Rental Nation

Update Appended: Sept. 14, 2012

Gabriel Stempinski is the consummate renter. When he and his fiance Shiva Goudarzi decided to move to Portland, Ore., this spring after she got pregnant, Stempinski didn’t even consider purchasing a home even though he thought home prices in Portland were a “sweet buy” and the couple planned on staying in the city indefinitely. Instead they found an upscale three-bedroom townhouse just outside the city center where they could live a “nonpermanent lifestyle” and “be world citizens.” On their frequent trips abroad–the couple has traveled to 12 countries in the past year alone–they often forgo hotel stays in favor of rentals they find through online services like Airbnb. Their renting forays range from the sartorial–a $400 Cynthia Vincent yellow dress rented for $60 to wear to a friend’s wedding in Shanghai–to the mundane. Over the past year, the couple has rented boats, cars, housekeepers, chefs, personal assistants to run errands, handymen, tools and electronics, all through online marketplaces where people rent and exchange idle goods and services they want on the fly. So enamored of the rental lifestyle is Stempinski, a self-employed executive consultant, that he even rents out himself–most recently to edit a research paper on marine mammals and to act in a promotional video through the online service TaskRabbit. “I don’t necessarily need the money,” says Stempinski, 31, who earns a six-figure salary from his consulting job. “It’s more a way for me to meet new people and do something cool.”

Renting in the U.S. used to be a humdrum affair. A few decades ago, the notion of renting brought to mind hard-up families scraping by on used appliances and dated furniture plucked from the nearest strip-mall Rent-A-Center. A fleshed-out American Dream–the home theater, the Whirlpool washing machine, the dual-subwoofer stereo–could be rented for a usurious price, but few considered the option glamorous or convenient. Instead, renting was an embarrassing admission that you hadn’t made it yet. Chances are, if you were renting the nuts and bolts of your daily life, you were watching the dream slip away.

The transformation of American rental culture in recent years has turned that notion on its head. There are still many Americans for whom renting the basics is about making ends meet. But a shinier, more affluent cadre of renters has also emerged, and they are shifting mainstream thinking about the ideals of ownership and what we want out of the dollars we spend. For these renters, the philosophy is more about having it all–designer dresses, haute tech gadgets, modern art–than it is about hardship or frugality. Why own a BMW when you can rent one for a night out on the town? Why shell out for a diamond necklace when you can rent one for a black-tie event this week and another for the next event? Armed with iPhones and intent on a grander but lighter style of life, this new wave of spenders has come to see renting, rather than owning, as the surest path to achieving their dreams. The trend, still in its infancy, has been termed the “sharing” economy, one that gives us access to the stuff we want without our having to own it. In some ways, rentals offer what we need for a busier, more crowded world: environmentally friendly car-sharing schemes, cloud-based apps and software to maintain and upgrade myriad home gadgets (refrigerators that tell us when we need milk, thermostats that track our energy use, alarm systems that send us video of our home). We save money, and parts of the economy grow as these new sharing-oriented business models are created.

Yet in other ways, renting can cost us dearly. Younger consumers weaned on lifestyles their overspent parents couldn’t actually afford have developed a penchant for luxury and instant gratification, even when their incomes don’t support it. People are “using the rental economy as a form of leverage,” says Michael Silverstein, an expert in consumer markets at the Boston Consulting Group who studies spending patterns. “Our values and culture are pushing people toward consumption now instead of consumption later. You don’t invest in things you want to keep because you’re not building a nest. It’s a major change in the U.S. economy.”

The short-term consequences could be grim: for example, as more people pile into rental properties, rising prices could max out consumers’ budgets, triggering a deflationary spiral not unlike Japan’s lost decade. That would be an environment in which “ownership prices and rents are falling because people can’t afford either,” says Peter Atwater, a behavioral economist. If consumers recoil because of a steep fall in prices triggered by falling profits and incomes, the economy will slow and debt will rise. “People have held on as long as they could. Between food inflation and energy inflation, they’re really being squeezed,” says Atwater. “If I’m moving from buying to renting, that buys me time, but I can only rent for so long until the money runs out.”

A rush into rentals isn’t unusual during recessions. People tend to switch from buying to renting essentials like furniture, refrigerators and televisions when wallets are thin and credit is tight. So do corporations, which rely more on rented office space, temporary workers and rented machinery. Equipment rentals, led by construction and industrial equipment, outpaced U.S. economic growth by more than 3 to 1 last year, with stronger growth expected this year. Usually this is a temporary shift that lasts only until a recovery begins. But coming out of the Great Recession, there are signs that rentership is becoming more of a lifestyle choice.

Nowhere is that shift clearer than in housing. Home buying, once considered the gateway to stability, peaked at 69% after George W. Bush declared in 2004 that we were an “ownership society.” Now baby boomers looking to downsize are trying to offload houses that are still 25% off their 2006 price peak, while young people, grappling with $1 trillion in student debt, job insecurity and the notion that housing prices don’t always go up, are hanging back. Some are camped out at Mom and Dad’s; others are paying through the nose for apartments at frothy prices even though buying a home has never been more achievable. A study in March by the real estate site Trulia found that buying was less expensive than renting in 98 out of 100 major U.S. metropolitan real estate markets. Homeownership has fallen to a 15-year low of 65%, while home prices have remained relatively flat. Meanwhile, rental prices continue to rise across the country, up 5% from a year ago.

The migration to more-flexible living has seeped into all facets of life. The more we rent, the more we move and the more we value the ability to shed stuff. Overall geographic mobility has been declining for a couple of decades, but renters are nearly five times as likely to move as homeowners, according to recent U.S. Census data. Meanwhile, the jitters that come with living in a 2% economy, rather than the 3%-to-4% yearly growth of the past, have collided with massive advances in technology that make renting an integral part of our daily routine. We use Netflix to rent movies and Spotify to listen to music, we store piles of photos and files in the rented server space of the cloud, and we read rented e-books on Kindles. Silicon Valley is awash in start-ups that want to take Netflixization to the next level, granting us access to all kinds of things we don’t want to hold on to but feel we can’t live without. Revenue at BabyPlays.com a toy-rental company, has doubled every year since 2010. Zipcar’s membership grew 25% last year after expanding 55% a year earlier, and an estimated 4.4 million people in North America will belong to car-sharing services by 2016. More than $500 million in seed money has been poured into the sharing economy.

Access, Not Ownership

Technology and scarcity have always played a role in the rise of rental industries. During the Industrial Revolution, emerging urban middle-class families moved from homes into hotels that allowed them to shed servants, whose wages were rising with the surge in manufacturing. The birth of cast-iron construction, which allowed architects to design vertically, gave rise to apartment houses. Car rentals took root in the early 1920s in response to a thriving rail industry that spread travelers across the country–and boomed in the ’60s and ’70s with the growth of air travel. Furniture, appliance and electronics rentals also scaled up around that time as consumer credit emerged and developers erected more apartment buildings in part to house women entering the workforce. But the market hovered around the credit-poor.

Any freedoms and privileges well-heeled Americans may have ascribed to the conveniences of renting then–be it the occasional tuxedo or video game–pale in comparison with how they feel today, wedded to the notion that owning less offers more. A powerful piece of evidence can be found in the one type of product Americans are still eager to buy en masse: their digital devices. The devices themselves get smaller with every additional dollar spent on them, yet they empower their owners to rent more through apps and the social Web. “We’ve hit an inflection point where, because of advances in technology, we can pay for what we use when we want it and not when we don’t,” says Lisa Gansky, author of The Mesh, a book about shared consumption.

This new rental economy is made possible in large part because of the cloud. The vastness of cloud technology has both expanded our definition of renting and allowed us to rent more. Companies that have come to view owning tech assets–servers, databases and software–as burdensome now rent them from cloud-based service providers, which has dramatically lowered the cost of doing business for a lot of technology-based start-ups and spurred the rental economy.

The next wave in smart tech, for instance, is bundling cloud-based rentals. Uber, the app-based town-car-rental business, synthesizes rented geolocation data from town-car drivers and passengers to deliver your late-night ride. Hipmunk, a travel site that evaluates the pain factor of air travel, offers a compilation of rented data from airlines and other travel databases. In health care, Cryoport’s smart biomaterial transport canisters, which are rented by hospitals and labs, contain sensors that gauge temperature, and cloud-based services track location.

Like the consignment stores and overstock outlets that came before them, many of today’s digital rental businesses thrive on ferreting out underused goods. Whereas in previous generations a neighbor’s hammer or a piece of jewelry may have been shared, those informal exchanges have been supplanted by today’s engines of access: the laptops and smart phones that allow us to scour the digital world in search of the physical. As more Netflix-like ventures–subscriptions modeled around the number of times an item can be used rather than the units sold–have moved into the cloud, more companies are realizing the value of renting their wares. Music-streaming services like Spotify will overtake digital downloads as the biggest growth engine for the music industry in 2012, according to Strategy Analytics. Home Depot says it will be making a “significant investment” in its rental business over the next several years to capture younger tool renters. Even as technology and shifts in business models have facilitated a rental economy, so has consumer sentiment.

One of the fundamental changes came, of course, after the housing crisis, when renting came to be seen as a shield against an unpredictable real estate market. Moody’s Analytics estimates that the housing crisis wiped out $4.3 trillion in owner-occupied-home values from 2007 to 2010. The typical American family, whose largest asset is their home, lost nearly 40% of their wealth over this period, according to the Federal Reserve. Now, even with home prices hovering nationally near a 10-year low, more people are choosing to rent than have in 15 years. The trend reflects banks’ tightening lending standards, especially for home loans, as well as consumers’ fearing for their financial future. “People just don’t have the access to credit they had before, nor do they have the nest-egg down payments for a lot of their big-ticket purchases, and that’s getting worse with growing student-loan balances,” says Atwater. You can see it in consumers’ mood: the Bloomberg Consumer Comfort Index–a measure of Americans’ perceptions of the economy, their personal finances and whether it’s a good time to buy goods and services–which was already negative, has fallen 41.5 points since 2007.

Commitment Phobia

The age of austerity has coincided with the Facebook age, one that prioritizes impermanence and immediacy, which also breeds a renter mentality. “People used to only share photos physically or via e-mail. Now it’s up to the minute. It’s, ‘Here’s what I’m doing. Here’s what I am,'” says Jason Dorsey, a generational researcher. “We now have less to spend, but we haven’t lowered our expectations. We still want material things, fancy shiny things, and we want them now. That makes this idea of renting suddenly seem more urgent and doable.” Camille Palmer, 32, a product engineer for Coach, who has rented six dresses over the past eight months from Rent the Runway, rents because it offers her more variety than she could afford by buying. “I’m very aware of the way I look in my pictures on Facebook. I hate what I’m wearing in a picture from a party in July. But pictures went up from a wedding I attended a few weeks ago wearing Rent the Runway jewelry, and everyone online said I looked fantastic.”

Younger consumers are also more educated, better traveled and more physically active, which heightens the appeal of spending precious dollars on new experiences rather than ownership of things, which seems very last century to many of them. As Stempinski puts it, the drudgery of buying a home and fixing it up “raises my blood pressure. It’s just a big commitment to make at this point in life when you’re seeing a lot less benefit.”

Shedding possessions is a way of punting the risks associated with settling down. Yet a more mobile life, unshackled from the burdens of ownership, can actually be riskier than one with basic liabilities. Whether rich or poor, families with more assets–including car equity and home equity–suffer less financial hardship during negative events such as job losses or unexpected medical expenses, because they can borrow and bridge gaps in lost income, according to Signe-Mary McKernan, an economist at the Urban Institute. Research has found that the process of acquiring things we value also improves physical and mental health as well as the upbringing of children. Kids learn “the benefits of saving, compound interest and delayed gratification,” says McKernan. By her estimates, young people who delay a home purchase by a decade lose roughly $42,000 on average in savings for retirement by the time they are 55 to 64.

The broader economy also suffers when people own less. Construction and manufacturing have contracted with the decline in homeownership, since people who don’t own their living space don’t invest to maintain it. In the auto industry, each car shared through services like Zipcar removes nine to 13 cars from the road, according to Susan Shaheen, a transportation researcher at the University of California, Berkeley.

In home entertainment, new rental models that lower the costs of movie watching for consumers are cutting into studio profits. As more people consume movies online rather than by way of DVDs, revenue in the industry has declined. Online movie consumption, which grew 160-fold from 2007 to 2011, is expected to yield about $2 billion for the entertainment industry in 2012, compared with $10 billion from physical formats.

Still, it’s possible that in some sectors, the sharing economy could spur overall economic growth. Netflix-like services that enable people to rent movies through the mail or via streaming have the potential to reach new consumers in rural areas or other parts of the country that can’t support traditional brick-and-mortar DVD sellers like Best Buy and rental outfits like Blockbuster. That makes the overall pie bigger.

Quality or Quantity?

For all the rental businesses that have cropped up to satisfy our luxury cravings–clothing, jewels, modern art–there are many others that speak to our higher values. More people are renting solar panels, cars, bikes, textbooks and kayaks. They are connecting to share garden space, baby clothes and creative media. And yet even as we yearn for community and a bigger stake in helping save the planet, we are churning through more physical stuff than ever before. It’s a phenomenon sociologist Juliet Schor calls the materiality paradox: more consumers value fashion and novelty in everything they buy, and so they divest themselves of their purchases as soon as the luster fades.

What we choose to reject depends on the gaps in our consumer education. We have become “more sophisticated in certain zones and deteriorated in others,” says Paco Underhill, a consumer researcher and the author of How We Buy. In the days when most households owned a sewing machine, there was a greater appreciation for apparel’s construction. Mothers taught daughters to recognize a good stitch and know when a dress warranted a higher price. As auto quality has improved along with consumer safety, we hold on to cars longer and pay more to replace them. The average new car costs more than $25,000, compared with less than $21,000 in 1970, adjusted for inflation. Still, more goods than ever before are priced for disposability. The cost of replacing the battery in an iPod Shuffle is the same as the price to buy an entirely new device. “If you’re manufacturing something in Guangdong and selling it in New York, it’s tough for a company to offer cheap and easy replacements of faulty parts,” says Underhill.

The difficulties in maintaining electronics could ease with smarter technology. Refrigerators designed with sensor-driven software may soon send us text messages about what needs restocking. “If the lifespan of a refrigerator is 15 years and the software has a lifespan of two years, doesn’t it make sense to lease my kitchen, and when the software needs upgrading I lease and replace the pieces?” says Underhill. A similar shift is under way in printing. Companies like Xerox and HP are transforming a hardware-based industry into the Netflix of printing to eliminate the hassles of owning: by 2015, roughly half the corporate world will rent instead of own printers along with all their digital and physical accoutrements, according to the Photizo Group, an imaging-industry research consultancy.

The bottom line: there are rewards to reap from the rental economy, both economic and social, but they depend on how we use it. It’s easy to envision a rental culture that recasts the value of ownership, empowering us to share more, waste less and cherish the things we do commit to own. It’s also easy to imagine the world’s landfills getting a lot bigger as our consumer consciences get smaller. “Everyone is seeking a better life. In a smarter world, we’d seek that out in just a few categories of consumption, not dozens of them,” says consumer-behavior researcher Silverstein.

Stempinski, who has no debt and plans to buy a home eventually, doesn’t think too much about any of that. He simply believes that renting makes his life more affordable and enjoyable in the here and now. “I get to maintain a high standard of living on less money,” he says. The rental lifestyle will leave him rich with experiences, even if poorer in retirement.

The original version of this story failed to mention that Michael Silverstein works at the Boston Consulting Group