As 2014 reaches the spring season, the nation’s apartment sector continues to be in outstanding shape. When the new year began, the national multifamily occupancy rate was at a 10-year high of 95.8 percent, according to a Jones Lang LaSalle (JLL) report, and the sector had just finished yet another 12 months of solid rent growth across the country.
These fine operating fundamentals have certainly caught the attention of investors: multifamily investment sales set a new record in 2013, totaling $105.4 billion in volume, up nearly 30 percent from $81.5 billion the previous year, the JLL report says.
With new apartment construction generally at sane levels, new rental households forming because of the improving employment picture, and both Millennials and empty nesters entering the rental pool in increasing numbers, reasons for optimism about the continued strong performance of apartments abound.
Let me add another, often-overlooked reason the multifamily sector will experience razor-thin vacancy rates in the years ahead: student debt. Admittedly, it’s not a pleasant issue to contemplate, as the debt can wreak havoc with a young adult’s financial security.
The statistics are sobering. Outstanding student loan debt has absolutely exploded over the past decade, mushrooming from $364 billion in 2005 to $1.08 trillion at the end of last year, according to a report from the Federal Reserve Bank of New York. Approximately 11.5 percent of student loan balances are at least 90 days delinquent, the report says.
Data from the New York Fed also shows the percentage of 25 year olds with some level of student debt rose from 25 percent in 2003 to 43 percent in 2012, and the average student-debt balance nearly doubled—from $10,649 to $20,326—in the same timeframe.
A high amount of student debt can hamstring a person’s ability to buy a car, save for retirement, start a family or take out a small business loan. It also can be a severe impediment to his or her efforts to buy a home, making it much harder to save the money needed for the higher down payments that mortgage lenders now require.
While unfortunate, the cold, hard fact is that rising student debt will benefit the apartment industry because twenty- and thirty-somethings who are unable to buy homes will have to remain in rental housing longer than their predecessors.
Much has been made of people’s, particularly younger adults’, growing preference for apartments, in part because of the flexibility to move that rental housing affords them and because apartments are so prevalent in the urban live-work-play environments that are becoming more popular. Indeed, it does seem to be true that more people are choosing to rent rather than own, and that trend is a big factor in the positive outlook many have about the apartment sector.
However, many apartment residents saddled with big college tuition bills probably want to move on and buy single-family homes, but they can’t. They aren’t “renters by choice,” to use a phrase common in the multifamily industry, but the fact that they will be renters for a good while longer is one very significant reason that the demand for apartments is poised to remain high for a long time.