May 12, 2017

Remember this term: Horizontal Apartments. That’s what some real estate developers are calling clusters of single-family homes in rental communities that combine the privacy of individual residences with professional property management to take care of repairs, yard maintenance and more.

These developments, first appearing in Texas and Arizona, typically feature subdivisions of 100 or more rental homes on small lots in suburbs near larger metropolitan areas. Intended to appeal to both Millennials moving up and Baby Boomers down-sizing, horizontal apartment communities offer the freedom and flexibility of renting, but with more privacy than a typical apartment complex. And some experts think this format could be a game-changer in the housing market. 

Why So Many Renters?

Like other periods of economic distress, the Great Recession decreased the number of home-owning households, and increased those who rent their living quarters. But the magnitude of the increase in renters has some wondering if larger demographic issues are also a factor. Per a report by the Harvard Joint Center for Housing Studies, “The number of renter households increased by 9 million between 2005 and 2015, marking the largest increase over any 10-year period on record.” (see graph)

Some argue that the uptick in the single-family rentals could be short-lived; as the economy improves, more renters will turn into homebuyers. But maybe not. For a variety of reasons, the Millennial generation has what might be characterized as “delayed-onset adulthood”: their career paths are slower (and often start with a “boomerang” back to their parents’ basement), they are marrying and starting families later. Stagnant wages and tighter lending standards make it harder for households to meet down payment requirements. At the same time, Baby Boomers are looking to cash out their home equity and reduce monthly living expenses by unloading their homes.

Horizontal apartment communities seem to reflect these trends. Developers say their average renters are in their late 30s, often have school-age children, and want to get out of apartment-complex living, but don’t have either the resources or long-term job stability to buy a home. The combination of relatively older tenants, especially those with young families, projects to longer rentals. “We hope they stay four to seven years as people keep their kids in school,” says Mark Wolf, a Texas developer. Matthew Blank, principal of an Arizona management group with several horizontal apartment communities, sees this arrangement as the new transitional step to home ownership. “People who rent from us are most likely to buy a house in the future.”

Horizontal Apartments Are A “New Thing” Because Americans Don’t Save

Developers say higher real estate prices in some areas of the country make horizontal apartment projects impractical. And while some property management companies are trying the same concept with a portfolio of single properties scattered in primarily owner-occupied residential neighborhoods, they don’t have the same neighborhood “control” over exteriors and security like they would in a contiguous complex. But even the few horizontal apartment developments in existence may reflect a subtle change in home ownership dynamics.

Historically, a decision to rent or buy has hinged on fluctuating economic and social factors, like interest rates, tax deductions, space for growing families and access to good schools. And with the exception of the zero-down, no-doc lending policies that precipitated the Great Recession, a decision to buy a first home always included coming up with a sizable down payment.

And that might be the real story here: Horizontal apartments are housing for grown-ups who haven’t been able to save for a place of their own. The monthly rent costs aren’t much different than those of a homeowner, but not having savings has limited their choices and spawned the horizontal apartment format. You could say the future of horizontal apartment developments is largely dependent on the savings habits of Millennials; less saving equals more horizontal apartments.

There have been, are, and will be financially sound reasons to renting instead of buying a house. In every housing scenario, the person with savings will have better options. 

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