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Research - NOVEMBER 14, 2018

Millennials will continue to fuel U.S. apartment demand

by Andrea Zander

TH Real Estate believes milliennials will continue to drive demand for U.S. apartments in the coming decade.

In the coming decade, the younger milliennials could reshape apartment markets in cities such as Charleston, S.C., and Orlando, Fla., if, as TH Real Estate anticipates, these cities experience an influx of milliennials looking for high-quality jobs and a lower cost of living.

TH Real Estate believes eight cities — Boston, Denver, Los Angeles, New York, San Diego, San Francisco, Seattle and San Jose — are at greatest risk of losing higher income older milliennials renters (30–36 years old) to suburban homeownership. As the older milliennials start to marry and have families, it will create the need for more space in the form of a single-family home. As the older milliennials in these eight cities move to the suburbs, demand for class A and luxury apartments should wane and prices for these types of apartments are likely to fall, creating an investment opportunity.

In order to evaluate the affect older milliennials will have on commercial real estate in these “flight to suburb” metros, TH Real Estate’s analysis of mobility data from the Census Bureau indicates most adults that move remain in the same metropolitan area as opposed to relocating to a new metropolitan area. As a result, TH Real Estate assumes 70 percent, or 2.1 million of the 3 million older milliennials in these eight cities, will stay in their current metro area as they marry and have children.

TH Real Estate analysis shows these eight cities experienced a large influx of milliennials in the last decade due to their strong post-recessionary job growth. Most of the older milliennials in these eight cities are currently renters given the relative lack of home affordability in these areas. However, homeownership rates among 35–39 year olds currently stands at 56.8 percent versus 47.9 percent for 30–34 year olds. Based on this, TH Real Estate has assumed a 60 percent homeownership rate among the older milliennials, which corresponds to roughly 1.3 million at risk to flee to suburban locations and purchase a single-family home. The other 40 percent of older milliennials (close to 1 million) are likely to seek out more affordable locations in the United States given the expensive housing in places such as San Francisco, New York City, San Jose and Los Angeles.

And these eight cities show a cyclical opportunity for investors because of the cities’ high cost of living and strong, well-diversified job markets. During this economic cycle, many of these typically supply-constrained metros experienced unprecedented levels of new supply, much of which was concentrated in the urban core and much of which was luxury and class A stock. As a result, luxury and class A apartment rents have begun to soften. Despite falling rental rates, many of the class A and luxury apartments in these eight metros will remain out of reach for the large number of younger milliennials (19–29 years old) following behind the old milliennials. Class A and luxury apartment buying opportunities could arise as pricing becomes dislocated due to more pessimistic rental growth expectations, concerns about oversupply, and/or flight to value in secondary and tertiary markets. Apartment prices in New York, San Francisco and San Jose are beginning to show signs of softness.

 

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