The Multi-Decade Opportunity in U.S. Residential Real Estate
Streaming Income - A Podcast from Barings
Deep Dive
What are the key factors driving the U.S. housing crisis?
The primary factors are a lack of new housing supply, rising interest rates, and affordability issues due to increased home prices and mortgage payments. The U.S. is short about 7.2 million housing units, and the supply has not kept up with growing demand from population and immigration.
Which demographic groups are most impacted by the housing crisis?
Gen Z and millennials, particularly first-time homebuyers, are most affected. High home prices, increased down payments, and higher mortgage rates make it difficult for these groups to enter the housing market. Additionally, lower to middle-income individuals with student loan debt face significant challenges.
What is the 'forever renter' phenomenon, and how does it impact the housing market?
The 'forever renter' phenomenon refers to a growing trend where individuals, particularly Gen Z and millennials, may remain renters for life due to affordability constraints. This trend is supported by the decline in homeownership rates, which have dropped from 69% in 2004 to 65.6% today. This shift creates strong demand for rental housing.
Why is the build-to-rent model attractive for investors?
The build-to-rent model is attractive because it addresses the growing demand for rental housing, particularly from the 'forever renter' demographic. It involves purpose-built single-family rental communities that offer amenities like yards, community spaces, and modern features, making them appealing to both Gen Z and baby boomers.
Which U.S. cities and regions are currently showing attractive investment opportunities in residential real estate?
Barings is focusing on growth markets like Boulder, Charleston, and Savannah, driven by factors such as strong employment growth, educational attainment, and quality of life. Institutional markets like Boston and Seattle are also attractive due to their long-term growth potential and barriers to entry.
How does the team at Barings assess risk across the real estate investment spectrum?
Barings invests across the risk spectrum, from core to development, depending on client needs. Currently, core plus and development opportunities are particularly attractive due to the repricing in the market and the lack of construction lending capital. Development projects offer the potential for strong returns as new supply remains constrained.
What is the relative attractiveness of real estate debt versus equity today?
Debt has been more attractive in recent years due to high base rates and credit spreads, but equity is becoming more attractive as the market reprices. Multifamily properties, for example, are now selling at higher cap rates (5.5% to 6%), making equity investments more appealing. Construction lending is also a strong debt opportunity due to the lack of capital in that space.
How might the outcome of the U.S. election impact residential real estate investment opportunities?
The election outcome is unlikely to significantly impact the long-term fundamentals of residential real estate. While tax laws and regulations may vary, the core supply and demand dynamics, driven by population growth and housing shortages, will remain the primary drivers of investment opportunities.
- Shortage of 7.2 million housing units
- Rising interest rates doubled mortgage payments since 2021
- Homeownership rate declined from 69% in 2004 to 65.6% in 2023
- For every 100 basis points decline in homeownership, 1.3 million people become renters
Shownotes Transcript