Apartments and single-family rentals are showing signs of becoming the fastest-growing sectors of the U.S. housing market as home prices approach record sums that are out of reach for buyers under age 40, signaling a shift in construction demand.

A lack of mortgage affordability is driving rentals to exceed sales as many potential homebuyers born between 1981 and 1996, the group known as millennials, struggle under the weight of student debt and stagnating wages, according to new findings from Toronto-based global credit rating firm DBRS Morningstar. The trend is already reflected in national multifamily rent growth of 6.2% year over year that swelled this spring at a rate more than double the normal seasonal trend, a pace CoStar research shows would equate to the strongest apartment rent gains this century if maintained throughout the year.

“As long as the home prices remain high and you have the tight inventory, I think the market bodes well for single-family [rental] developers, as well as those seeking capital to continue that sector,” Adler Salomon, senior vice president at DBRS Morningstar, said in an interview .

With U.S. housing prices soaring, many Americans carrying high debt and wages staying relatively low, the number of potential buyers priced out of homeownership is growing, according to a DBRS Morningstar report. More people are opting to remain renters because they can’t or don’t want to enter the housing market, creating plenty of runway for developers to build apartments and rental units to address that demand, analysts say.

Between 2000 and 2020, the inventory of single-family rental homes and multifamily rental units grew 26%, compared to owner-occupied single-family homes growing 21.2%, according to DBRS Morningstar, which analyzed U.S. Census Bureau data.

Today’s conditions bode well for traditional multifamily developers to build more properties that cater to young adults who aren’t yet ready to enter the housing market, as well as older Americans over age 55 who comprise a growing proportion of the rental market, Steven Jellinek, vice president at DBRS Morningstar, said in an interview.

Affordability Concerns

Many Americans simply can’t afford a mortgage, statistics show. Some are pinched by persistent student debt and low wages. The average household with student debt owes $57,520, according to NerdWallet, a personal finance company. The minimum wage, which also influences wages that are paid above it, hasn’t been changed since 2009, when it was raised from $6.55 to $7.25 per hour, according to the U.S. Department of Labor.

Meanwhile, the U.S. median home price has grown to roughly 4.29 times the U.S. median income, up from 3.27 times in 2011, the report said.

“The fact that the millennials are pretty debt burdened and the fact that the lack of affordability persists [means] we think that they’ll continue to rent,” Salomon said.

Developers seem to be trying to heed the call.

Apartment developers completed more than 425,000 units in 2020, the highest sum of rental units built in a year this century, according to CoStar data. That year, however, also saw the lowest volume of apartment units to begin construction in a single year since 2013, with just 340,000 units breaking ground last year.

Some of that slowdown stems from shortages of steel, lumber and other construction materials. The pandemic supercharged the cyclical nature of the cost of commodities used in the housing and construction market, leading to record-high pricing for materials such as softwood lumber and steel for multiple consecutive months this year, according to the National Association of Home Builders.

Adults under 40 are expected to soon reach a demographic inflection point. Between 2020 and 2030, the U.S. Census Bureau expects the number of Americans between the ages of 30 and 50 — which is also when many people start families — to increase by roughly 8 million, according to Morningstar. That’s compared to the demographic growing by just 1 million between 2010 and 2020, according to Morningstar.

Family renters, who represent one-third of the U.S. renter pool, have diverse housing preferences, the report said. It cited data from John Burns Real Estate Consulting that showed 52% of single-family rental tenants are families, compared with only 30% of multifamily renters, who the report said are far more likely to be under age 35 or over age 65.

Whether those young adults will continue to gravitate toward rentals as they grow older and have families is something the industry is watching closely.

“The majority of single-family rental tenants are families,” Jellinek said, adding that build-to-rent homes also offer them the chance to live in a home without buying one. “People who can’t or don’t want to buy a home are finding new, creative ways to rent, or finding options available to them.”