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    How Wealthy Renters Are Changing the Multifamily Market

    The multifamily rental housing segment has not always been the booming market it is today. Americans have historically preferred home ownership to renting their living spaces. But in the 15 years since the Great Financial Crisis, a demographic known as renter-by-choice or lifestyle renters have changed the conversation.  

    Today, the renter household population has doubled from its level in the early 2000s. While there are several reasons why the rental housing market has flourished—a housing shortage, unattainable home prices, stagnant real wage growth, and income inequality - one-third of renters fall into the lifestyle renter category. 

    This not-so-small group is changing the dynamics of rental housing, creating demand for boutique luxury properties, service-driven management, high-end amenities, and, more recently, single-family rental communities. Consequently, today's rental market looks much different than it did just a decade ago.

    Who is a Renter by Choice?

    Renter-by-choice are a high-income earning market demographic with the option to rent based on preference, not necessity. Often, the people in this demographic group can afford to buy a home and have alternative means to build wealth other than homeownership. 

    There are many reasons why someone would prefer renting: to eschew the maintenance responsibilities of homeownership, to live in a more desirable area than they could otherwise not afford to buy, to have access to onsite amenities and services that aren’t built-in to owned homes, or even simply for more flexibility. 

    Research conducted by Lending Tree found that the cost of renting was lower than the cost of homeownership in the top 50 U.S. metropolitan markets. In New York City, the average mortgage costs $1,300 more than the average rent, and in San Francisco and San Jose, the gap is $1,000. Those figures don’t consider maintenance costs or the hefty down payment needed to purchase a home. 

    Overall, these renters can stay cash-flush by leasing.  

    Lifestyle renters are also a mixed-age demographic. The group can include young high-earning tech professionals - the entry-level pay for a software engineer at Amazon is $143,660) and empty nesters looking to downsize and shed homeowner responsibilities. After all, who wants to mow the lawn after retirement?

    The thriving housing market has also pushed homeowners back into rentals. The New York Times wrote last year about a trend in homeowners “cashing out” by selling their homes at peak pricing and then moving into a rental until the market cools down and they can buy again. The movement accounted for 19% of home sales in 2021.

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    Building for High-Income Renters

    Although only a third of renters fall into the lifestyle renter category, developers and investors have catered to the demographic by building high-end luxury units and outfitting properties with hotel-like amenities. Overall, rental housing development is on fire, with a record number of units under construction. Last year, nearly 300,000 units were delivered in the US, the highest since 1987, and 400,000 units are under construction this year. About 80% of the construction pipeline, or 8 in every 10 buildings delivered, is high-end housing, according to Rent Café

    More recently, the renter-by-choice demographic inspired a new surge in single-family rental communities. 

    Millennial renters-by-choice - and some not by choice - with families are driving the demand and massive development of single-family rentals. They want to live in nice homes in good communities with good schools, and they want those things without the burden or cost of homeownership. Developers have been happy to cater to that desire, pumping $40 billion into the build-to-rent market.

    The reason behind the frenzy to build housing for lifestyle renters is a simple one. Luxury units have higher rents and therefore generate higher returns. This year, lifestyle rents outpaced renter-by-necessity rates by 1.2%, according to research from Yardi Matrix. 

    New Market Dynamics

    Over the last 15 years, multifamily has evolved into a nuanced asset class with diverse demographic groups. There are renters for workforce housing, affordable/low-income housing, and mainstream market-rate product. There’s a national housing shortage and affordability gap, which has expanded the country’s unhoused population. Some critics have blamed lifestyle renters for inflating costs, but others think we need more luxury housing construction, not less. 

    In The Atlantic, city planner and California YIMBY research director M. Nolan Gray explained the importance of building high-end apartment units. “For decades, urban economists have argued that the affordable-housing crisis is a straightforward matter of demand outstripping supply: A lot of people want to live in certain neighborhoods, yet we don’t build enough housing to accommodate all of them.” In this framework, lifestyle renters are helping to pay for the expensive creation of new housing, which appeals to developers. 

    However, not everyone has bought into the trickle-down housing concept. Some critics have suggested that building luxury apartment units actually inflates overall housing costs and segregates neighborhoods. 

    Evan Mast of the W.E. Upjohn Institute for Employment Research took a closer look at the issue in 2019, analyzing the footprint of 802 multifamily developments across the country. 

    Bloomberg notes, “when a household moves into a new unit, they initiate a kind of housing musical chairs by vacating their existing unit. A second household then moves into that unit, in turn vacating a third unit.” Mast calls this a migration chain, and in the sixth link of that chain, these developments ultimately open up housing for residents from the poorest areas. His data indicated 20% of people that moved as a result of that process came from low-income neighborhoods. 

    Ultimately, the issue of housing is complicated and will require an amalgam of solutions. 

    Creating more homes at every end of the spectrum is the end goal. The housing crisis has shone a much-needed spotlight on affordable housing construction and preservation. Still, luxury units and the wealthy cohort they attract are a vital part of the conversation. 

    Despite the attractive pro forma rents that come with a luxury property, developers continue to look for ways to curb costs in the face of rapidly rising construction pricing. Modern real estate development software platforms can reduce cost overruns and trim budgets by leveraging data analytics and machine learning to keep projects on track. Technology can serve as an important tool in moving housing projects forward. 

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