Housing Continuum II- Entry-level Multifamily/Rentals

Housing Continuum

The Housing Continuum

Link to previous article: Part I – Introducing the Housing Continuum

This article is the second in a series examining the housing market dynamics represented by what we call “The Housing Continuum”, as illustrated in the chart above.  The first article introduced the Housing Continuum concept.  Each successive article will focus on one segment, starting with the Entry-level Multifamily segment.

About the Entry-Level Multifamily/Renters Segment

This segment is generally where households start their journey through the Housing Continuum.  In 2009, the rental rate in the US was 32.6% of all households, according to the 2009 Housing Vacancy Survey conducted annually by the US Census Bureau (slightly less than one-third of the population).

We consider this segment to also include households renting housing units other than conventional multifamily (mobile/manufactured housing, doubles, single-family homes, etc.).  The key factor is that they are renting lower-priced, lower-quality housing.

Who Are the Entry-Level Renters?

Generally, entry-level renters are under age 30.   Households in this group are typically starting their first job out of high school, graduating from college, or getting stated in a career.  This group also contains many households in lower-paying service sector positions who may not be able to afford mid-level rentals.

Households in this group are typically single and often live with a roommate based on economic need. They are generally particularly price conscious: price often overrides other considerations such as location, floor plan, amenities and condition.  This group will typically move up the continuum of housing into mid-level rental housing as their income grows, and as household circumstances dictate (job transfer/promotion, marriage, children, etc.).

Characteristics of Entry-Level Multifamily Housing

Entry-level multifamily housing typically consists of older, less attractive properties.  Several profiles exist for entry-level housing (properties may fit more than one profile):

  • Properties in less-desirable areas.
  • Properties with few amenities.
  • Older properties well past their glory years.  Such properties were built in the 1960s or 1970s during the Baby Boom and may have been fashionable addresses at the time, with an amenity package that time has passed by (tennis court, racquetball court, sauna). Often such properties are in inner-ring suburbs, or near once-thriving retail areas that have been supplanted by newer retail areas farther out from the central city and have fallen on harder times.
  • Properties with with functionally obsolete floor plans, including small bedrooms or generally lacking the storage space of more recent and competitive units. Such units may have functioned as move-up housing in their time, but they have been passed by more functional modern units and now function as entry-level housing.

Renters typically stay in such housing only as long as economically necessary.

How the Economy Typically Affects Entry-Level Multifamily

When the economy is going well and companies are hiring, then entry-level housing typically flourishes.  Household formation typically fluctuates with economic conditions, so when there are more households in the rental market, particularly younger households with entry-level jobs, this sector performs well.  When the market is tight, households are more willing to overlook the flaws typically present in entry-level multifamily.

However, we have found in some markets that some properties in this segment struggle because of their marketability issues – even when the economy is doing well.  In the mid-2000s, as households left mid-range multifamily for homeownership, mid-range properties often reduced rents or offered specials in order to stay full, making their properties a more attractive step-up bargain for entry-level households, and leaving poorly competing entry-level properties with vacancy problems.

Another management issue that entry-level rental often encounters during strong economies is the tendency to aggressively push rent increases.  If rents get pushed too far, such units come within an easy step-up range of better, mid-level rentals, and lose tenants to higher-quality housing options.

In a poor economy, household formations typically go down. Singles who would otherwise live on their own may be forced to take a roommate.  Some people delay moving out of their parents’ home, or go back to living with their parents after being on their own.  This can benefit entry-level housing – although there are fewer households being formed, those households are typically seeking lower-priced housing and may stay longer, as they have less economic means to improve their housing situation.

Households may also have to downsize into an entry-level rental due to loss of employment or foreclosure on their home.  In addition, many households may use a recession as the opportunity to go back to school and get additional education or training and may find themselves in entry-level housing, albeit for a temporary period.

Entry-level rental housing is also often a fallback position for a household that splits due to a divorce or death of a spouse.

In addition, many households will “stall” economically and find themselves unable to move out of the entry-level rental base.  Many renters in this sector lack the education or skills to earn enough to afford better housing.  They may move up somewhat within the sector to slightly better-quality entry-level housing, but they may never reach a position where they can ever afford anything better.

Next – Part III – Mid-Level (Step-Up) Multifamily

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  1. Pingback: Housing Continuum III – Mid-Range Multifamily/Rental « Danter Company Blog

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