The recent capital markets dislocation caused by interest rate increases that began in early 2022, as well as inflationary pressures on construction costs, has resulted in a challenging market to plan, finance, and develop new rental housing in the United States. Despite the current financing challenges, the long-term macro fundamentals for rental housing remain strong, as evidenced by the shortage of both rental and for-sale housing inventory. This imbalance will be further exacerbated by the significant decline in new housing starts.
Projects that can obtain financing in the current market (based on today’s underwriting and investment return requirements) and deliver into the upcoming window of undersupply (due to fewer completions in 2026 to 2027) are poised to outperform in terms of both lease-up velocity and rental rate growth. Furthermore, projects launching today are likely to benefit from prospective rate cuts which have already begun to take hold.
Single-Family Supply/Demand Imbalance Leading to Long-Term Renters
According to the National Association of Home Builders, the U.S. has a housing deficit of approximately 4.5 million units.1 The current shortage can be traced back to the subprime mortgage crisis and the ensuing global financial crisis, which resulted in a significant decline in new annual housing starts as the housing finance industry recovered.
As the recovery cycle progressed over the last decade post-Global Financial Crisis, the number of units built did not keep up with the new household formation. Between 2012 and 2023, 17.2 million new households were formed in the U.S. compared to 13.4 million new housing units started and completed over the same period.2
Figure 1: JLL Research, U.S. Census Bureau, Freddie Mac, RealPage, NerdWallet, Green Street — U.S. Housing Completions vs. Total Household Formations, 1968-2024
For many young Americans with aspirations of homeownership, that goal has now become unattainable as affordability has eroded in the current high-interest rate environment. In most U.S. markets, it is now more economical to rent than to own a home. Further, many Americans – particularly younger millenials and those characterized as “Gen Z” – value mobility and therefore have become “renters by choice”. These factors have made many renters become long-term renters or even lifelong renters. Fannie Mae’s Home Purchase Sentiment Index, which measures consumer attitude towards homebuying, decreased 2.5 points to an all-time survey low of 69.4 percent in May 2024.3 Americans believe that housing will remain unaffordable due to mortgage rate uncertainty. Furthermore, according to this same survey, consumers believe that home prices will continue to increase. Only 19% of consumers think that now is a good time to buy a home.
As consumers views of lack of affordability and renting by choice continue to persist, demand for rental housing in the U.S. is continuing to grow. In addition to continued multifamily development, an increased supply of alternative forms of housing such as single-family build for rent will continue to fill the gap in the market.
Figure 2: Fannie Mae — Home Purchase Sentiment Index
Figure 3: University of Michigan — Soaring Mortgage Rates Impact Home Buying Conditions
Multifamily and Single-Family Build-For-Rent Poised to Gain
At a time when rental housing demand is at an all-time high, the National Association of Home Builders projects multifamily construction starts will decline by 20% from 2023. This would represent a 50% decline from 2022.4 In some markets, where the new supply has recently hit peak levels, including Austin, Phoenix, Atlanta, and Nashville, this decline in construction starts is a welcome shift toward market normalization. Permits and starts are now 10% to 20% below historical averages respectively, and the U.S. market is on track to deliver 232,000 multifamily units this year as opposed to the 300,000 to 360,000 multifamily units per year that is needed to meet the projected annual population growth, ignoring the current housing supply shortage.5
If trends continue, new demand generated by population growth alone will require the U.S. to build 4.3 million more multifamily rental units by 2035.6 This includes 600,000 units that are needed to fill the shortage from the underbuilding period that followed the Global Financial Crisis. Further, continued shifts in sentiment towards homebuying and the decline in homeownership are expected to put additional pressure on demand for rental housing. It is estimated that even a 1% drop in the homeownership rate would require an additional 1.3 million new rental housing units.
Figure 4: Green Street Apartment Insights — Multifamily Permits and Starts
The Opportunity
The overall supply-demand imbalance that exists in the U.S. housing market is continuing to drive strong fundamentals for rental housing assets, creating a greater urgency for new project starts. When analyzing the current rental market, the markets with the highest barriers to entry will likely outperform on rent growth in the long term, while the lower barrier to entry markets with strong growth profiles will also fare well despite short term supply challenges. There are multiple rental housing categories within the market, including traditional multifamily apartments and the newer sector of single-family or townhome build-for-rent communities that provide a single-family lifestyle on a rental basis. Both categories are poised to gain in the current market imbalance as the trends of unaffordability and renting by choice continue to grow.
When analyzing a project today, developers must be able to achieve financing based on current underwriting standards. This has become much more challenging in today’s market than in the period from 2021 to 2022 but select projects are still being financed and built by experienced developers who are able to take advantage of this environment by identifying projects with strong risk adjusted returns.
Capital markets softness is cyclical. The interest rate cuts that have already started in the U.S. are likely to start to put further downward pressure on real estate capitalization rates. Over the next few years as this plays out, lower cap rates will amplify the positive fundamentals of a deal initiated today thus likely driving stronger returns for investors in the future.
About Peakhill
Peakhill is an asset manager with both commercial real estate credit and equity platforms operating throughout North America. Peakhill Equity Partners is an opportunistic equity platform focused on Co-General Partner (“Co-GP”) and Priority Equity investments in ground-up and value-add real estate projects in the U.S. and Canada. Through its entrepreneurial structure, flexible balance sheet, development expertise, and strategic relationship with its lending arm, Peakhill Capital, Peakhill Equity Partners seeks to identify equity investment opportunities with superior risk-adjusted returns through the capital structure. For more information on Peakhill Equity Partners, please visit equity.peakhillcapital.com.
Authored By: Jonah Belkin, Josh Robins, Paul Heydweiller, and Ryan Goren
This white paper (The “white paper”) is not to be reproduced or disseminated to any person without the prior express consent of Peakhill Equity Partners, Inc. (“Peakhill”). The white paper is being provided for information and discussion purposes only. Peakhill expressly disclaims any and all liability for any errors or omissions in the white paper or any other written or oral communication transmitted or made available. The contents of the white paper are not to be construed as legal, business or tax advice. If any information related to the white paper, or regarding Peakhill’s corporate strategy and organization, is provided at any time, orally or otherwise, such information is provided as a convenience only without representation or warranty as to its accuracy or completeness and should not be relied upon without independent investigation and verification.
Footnotes
- Forbes — Housing Market Predictions For 2024: When Will Home Prices Be Affordable Again? ↩︎
- Realtor.com — U.S. Housing Supply Gap Grows in 2023; Growth Outpaces Permits in Fast-Growing Sunbelt Metros ↩︎
- Fannie Mae — Homebuying Sentiment Hits New Survey Low ↩︎
- National Association of Home Builders: Multifamily starts will continue to decline in 2024 ↩︎
- Forbes — Excess Supply Of Apartment Deliveries Now, But Possible Shortages By 2026 ↩︎
- National Multifamily Housing — Apartment Supply Shortage ↩︎
