If property investors and managers had a crystal ball to see into the future, there would be no pressure to keep up with trends that impact the real estate rental market.
Unfortunately, no such crystal ball is available, so following new developments and trends that impact rental markets is essential to anticipate strategies for engaging potential renters and determining where to look for new investment opportunities.
A number of trends that will shape the 2018 rental market are emerging as forecasters gauge the state of the market and make informed predictions that investors and property managers can use to help shape their strategies.
1. Key rental markets on the rise
Investor interest in previously strong rental markets like San Francisco and San Jose is losing steam as new apartments compete with high-priced homes to attract potential buyers in other areas, although San Diego remains among the top 10. Investor interest in 2018 will focus on:
Phoenix is also expected to remain a top investment choice for rental properties throughout 2018.
2. Home prices continue to rise
Keeping in step with substantial gains made in housing prices in various markets throughout 2017, many real estate and investment analysts are predicting another strong year in 2018 for U.S. housing. In their newly released 2018 Forecast, Freddie Mac predicts a steady 5 percent price growth. According to the report, year-to-date total home sales are at their highest since 2007. Limited housing inventory is expected to drive price increases, and demand will be reduced by the country’s aging population. Forecasts tell us that total home sales will grow about two percent in 2018 from 2017.
3. Demand for rentals in the suburbs on the upswing
Even as urban rent prices continue to rise, skyrocketing city property costs have both renters and investors gravitating to suburban rental properties just outside thriving metro areas, creating substantial opportunities for investors.
Suburban rental property owners and managers are tasked with creating a perception of community that includes sought-after amenities, factors that are often neglected in the planning phase. Investors are discovering opportunities in purchasing distressed, under-performing or under-managed buildings and renovating them to help enhance neighborhoods and boost interest among potential renters.
4. Millennials continue to be the largest demographic group among renters
According to Pew research, Millennial households continue to lead the ranks of renters. Millennials accounted for 18.4 million of the estimated 45.9 million renters in 2016, while Generation X comprised 12.9 million rental households and Baby Boomers made up 10.4 million rental households. Despite the fact that most Millennials would like to be homeowners, a substantial number of them will continue renting in 2018, particularly in areas with that attract high volumes of relocators. Property owners and managers will edge out competitors by creating rental units that accommodate tech-savvy, and health and environmentally conscious Millennials. This group is looking for pet-friendly spaces with high-speed Wi-Fi, online portals to submit rent payments and maintenance requests, and smart home technology.
5. “Gen Z” enters the rental market
Gen Z, those born after 1995, are on track to becoming the largest demographic in the U.S. Gen Z currently represents almost 25 percent of the country’s population and are expected to comprise 40 percent of all consumers by 2020. Property owners and managers in cities or near universities should already be thinking of ways to appeal to this new generation of renters. Reaching this group effectively will require digital marketing strategies like advertising vacancies through online videos, virtual tours, and making it simple for applicants to connect via text and submit rental applications online.
6. Real Estate rental properties continues to be a smart investment
The number of U.S. renter households rose by 600,000 between 2015 and 2016, according to the Housing Vacancy Survey, signaling 12 consecutive years of growth. The swell in demand for rental units is broad-based and represents several types of households that traditionally favor homeownership, according to the Joint Center for Housing Studies of Harvard University. We’re talking about older adults, families with children, and high-income households.
The changes reflect a number of factors, including fallout from the mortgage foreclosure crisis and large demographic shifts, especially as the US population ages.
As demand for rental housing continues to remain high, institutional investors and small-scale investors alike have been adding rental housing to their portfolios and benefitting from the income streams and long-term appreciation they provide.
Other indicators support rental price increases in the long-term, as attitudes toward renting continue to shift in the emerging sharing economy, which deemphasizes property ownership and supports demand for rental units. Homeownership is positioned to decline even more over the next seven years, to reach an anticipated national rate of 60.8 by 2025; the lowest rate since the 1950’s.
The study also reports that 12.5 million net new households are expected to form over the next 10 years, at which time more than 50 percent (7.3 million) households will rent, benefiting investors who own rental real estate properties as well as the property management industry.
While some areas show signs of slowing rent growth, most experts say it shouldn’t raise alarms among investors. Profitable investment opportunities remain available in many markets as overall demand for rental housing continues to grow.
When evaluating a potential property purchase, investors need to continue performing their due diligence, carefully assessing the local community, following housing market trends, and keeping an eye out for new developments such as new business and corporate growth factors that will add more jobs and more potential renters. They should also stay abreast of other apartment complexes with which they may compete for renters.
Finally, investors need to thoroughly calculate their expected cash flow as well as their projected cash on cash returns and cap rates to confirm the viability of an investment and evaluate its potential.
RentVest Property Management