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Podcast Digest: Consulting Executives on Emerging Rental Trends

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LOS ANGELES, June 12, 2019 (Industry Intelligence Inc.) – Lesley Deutch and Ken Perlman, both principals at John Burns Real Estate Consulting, discussed notable shifts in the apartment rental market with host Dean Wehrli in a podcast on the company’s website.

Deutch and Perlman expect the current cycle of apartment development to be ending, and the next cycle is going to look very different. Deutch anticipates two different renter types emerging.

Those two groups, she said, will be younger renters saddled with student debt prioritizing roommate-friendly, minimal-amenity spaces, and older renters-by-choice aged 55-plus seeking convenience of lifestyle, social flexibility and a broad range of amenities.

‘So it’s different configurations and a slightly different set of amenities for each of these groups,’ Deutch said. She counsels developers to consider no or very minimalistic amenities for younger renters while building spacious units with robust amenities for older renters.

Perlman pointed to a survey by the National Multifamily Housing Council citing rental activity by age in which move-down renters aged 55-plus rent rather than buy primarily because they demand convenience, flexibility and ease of maintenance.

Wehrli cited the Bay Area as an example where parcel lockers are becoming critical among move-down renters, highlighting a trend that both Deutch and Perlman observe across markets.

Wehrli asked Deutch and Perlman for their take on whether the apartment market is oversupplied.

‘In every market there’s been a ton of construction,’ Deutch said. ‘But I think you’ve got to really delve down into which submarkets and areas have seen that construction. Once you get into that I think that there are some markets that are still undersupplied.’

The specific product-type apartment developers have built also matters, according to Deutch. So the market may be oversupplied on a particular product but there’s room to grow on different apartment types.

Deutch and Perlman cited affordable units with minimal amenities and larger units with special amenity packages—such as gym memberships, conceierge services and parcel lockers—as areas with considerable growth potential.

‘I think there is generally the danger that many markets are oversupplied,’ Perlman said. Effective rent growth year-over-year in markets like Denver, Pheonix and Las Vegas is up 6%-8%, he noted, but occupancy rates have dropped 1% across most markets.

‘There’s this notion that we are beginning to reach a critical mass or point where we don’t have a lot of room to expand on the traditional apartment market, but … we have to really look at niches in our specific submarkets to identify a larger pattern,’ Perlman said.

Wehrli asked Deutch and Perlman for their stance on markets that are currently experiencing the most growth.

‘The big growth markets are those that are seeing some really strong employment growth, because that’s where young people will go and also where the 55-plus will go to be with their children,’ Deutch said. The so called ‘connectors,’ or millennials born in the 1990s, are the new target renters, she added, so the biggest growth markets will be those with viable employment opportunites.

Perlman observed that people are increasingly flocking toward ‘new boomtowns’ like Denver, San Jose, Austin, Salt Lake City, Dallas and Orlando, where job growth is attracting both younger and older renters. These groups are willing to move to ‘surban’ areas, meaning suburban locations with considerable amenities and high access to transportation.

Wehrli cited San Diego’s Pacific Islands Ranch community as an example of such a growing second-tier ‘surban’ market.

Occupany rates are down in some of those markets simply due to oversupply, however. Deutch said these markets still present significant opportunity but should shift their focus to connectors and move-down renters—the ‘new renter,’ so to speak.

Deutch and Perlman suggested following jobs, ‘new renters’ and ‘good’ school districts to identify the strongest growth markets.

A third type of renter that developers should watch for, according to Perlman, are the older millennials, or ‘sharers’ born in the 1980s, as they move into their family formation years. Since the cost of owning an entry level home is dramatically higher than renting an apartment, demand for single family rental units is growing, Perlman said.

In Salt Lake City, for example, it costs 126% more to own an entry level home as it does to rent an apartment. Both Deutch and Perlman observe this trend across markets in ‘new boomtowns' like Orange County, Seattle, San Jose, San Francisco, Austin and Denver.

In Miami, development has moved outward to places one wouldn’t normally consider. Areas near a highway within commutable distance to work have seen huge leaseup rates, Deutch observed.

Perlman concluded that the main motivator to continue renting was access to amenities, ease of maintenance and the rising cost of ownership in some expanding ‘surban’ markets. People living in these areas, he added, are increasingly interested in single family spaces for rent.

Wehrli asked Deutch and Perlman for their take on what differentiates older renters from owners.

Rentership rates for people between 45 and 65 have changed significantly, Perlman said. ‘There’s been a spike in this population.’ In 2003, aproximitely 21% of people between 45 and 65 were renters, compared to 27%-28% today. ‘These people are renting primarily out of convenience,’ Perlman explained.

Deutch cited flexibility, convenience and broad access to amenities as factors that differentiate older renters from owners.

Finally, when asked asked about the most serious threats facing the apartment rental market, Perlman highlighted three overarching factors: rents that outpace incomes, single family rental units and oversupplied markets.

Industry Intelligence editor’s note: The primary source of this article is a John Burns Real Estate Consulting podcast posted on the company’s website. To listen to the podcast, please click here.