Q3 2022: State of the Market: "Multifamily Demand Drivers," with Co-Founder and Principal, Michael Becker
State of the Market: "Multifamily Demand Drivers"
Written by Michael Becker
Q3 2022 Newsletter
Michael Becker Here...
The 19th-century French philosopher, Auguste Comte, dubiously coined the phrase, "Demography is destiny." While this age-old utterance is arguably overstated in most cases, I maintain that demography plays a principal role in the development of communities, economies, and nations.
With the recent turmoil in the capital markets in the consciousness of the “Investor Class,” in addition to the other macro trends currently impacting the markets that I discussed in the two prior quarterly newsletters, I thought I would take the opportunity to review some demographic data and trends as they relate to Texas Multifamily. After reviewing this information, I confidently maintain that the overall Multifamily market fundamentals, which act as the main driver behind SPI Advisory’s investment thesis of buying Apartments in high-growth Texas markets, are as strong as any point in our company’s existence.
Let me discuss what I found . . .
In May 2022, the National Apartment Association (NAA) and National Multifamily Housing Council (NMHC) released a report that forecasted US Apartment Demand through 2035. The report found that the US is short 600K multifamily units presently. Additionally, it found that demographic growth is expected to generate demand for another 3.7 million new US multifamily rental units through 2035. In total, the US will need approximately 4.3 million new multifamily units to keep up. The chart below shows the top 50 Markets in the US. Of note, the Top 3 ranked markets for demand are Austin, DFW, & Houston, with San Antonio coming in at 13th on the list.- #1 - Austin needs 117,107 more units, a 2.6% annual growth to existing apartment stock
- #2 - DFW needs 269,906 more units, a 2.0% annual growth to existing apartment stock
- #3 - Houston needs 209,084 more units, a 1.9% annual growth to existing apartment stock
- #13 - San Antonio needs 59,180 more units, a 1.8% annual growth to existing apartment stock
Source: National Apartment Association | National Multifamily Housing Council, “U.S. Apartment Demand Through 2035,” July 2022
Population growth & relative affordability are significant factors driving apartment demand in the Texas multifamily market.
First, let me discuss the factor of affordability:
As the chart below indicates, Austin, DFW, & Houston's Median Household Incomes exceed the US Median. Notably, Austin is an impressive ~$15,000, or 23% above the US Median and San Antonio is below ~$3,500, or 5%.
Source: DataUSA, 2022
The following chart compares the Median Rents in Texas to the US. The data in this chart suggests that DFW, Houston, & San Antonio's Median Rents fall below the US Median, with Austin being ~$190, or 13% above the US Median. Comparatively, San Antonio is a bargain having ~$250, or 20% lower rents than the US Median.
Source: Realpage, June 2022
Reviewing the relationship between Rent & Income levels in the 4 Texas Major Markets confirmed my presupposition that, on a larger scale, they're still affordable when compared to the US as a whole. This affordability gap is even more pronounced when you compare the 4 markets to a number of the large cities in the Northeast and California from which many new Texas residents are migrating. Couple this with Texas' absence of State Income tax, and the renter's dollar continues to go a long way in Texas, today. This phenomenon is supportive of relatively high future rent growth for the years to come.
Source: Realpage, June 2022
Now, let's discuss Texas population growth relative to the US as a whole:
Per the US Census, in 2020, the Nation stood at a population of 332.6 million. In that same report, it projected that by 2030, the US population will increase a total of 7% to 355.1M. The chart below indicated that all 4 of the Major Markets in Texas are projected to grow at least 3x more than the national average in this time period. This conjecture coincides with & supports NMHC & NAA's apartment demand projections.
Source: Texas Demographic Center Data, 2022
What does all of this mean for SPI Advisory's Investment Thesis?
It's easy to get caught up in the day-to-day market movements on what rental rates are today compared to last month, or worrying about whether the Federal Reserve is going to hike 25bps or 50bps at their next meeting. And for good reason – these factors largely impact investment returns, so, we most certainly pay attention to them at SPI Advisory. However, it's also important to consider the factors featured less day in and day out by the financial media, like population growth, that play as significant of a role in creating the conditions of a fundamentally strong Multifamily market for the decades to come.
Simply put, the demographic trends positively impacting Texas Multifamily are strong and, for as far as I can see, should remain so for the foreseeable future, especially on a relative basis to the US at large. This has me feeling very optimistic about the future prospects of well-located Texas Multifamily projects. It's my personal opinion that, when condsidering investing in one of our conservatively structured investment offerings, it's imperative to remember that, given a long enough time horizon, the market fundamentals should be strong enough to overcome most any obstacle attempting to stand in the way of a successful investment outcome.
Cheers,
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