees an accelerating demand for multifamily housing in the year ahead. Absorption in 1H 2023 surged to 98,429 units, the bulk of it in the second quarter. It predicted total deliveries for all of 2023 will surge 51.1% over the prior year. While inventory grew 2% in the median market, Newmark expects the median market’s inventory to grow by 3.2% over the next year, with 28 markets recording growth of 5% or more.

A number of factors are driving the demand for multifamily housing, Newmark explained. A key factor is that the cost of homeownership is significantly higher than for rentals – with a differential of $763 in 2Q 2023 after a rapid increase that began in 2Q 2022. 

Another factor is that rising interest rates are squeezing out potential single family homebuyers and driving them to rent. “The 30-year fixed rate mortgage average still increased 17.7% between the second quarter of 2022 and 2023,” the report noted. As a result, home mortgage applications fell to a five-year low. And the opportunity to buy an existing home for less than a new one is also drying up, with the smallest price difference between the two in the last seven years.

Many would-be homeowners are also carrying more debt and saving less. “Credit card debt in the U.S. continues to reach all-time highs with each passing quarter,” Newmark observed.

And even though 11.5% more single-family building permits were issued, their number was still below the long-term trend.

National homeownership rates did rise year-over-year, reaching 65.9% in 3Q 2022, but not in the largest markets like New York, Los Angeles, Houston, Dallas, San Francisco and Miami. Indeed, of the 27 primary markets studied, only one-third experienced homeownership rates above the U.S. average.

For the first time in three quarters, multifamily showed positive effective rent growth year-over-year in 2Q 2023. “Nevertheless, year-over-year effective rent growth continued to slow and is now below the long-term average,” Newmark reported, with the Midwest being an exception.

However, as banks cut back on lending, multifamily developers have less access to capital, resulting in a 33.4% year-over-year drop in permitting. Multifamily origination volumes were the lowest since 2014, although they have been decelerating since March 2022.

Meanwhile, many renters facing higher costs of living are picking up and moving out, Newmark noted. Those between the ages of 25 and 34 are increasingly migrating out of high-cost markets to areas with a lower cost of living, including Austin, Charlotte and Raleigh-Durham.