Millennials and Multifamily DevelopmentBrian Hansen
Much has been written recently about the economic footprint of the Generation Y demographic, commonly known as Millennials. As they begin to reach the prime earnings phase of their lives, their particular influence can be directly observed in how advertisers chase their dollars, how retailers shape their products, and, not surprisingly, how real estate players appeal to their appetite for working, living and socializing. For most Millennials, choices around housing are more complex than the age-old decision of whether or not to buy or rent, or where to live. Understanding the complex nature of their evolving decision process drives, and will continue to drive, multifamily development, ownership and finance for some time to come.
Millennials are now considered the most economically significant demographic in our economy. As the largest demographic group in the U.S., with well over 80 million consumers, or 31 percent of the consumer demand in our country, they are an economic force to be reckoned with. And since the Millennials’ demographic now encompasses the 35-year-old age bracket, these Gen-Y’ers are fast approaching the coveted peak earnings period (between ages 35 and 45), a key driver for those who will cater to their demands and needs. While this group is statistically larger than even the Baby Boomer generation, they are statistically slower to get married and have children. They are slower to settle down, or to buy their first homes, often years behind their parent’s and grandparents’ historical demand cycles. This unusual demand paradigm directly impacts builders, owners and developers in today’s real estate landscape. To really understand what drives this group requires looking closely at the statistics.
U.S. home ownership has decreased to 63.5 percent in the past eight years, which is just shy of a 50-year low. This simply means the U.S. has more renters than ever, requiring an ever-increasing focus on the needs of those renters by those of us in the multifamily space. In the specific case of Millennials, many cannot afford to buy a home in the traditionally urban areas of the U.S. This is a pertinent fact given the size of their demographic. While many Millennials have indicated they would like to buy a home (nearly 91 percent, according to Joe Tyrrell at Ellie Mae), tighter bank credit due to the housing crisis, coupled with residual student debt (averaging $30,000 per Millennial), has frustrated demand. This, therefore, has pushed most Millennials to delay home ownership. They have, in effect, become voracious renters, focusing their pent-up demand on what has been referred to as the urban-suburban living experience. These unique group dynamics leave an upwardly mobile and very sizable group of consumers looking for amenities in housing to satisfy their natural tastes and desires for better and convenient living. It has also caused them to look for living opportunities in areas and cities in the U.S. that are considered secondary and less expensive markets. Millennials don’t seem to find a city they like, settle down and look for a job. Rather, they look for cities where the cost of living is affordable, where employment opportunities integrate with the social agenda of the community, and where the job has “meaning.” In short, Millennials want to make a difference in their communities and they want to be a part of change in an urban-suburban setting.
This sizable group and their collective behavior has not only dramatically altered traditional markets like retail, but this group’s seismic shift in behavior and tastes has found its way into the real estate market as well, specifically the multifamily market. Shifting overall demand from such a large group of consumers places pressure on developers and owners to adapt and provide housing that appeals to this new high-tech, socially conscious, eco-loving group. They are, in a sense, a hybrid of hippies and yuppies. “Yippies,” if you will, and they know exactly what they want as consumers.
So what does this group really look like and what drives them? Their median age is currently 30 years old, and their median income is just slightly above $77,000 per year. Many are single and saddled with historically high student debt that severely hampers their ability to save for a down payment on a house, or contemplate starting a family. They have also seen their parents downsized, restructured and generally phased out of every job in every sector you can imagine. The fear and apprehension from these experiences hamper Millennials’ desire to own a home, as most value mobility and financial freedom over the perceived ties that anchor you with home ownership. What Millennials do value is lifestyle over hours spent at work. They also value family time, social time and personal time. This means they are a demographic whose purchasing power, coupled with their social agenda, directly drives their consumer decisions.
The end result of their “demand agenda” in the multifamily sector is that Millennials are strongly attracted to amenities. This has been referred to as concierge demand. Millennials insist on buildings with ultra-high-speed Wi-Fi with video and music streaming capabilities. They want common rooms and common outdoor spaces where they can socialize and get to know each other better. They are cost conscious, but recognize the value of brands, insisting on the best quality in their apartment construction. Brand names and fixtures like Kohler, and appliances like GE monogram, attract these quality- and experience-conscience consumers.
Commuting is another issue. Many are attracted by the opportunity to leave the car behind and rent in a building that is walking distance from the train or local commuter rail. Dry cleaning, maid service, hair and nail amenities, even grocery delivery, are all in demand. Nothing is off the table in terms of apartment amenities to entice this group to a building where they can rent a lifestyle of convenience. They also appreciate socially responsible housing. It is not uncommon for this group to pay a premium in rent to have a “green footprint” for their living quarters. Zero-emission footprints have become the clarion call for would-be Millennial renters. When you can cap that off with smart technology in each apartment, you have guaranteed them the ability to control their carbon footprint right on their smartphones, with added security to boot. They are the first generation to have a lifestyle offered to them, fully integrated, with technology in their living spaces.
Much of these amenities are not expensive for developers and owners. This is why we are now seeing a new horizon of building and remodeling for a generation that is discriminating and economically powerful. As the competition for multifamily renters heats up in the slow-growing “new economy,” it will be the developers’ and builders’ ability to adapt and change that will guarantee their success with a generation whose priorities are far different than that of their parents and grandparents. With rents on the rise again, and multifamily starts being met each year by ever-increasing demand, the challenge for those in the apartment space will be to watch the shifting demand of the Millennials. Whether it is to meet their needs and demands as it stands now, or to adapt supply to their potential shift from renting to home ownership, whatever this shift is, it will be led by this powerful group of consumers.