By Sunny Sajnani, Director / Principal
As a real estate professional in one of the fastest growing markets in the country, I am constantly hearing about new multifamily projects breaking ground in high-demand markets. As long as job growth stays strong, I have no doubt that all these new apartment units will get absorbed. But what’s crazy and hard to fathom is the amount of rent these developers are demanding for these new projects. Who the heck can afford to pay this much rent?? Well, millennials—the largest demographic of the current renter pool—are finding ways to fork over the cash.
Rent.com conducted a survey of 1,000 millennial renters to find out how they are planning their next move, finding more than half (57%) rank affordability as the most important factor when choosing an apartment. Yet when asked, 55% said they are willing to spend up to $150 more per month in order to stay in an apartment they love. Nearly one in four respondents (24%) are willing to shell out an additional $400 a month, just to keep their pad. This tells me one thing: young people “think” they want to find a good deal on an apartment, but they will pay up in rent for amenities and location.
It seems that the millennial heart and head are at odds. Despite their desire for affordable apartments above all else, 22% of millennials are spending up to 40% of their annual income on rent. In order to afford living, more than one in three millennial renters (39%) reported getting some financial help, with 24% turning to their parents for additional support, 9% receiving financial support from the government and 6% depending on the kindness of others.
Now that we have figured out that millennials give significantly more weight into where they live compared to earlier generations (and mooch off their parents too), what happens if rents keep increasing? According to National Real Estate Investor, we are experiencing the “Best Rent Growth in 15 Years for Apartments.” New resident rents rose 5.2% over the 12 months that ended Q2 2015. That’s the biggest rent hike since 1999-2000, according to the latest data from MPF research, a Multi-family research firm.
But will residents be forced out of the market? It doesn’t look that way. While rent growth has outpaced wage growth, there’s still enough in our paychecks to cover the rent. As mentioned above, the effective rent growth hit just above 5% in May; however, total wage growth has hit 2.3%, which is enough to cover the rent increase dollar for dollar.
For investors of multifamily projects who are questioning whether this massive rent growth can sustain without a correction, I think you can rest at night knowing that your kids are keeping your investment safe! All joking aside, multifamily has proven to be the most attractive commercial real estate sector over the past decade and there’s no reason in sight of it slowing down. At MCA, we have raised hundreds of millions of debt and equity financing for multifamily deals over the past several years that have produced very strong returns. Luckily, the rents and lease-ups have outperformed our initial assumptions in this millennial driven market.
The author, Sunny Sajnani, is a Senior Director and Principal in the Dallas office of Metropolitan Capital. Sunny can be reached at email@example.com or 972-267-0600.