What's Driving the Apartment Sector?

Demand for rental housing is showing no signs of slowing. The United States is projected to add 11.6 million new households between 2007 and 2015, an average of roughly 1.5 million new households each year. This rate is 15 percent higher than the 1.3 million new households created each year since 2001. Most of the growth in household formation can be attributed to the echo-boomer generation, who range in age from 20 to 24 years, and strong immigration, which both positively impact the apartment sector, according to a RREEF report.

Echo boomers account for around 30 percent of the U.S. population or 76.3 million. This group is critically important to the apartment market: Roughly 75 percent of this age group calls an apartment home and historically has lived in apartments. In the 1990s, this age cohort shrunk significantly but started to grow again in 2001 as echo boomers - children of the baby boomers - came of age.

Similarly, immigrants make up a large portion of the renter population. Roughly 4 million immigrant households live in apartments today, and immigrant households are expected to contribute a greater proportion to future apartment demand, according to the National Multi-Housing Council. By 2010, another 500,000 immigrant households are expected to live in rental units.

In addition to echo boomers and immigrants, many Americans may end up in apartments as the cost of homeownership increases. Homeownership costs about 30 percent more a month than renting, according to the NMHC. That affordability gap plus high housing prices are causing fewer apartment residents to become homeowners.

In addition, many existing homeowners have mortgage payments that grow as short-term interest rates increase. The impact of the interest rate hikes already is apparent: The number of foreclosures during the first 10 months of 2006 (766,058 properties) was 19.6 percent more than the number of foreclosures for all of 2005, according to Foreclosures.com, a California-based real estate investment advisory firm and publisher of property foreclosure information.

While foreclosures and weak home sales aren't anything to cheer about from an economic perspective, the multifamily sector certainly will benefit, and those rewards will be passed on to investors.