Millennials Move the Multifamily Market — But is Their Reign Almost Over?
Gregg Gerken, head of U.S. Commercial Real Estate at TD Bank, appreciates what millennials have done for the nation’s multifamily market. Factors contributing to multifamily’s success in recent years include millennials’ desire to live close to where they work and play, their tendency to delay marriage and kids and their social preferences that often involve roommates or the sharing economy.
However, millennials are growing up — and many are aging out of the rental market. For many, those delayed life milestones are upon them. Other generations are waiting in the wings, but will they be enough to sustain the current level of multifamily supply and demand? Gerken tackles all of this and more in the Q&A below.
Finance Insight (FI): Multifamily has been a strong performer for a while now. Do you expect this to continue in 2020 and beyond, particularly as millennials start to enter their traditional marrying and childbearing years?
Gerken: For 2020, multifamily will continue to be a strong performer. When you look at the long-term demographic trends, however, this activity will trail off a bit as the millennial generation starts to age out of the key renter cohort, which is between the ages of 25 and 34.
Generation Z will pick up some of the slack, but the size of this demographic is smaller, so we will see a decline in the number of people moving up through each of these age cohorts over the next 10 years or so. Couple that with a lot of baby boomers who currently rent but may move to seniors housing facilities in the coming years, and the key multifamily renter demographic continues to shrink.
FI: How does this generation’s position within the current economy differ from that of past generations?
Gerken: Overall, household formations have continued, but they’ll start to decline somewhat as millennials move into the 35-to-40 age bracket. The average millennial is also getting married, having kids and buying a house later. There is an economic impact to that. We’re experiencing record employment, so the participation rate has increased, but wage growth has not kept pace. It usually does in this type of employment scenario.
The amount of student debt has also more than doubled since the early 2000s, so the balance sheets of millennials aren’t quite in the same shape as those of previous generations.
The value of homes dropped significantly during the downturn, but has fully recovered and the median price of a house has gone up significantly. The question is whether or not millennials have the ability and down payment to reach for the types of housing that is on the market right now. You’re also starting to see the cost to build multifamily and single-family homes go up pretty significantly as of late.
FI: Is there a demand for luxury buildings, particularly from millennials, or are these sorts of living situations unattainable for many in this generation due to stagnant wages and larger student loans?
Gerken: This type of housing makes up a fairly small percentage of the total rental stock, but that is what is being built right now.
Over time, we’ve seen this trend where Class B is being renovated with significant improvements to make these assets at least Class B+. This product reaches those people who couldn’t necessarily afford to rent in Class A.
This trend typically involves changing the unit size and adding a lot of amenities, because residents are no longer living in a 1,200- to 1,300-square-foot apartment. They’re living in a 400- to 700-square-foot unit, so getting outside the apartment is probably a necessity. Amenities are something people look for to keep them from going stir crazy!
FI: Going along with this smaller-unit trend, has the demand for microapartments picked up?
Gerken: Microapartments aren’t a full-scale trend yet but more a function of a mix in the buildings. When you take a look at affordable housing and that next tier down to make sure housing is in reach in relation to where demand is, it’s the all-in cost of apartments that matters. For developers, the rent per square foot is a factor, but you’re spreading the cost of the build out over more units. Microapartments are still somewhat unique to each market and a factor of what the all-in price is. Boston, for example, encourages microapartments because the rent per square foot is a little higher there. The unit size, by virtue of what’s affordable, has come down somewhat. Meanwhile the Sunbelt doesn’t have the same price pressure, so the need for microapartments isn’t really there.
FI: Have you seen any pushback from the millennial renter demographic when it comes to rental rates? Is there a need or desire for more reasonably priced housing options, or have they chosen other solutions, such as Airbnb’ing second bedrooms, finding roommates, embracing couch surfing or living with parents?
Gerken: These activities are all subsections of that generation. The number of households under the age of 34 with roommates has gone from roughly 2.5 million renters to almost 3.5 million renters. There are also many young adults living with their parents. In 2003, there were roughly 4 million. Now, it’s up to 7 million. It’s a fact of life. It says something about the types of jobs people are able to get. Manufacturing has left the U.S. We may be at full employment, but are these the types of jobs that pay what they did a generation ago? That, coupled with a tremendous amount of student debt — which is pushing off homebuying, marriage, kids, etc. — puts some pressure on millennials and helps the rental market pretty significantly. The demand for more and affordable housing is there. The question is whether that demand is being served. If there were affordable housing options, would these residents still want to have a roommate or would they prefer to live on their own? Many affordable projects have a massive waiting list, so most who apply for these units don’t get them. One of the unintended consequences of this is that rent control laws get passed. I understand the reason and rationale for this, but is rent control really the best solution?