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Last month Fannie Mae reminded investors that national vacancy rates are exceeding 10%. Despite the fact that multifamily starts nationally are still going strong, developers must have some target tenants in mind.

So who are today’s tenants?

Currently about 35,000,000 Americans rent. This is down from 35,500,000 in 1994, due in part, to todays’s low interest rates Renters include: students, those people in the 20 – 34 age bracket (also known as ‘echo-boomers’), single individuals, young families, senior citizens and legal and illegal immigrants.

Historically low interest rates have encouraged many people who would have been renters to buy homes or condominiums. This has kept the homebuilders market growing nationally, and has encouraged many Americans to become homeowners in the last 5 years.

Be aware, however, that both the rental market and the home ownership market depends upon people being employed. The increase in unemployment numbers nationally is an important indicator of the ability to pay rent or a mortgage. With today’s high unemployment rates, many first-time renters have chosen to remain at home until they can find a job that pays more than minimum wage, or find a job in the first place.

The hidden secret to the survival as an investor with today’s high vacancy rates is the high immigration level into the United States. Since most immigrants rent in their first five years in the U.S. before fulfilling the American dream of owning a home, they have helped investors carry on. In order to better understand this trend, I have included some 2001 statistics from the Census Bureau.

Chart 1.

Most of these immigrants (over 600,000) have been admitted as close family members of existing US citizens.

So what do these statistics mean to an investor? It means that at a minimum approximately 5,000,000 of the current 35,000,000 renters are legal immigrants (if about 1,000,000 people immigrate to US annually and they stay renters for an average of 5 years). In addition, according to the census bureau, there are about 8,500,000 illegal immigrants in the United States today. Immigrants are a major part of the rental pool. To ignore them is to ignore potential revenue.

Also of note is that over the past 20 years, in anticipation of the baby boomers retiring, there has been an increase in the construction of assisted living facilities and senior housing projects. A mix of home, hotel, social gathering place with a small mix of medical care thrown in, these projects have attracted those people that don’t want to cook for themselves and want some social interaction in their later years, but do not want to reside in what would be considered an “old age home.” This product is geared for rather wealthy senior citizens since currently is costs $2,000 to $4,000 a month to live in such an apartment. (Studies show that this a market will boom again in the 2020’s.) Additionally, many of these same people have chosen to move into condominiums, fueling a growth in this market. The bottom line is that this market group has exited from conventional apartment and home rentals, resulting in reduced demand.

In conclusion, investors are in for a long battle for tenants. New apartment construction has slowed, but has not stopped. This means that high vacancy rates will continue until the unemployment rates drop. Rental rates will drop as supply continues to outstrip demand. Investors in high-end properties will continue to struggle as they face an out-migration of tenants to homeownership, though we are seeing a trend at the low end of the market where foreclosures on homes are increasing. This means that people will need to move back into apartments, but as a part of the larger market place, those numbers remain small. Concessions and clean good quality living will continue to attract tenants. Mold and mildew in units will only attract those that want to sue their landlords.

If you expect the Echo-boomers to save multifamily investors, the growth of their population will not have an impact until 2007 (According to Fannie Mae April 2003 report). This suggests that unless the job market picks up, Landlords will have a long, dry run until 2007 to find tenants. Now is the time for landlords to target the immigrant pool if they want to stay in business.

Published: June 2, 2003

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Clifford A. Hockley is the President of Bluestone & Hockley Real Estate Services, one of the larger brokerage and property management companies in Portland, Oregon. Mr. Hockley holds an MBA Willamette University and a B.S. in Political Science from Claremont McKenna College. He is a Certified Property Manager and Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Mr.Hockley serves as member at large on the Portland IREM board. He has twice been named Certified Property Manager of the Year (2001 and 2003) by the Institute of Real Estate Management and is a frequent contributor to industry newsletters.