The number of rental units and the number of future renters don’t quite match up in the U.S., according to the Bipartisan Policy Center. As the Baby Boomers retire and Generation Y (Gen Y) begins forming households in the coming years, the demand for rentals will swell beyond the actual number of units presently available. This will drive the price of rents up, especially hurting low-income families who rely on low-rent housing.

first tuesday insight

Is the future as dire as it seems for rentals in California?

Yes and no.

Yes: demand for rentals will increase from now through the end of this decade. This is because Gen Y will find employment primarily in the cities, where it usually makes more financial sense to rent rather than buy.

Remember, as rental demand grows, builders will rise to the occasion. In fact, apartment and condo construction starts already outpace single family residential (SFR) starts in this recovery, as builders do their best to anticipate market demand. This is why construction starts are a leading indicator, but by no means a definitive sign of market health.

Related article:

The rising trend in California construction starts

So Gen Y will continue to drive demand for rental housing — but don’t forget the Baby Boomers!

Baby Boomers are less likely to move into rental housing when they retire — and retire they will over the next 15 to 20 years. Certainly some Boomers will rent out of necessity, but it is the way of their generation to own.

Thus, it is likely Baby Boomers will trade their large, suburban homes for smaller residences situated closer to their children and grandchildren (in urban areas) — think condos or small SFRs on the outskirts of town. But it is unlikely they will give up homeownership altogether.

The most serious roadblock to builders meeting the increased demand for rentals (as they must) are California’s zoning regulations. City planning departments need to allow for more high-rise apartment buildings to house employees seeking shelter near their jobs. Otherwise, the price of rentals will shoot up, forming localized (and unstable) pricing booms. Think of rent control as the result for being wrong-footed on zoning.

Urban city centers suffer from a dangerous confluence of limited supply and unlimited demand. Supply remains constrained due to the old fashioned point of view that growth only happens outward. Take a look at the thriving metropolises like Sao Paulo and Bogota and it quickly becomes clear — the new direction of growth is up, not out.

Related article:

Loosen the noose on urban density

Fewer zoning restrictions would solve all of this — it’s all in the hands of the few citizens who make the most noise, so be an advocate for more forward-thinking zoning conditions!

Re: The U.S. Simply Doesn’t Have Enough Available Rental Housing, Whether You’re Rich or Poor from the Atlantic Cities