20-Somethings Emerging From Their Parents' Basement Will Keep American Apartment Demand Robust

Despite some signs of overbuilding, America's apartment rental market will remain robust as 20-somethings begin to move out of their parents' homes, Wells Fargo's Anika Khan writes in a new note.

Since the recession, there's actually been a substantial boom in in multi-family housing starts.

The surge didn't emerge out of nowhere: Khan says demand has moved at a "breakneck" pace since 2010, fueled by tighter lending standards for home loans and slowly recovering household formation.

Today, the apartment vacancy rate is at a low not seen in more than a decade.

Still, Khan says there are now fears in the market that supply has grown too rapidly.

Those fears would be misplaced, as it now appears junior is ready to enter the real world:

"...due to the slower pace of hiring, the number of young adults living at home with an older family member swelled during the early stages of the economic recovery. The large number of young adults living at home with parents suggests there is a good amount of pent-up demand for apartment space. The so-called "echo-boom" generation (18 to 30 years old) hits the prime age for renters (20 to 29 years old). According to the U.S. Census Bureau, there were 44 million people in the prime renter age group in 2012. With this younger age cohort having a higher propensity to rent, especially with lending standards still relatively tight and the large burden of student loan debt, rental demand should remain robust.

Some markets are probably seeing overly strong supply growth. Khan charts metros where projected completions as a percent of stock is greatest:

Elsewhere, the market will remain tight as employment improves. Khan calculates a ratio fo projected employment to completions.

Khan concludes: "On a national basis, apartment demand is expected to continue to outpace supply. However, all real estate is local."