As those in the multifamily industry have happily known for some time now, the apartment market has experienced a dramatic resurgence in the past two years. Fundamentals have improved for nine straight quarters since reaching their nadir at the end of 2009, and the national vacancy rate stood at 4.9 percent as of the first quarter of this year, its lowest level in more than 10 years.

This is a spectacular result given the rather weak performance of the economy over the same time period, when gross domestic product (GDP) grew at an annualized rate greater than 3 percent only twice in eight quarters in 2010 and 2011. Indeed, by historical standards, we're experiencing an anemic recovery.

The job market has fared even worse than the economy in this time frame. As of March 2012, we had regained only 3.5 million of the 8.6 million jobs that were lost due to the recession.

Double or Nothing

With such disappointing overall indicators, what can explain the sharp turnaround in the apartment market? As with many things in economics, the answer can be distilled to supply and demand.

During the recession, construction activity for new apartments slowed dramatically. Because it takes time to build new apartment projects, supply growth has continued to be rather muted since the recovery began. The demand side is a bit more complicated. The confluence of a few key factors has resulted in the greatest demand for apartments since the early 2000s.

While it is widely known that the homeownership rate has declined dramatically since 2006, the drop hasn't been uniform by age— predominantly younger age cohorts experienced far larger declines in homeownership than their older counterparts. The homeownership rate for those ages 25 to 29 fell by 7.4 percent between the end of 2006 and the third quarter of 2011. By contrast, for those ages 55 to 64, the decline was only 2.1 percent.

The labor market experienced a similar dynamic. While the unemployment rate for workers ages 25 to 29 increased 5.8 percent from the end of 2006 to the third quarter of 2011, the corresponding increase for workers ages 55 to 64 was only 4 percent. With a housing market in decline and an unwelcoming job market, some young adults decided to rent their own apartment. But with a weak labor market for younger workers and very little income, many could not afford one. Of those who sought to rent, some shared multi-bedroom apartment units while others moved back in with their parents.

Consequently, an increase occurred in what the government dubs “doubled-up households.” These households are defined as those that include at least one additional adult—a person 18 or older who is not enrolled in school and is not the householder, spouse, or cohabiting partner of the householder. Between 2007 and 2011, doubled-up households increased by 2.1 million. Most of this increase stemmed from the rise in the number of young people ages 25 to 34 living with their parents.

Sometime between 2010 and 2011, however, this trend began to ease and the number of doubled-up households started to decrease. This reversal released a great deal of pent-up demand for apartments. A greater number of people sharing multi-bedroom apartment units, as well as a greater number of young adults living at home, were able to move out and rent their own units. Moreover, these young adults largely did not purchase homes.

But what caused this unbundling of doubled-up households? After faring poorly during the recession, younger workers have disproportionately benefitted from the labor market recovery. Since the labor market bottomed out in late 2009, only two age cohorts have gained jobs on a net basis—workers ages 55 and over and workers between the ages of 20 and 34. That second group is the prime age cohort for rental apartments. The net gain of more than 1.5 million jobs by this age cohort has enabled many of these young workers to move into their own apartments.

Demand Still Pent-Up

Given the strong recent improvement in apartment fundamentals, many market participants wonder whether the released well of pent-up demand has run dry. That's unlikely.

The 2010 decennial census estimates that roughly 37 million people ages 20 to 34 live in the United States. Three out of every 10 of these live with their parents. According to Pew Research, 78 percent of these young adults are content living at home—but that means 22 percent are not. That equates to roughly 2.44 million people who would probably still like to move out. As long as the economy continues to create jobs for them, expect the release of pentup demand to continue.

After rising disastrously in 2009, the national vacancy rate has steadily declined, falling to its lowest level since the fourth quarter of 2001.
Year 2005 2006 2007 2008 2009 2010 2011 2012*
Vacancy Rate 5.7% 5.8% 5.7% 6.7% 8.0% 6.6% 5.2% 4.9%