Time to Reboot Your Rental Housing Strategies
By John Burns, CEO John Burns Consulting
Huge shifts are occurring in the rental market:
- Return to basics. Rental demand is shifting to a focus on affordability, with renters willing to sacrifice square footage, privacy, amenities, and commute time in return for lower rent.
- Suburban growth. Urban renters are moving, children in tow, to the suburbs to either purchase a home or rent in a good school district.
- Entrepreneurial capital. Capital is flooding into a brand new asset class: newly built rental homes (build for rent, or BFR) with a variety of new designs appealing to a range of rental segments that have gone unserved.
Strategic Advice
Investors will focus on suburban more than urban development this year. Designs and amenities need to change quickly:
Urban: Lower the rents through fewer amenities and less private space, as today’s young renter is more likely to take on a roommate to save rent and less willing to pay a premium for great amenities.
Suburban: Shift back toward more affordable, family-oriented, value-oriented apartments that have plenty of square footage and new homes designed with renters in mind.
Here are some highlights from Dean, Lesley, and Ken, who consult rental communities from coast to coast.
The Demographic Shift behind the Trend
Apartment demand has now shifted from those born in the 1980s, who are now 29–38 years old, to those born in the 1990s. In our book Big Shifts Ahead (which is now available as an audiobook), we coined the terms 1980s Sharers and 1990s Connectors for those born in those two decades.
Amenity Race Coming to an End
Lesley believes the amenity race is going to end. Younger renters are saddled with student debt, and many do not have parents willing to help them pay rent.
Amenities also push up rents, and Ken notes that the premium between A- and B- quality locations has essentially been cut in half due to the shift toward the more affordable B locations. In some markets, the gap closed from a 50% premium to 25%–30%.
Go Suburban or to the Boomtowns
While many luxury, coastal urban markets have become oversupplied, suburbs experienced less construction, and we expect rent growth in select suburban markets over the next two years.
New boomtowns are where the young people are going for great jobs and quality of life, and their parents are following them: Austin, Denver, Nashville, Dallas, Orlando. These markets have seen a ton of apartment construction recently, and lease-up rates remain strong.
Submarket Specifics
Ken and Lesley note that executives should not “paint markets with a broad brush,” and each submarket is unique. One trend our team has noticed is the propensity for 1980s Sharers to move to the suburbs—to rent. They now need the superior suburban schools for their children. While many are buying, there has also been a surge in renting. With the new tax act decreasing the financial incentive to own, we expect the propensity to rent to continue to increase.
Hottest Rental Trend
The hottest trend, which we can verify by the explosion in our feasibility business in the last year, is the preponderance of newly built townhomes and detached homes for rent. These BFR communities are most popular in Phoenix, where many of the pioneering companies are located, but are quickly spreading elsewhere. While the demographic profiles of apartment and home rentals differs, there is increasing competition between apartments and single-family rental homes in these areas.
