NICOLAS P. RETSINAS
‘Remarkably fluid’ market
Middle-market rental housing may have been overlooked by policymakers and analysts during the 1990s, but there are significant development and investment opportunities for such rentals, according to a new study.
The study, completed by the Joint Center for Housing Studies at Harvard University, finds that middle-market rentals provide housing for 40 percent of renters who seek housing at more modest costs. The 14 million units in that market are home to about 35 million people.
And contrary to the public perception that most of the new rentals built in the 1990s were either subsidized apartments for low-income tenants or luxury units for upper-income households, the study revealed that a significant portion of new rental housing construction was for middle-market renters, according to Rachel Drew, one of the authors of the study.
Drew said 40 percent of the units constructed in the 1990s nationwide were for the middle market, and a lot of the new construction was taking place in the suburbs despite intense community resistance.
“It proves the point that this is a market that developers can get into, and there are opportunities for renters who want new units – that they don’t have to go to luxury units,” said Drew.
Titled “Middle-Market Rentals: Hiding in Plain Sight,” the study was commissioned by the National Multi Housing Council, the National Association of Realtors and the Research Institute for Housing America of the Mortgage Bankers Association. It analyzes middle-market rental housing on national and regional levels and includes a detailed examination of four metropolitan areas – Boston, Los Angeles, Minneapolis and Tampa, Fla.
While much attention has been focused on the luxury and affordable and subsidized rental markets, there has been no comprehensive study on middle-market rentals, said NMHC Chief Economist Mark Obrinsky.
Demographic projections, which suggest that there will be an increasing demand for middle-market rental housing over the next decade, prompted leaders of NMHC, NAR and MBA to get a better understanding of how the middle market operates.
Obrinsky said the echo boomer generation – children of the baby boomers – will help fuel demand for rentals in the middle market in upcoming years. As they age into their 20s and early 30s over the next five to 10 years, echo boomers will be a core market for rental housing – unlike the last decade, when the number of people in their 20s was on the decline, he said.
“That’s one demographic group that’s going to be looking to rent middle-market kind of units,” said Obrinsky.
In addition, Obrinsky predicts that new immigrants, who will be unable to buy homes, will seek out rental housing, and a portion of them will want apartments in the middle market.
A ‘Viable Market’
The middle market is defined in the study as the housing stock with rents between the 40th and 80th percentiles of local rent distributions. In the Boston metropolitan area, for example, middle-market rents range from $608 to $964 for a studio or one-bedroom apartment to between $800 and $1,188 for a two-bedroom apartment.
Generally, middle-market rental housing is found throughout metropolitan areas, according to the study, but is still mostly concentrated in inner-city or central-city neighborhoods. The location of middle-market rental housing, however, has shifted within metro areas during the 1990s.
In the Boston metro area, for example, half of all middle-market rental units are located in 20 percent of the census tracts, according to Drew.
Boston neighborhoods and communities near the city that have seen the biggest growth in middle-market rental housing units are communities that also experienced gentrification. Working-class communities close to downtown Boston, such as Everett, Revere and Somerville, saw some of the rents increase from lower-market to middle-market rates during the 1990s.
While those communities were adding middle-market rental units, other towns and cities were losing them. Communities along the Route 128 and Interstate 95 corridor – extending from Wellesley to Burlington – saw rents at what were once considered middle-market units escalate to upper-market rents. However, Drew pointed out that those losses were occurring during the height of the technology boom, when there was tremendous demand for apartments and homes from tech employees.
During that period, there was also new construction of middle-market apartments in communities on the fringes of the Boston metro area, such as Marlborough and Milford.
“The middle market is remarkably fluid,” said Joint Center for Housing Studies Director Nicolas P. Retsinas in a prepared statement. “Contrary to popular belief that almost all new construction is aimed at the top of the market, an equal number of new units are built for the middle market as for the top fifth of the rent distribution.”
Nationwide, vacancy rates in the middle market are often lower than those in the lower and upper markets. Middle market vacancies in Los Angeles, Tampa and Minneapolis were lower than those in the lower and upper markets, the study showed. But in Boston, the vacancy rates for middle-market units were slightly higher than the lower market. Vacancy rates for middle- and upper-market units in Boston were lower than 4 percent, and around 2.5 percent for the lower market.
The study also revealed that, nationwide, residents of middle-market rentals are more diverse in terms of their income, age and education than renters in other segments of the rental market. Nearly half of middle-market renter households earn between $20,000 and $50,000 a year, according to the study, and median household incomes of middle-market renters are in the low-$30,000 range in most metro areas. Some 23 percent have annual incomes that exceed $50,000, and 29 percent have incomes below $20,000.
Almost a quarter of the middle-market renters have a college degree or graduate degree. In addition, more than 35 percent of middle-market renter households nationally are minorities.
But in Boston, middle-market renters tend to be more educated, have higher incomes and are less racially and ethnically diverse than in other metro areas. Some 41 percent of middle-market renters in Boston have college degrees, and their median household income was $42,000, compared to $30,000 to $33,000 in the other three metro areas examined. The study also found that 74 percent of middle-market renters in the Boston metro area were white, 9 percent were black and 7 percent were Hispanic. Nationwide, 62 percent of the renters in the middle market were white.
The study’s findings indicate that the middle market is a “viable market” for investors and that they don’t have to invest only in luxury rental housing to see a profit, according to Drew.
Since they are less dependent on upper-income renters, rental housing that is geared to more moderate-income households tend to fare better during a struggling economy, she said.
“Over the long haul, [middle-market rental housing developments] appear to weather economic cycles better,” said Drew.
