The Turmoil in the Subprime Market is becoming a Bright Light for Apartment Buildings

What do subprime lending, supply and demand, foreclosures, echo boomers, empty nesters, escalated building costs, unaffordable housing, job growth, resort style amenities, immigration and growth markets have in common? They are all factors driving the increased demand for Class A apartment buildings across the United States.

With interest rates at record lows in conjunction with the tech bust of the early 2000’s, many investors were convinced to pull their assets from the stock market and funnel these dollars into real estate investments, specifically the U.S. housing market. This trend, combined with lenders willing to loan money to the most risky of borrows (subprime), led to a decreased demand for rental apartments across the country as many of the markets elite renters were now able to own a home rather than rent a unit.

Naturally, this real estate frenzy brought in the latest speculators and condo converters seeking to make a quick buck. The problem though is that many markets, like South Florida for example, were and remain artificially inflated with speculators and subprime loans. As the demand for home building and purchasing decreases, many speculators are now stuck with illiquid investments that they are either forced to carry or foreclose on. Adding fuel to the fire, many subprime mortgages are re-setting after their teaser 1% introductory periods expire, leaving many first-time owners compelled to rent.

These negative circumstances consisting of foreclosures, the elimination of subprime borrowers, and the vast supply of multi-family units that the condo converters removed from the market place, shared with recent and future demographic trends have created the “perfect storm” for rental apartment buildings. Many are well aware that over the next 20 years, 78 million baby boomers will be entering into retirement. Many of these boomers will become empty-nesters possibly seeking to downsize their need for larger family housing allowing them to potentially direct their primary resources towards other activities. The children of these boomers, known as the “echo boomers”, have a population size nearly that of their parents, about 76 million people. Born between1982 and 1994, the echo boomers are just beginning to graduate from college and enter the work force. This demographic segment may be the number one driving factor for rental living over the next 12 years as these boomers are currently seeking jobs, geographic relocation, and moving away from home. It may be difficult in today’s environment for these 21 year old young adults to afford a hefty down payment in order to purchase a single family home.

Affordable housing for both the baby and echo boomers, which is currently over 50% of the U.S. population, is expected to significantly boost the demand for rental apartment buildings over the next 12 to 20 years. Landlords are now able to push rents in many markets, resulting in rapid capital appreciation of apartments. In fact a Harvard University study issued in June 2007 stated that “The long-term outlook for residential investment remains strong.” As it relates directly to apartments, the report mentions, “The children of the baby boomers coming of age in the next decade [echo boomers] will reinforce the demand for rental units.” The Harvard study concludes that, “In fast-growing areas, the existing housing stock will be unable to accommodate the rising number of young households.”

It is important to understand the inverse relationship between rental real estate and direct real estate ownership. When it is an ideal time to purchase a home, the demand for rentals is driven downward. By the same token, when the demand for home purchases is down (today’s environment), usually rental growth is on the rise. 1031 Alternatives Group, through our real estate sponsor firms, has established an investment philosophy that emphasizes the aforementioned demographic trends, in this case as it specifically relates to apartment investments. For further information on these programs, please contact our offices directly for a complimentary brochure on “Demographic Investing”.