Insight: Millennial Myths
Urban core.” “Live, work, play.” “Millennials.” “24-hour cities.” “18-hour cities.” “Renter-by-choice…” buzzwords to describe the new breed of trendy, millennial renters looking for an exciting, active urban lifestyle keeps getting longer and paints a picture of millennials as a monolithic block making identical housing and lifestyle choices. However, our experience - from managing rental properties in Phoenix as well as regular visits to Seattle - has been quite mixed. The new millennial-renter phenomenon who rents out of choice in dense urban centers close to bars, shopping, clubs, employment, yoga studios, and the arts definitely seems to be a trend among young - often without children (single parenthood and divorce rates are markedly lower among college educated young adults than among those who didn't graduate college) - well paid professionals in cities such as Seattle, Denver, Portland, New York City, Austin, and others. On Saturdays, it isn’t uncommon to see young professionals, still slightly hungover from a Friday night out on the town, biking to some hipster brunch spot, spending 30 minutes waiting for a table, paying $60 for a breakfast for two, and enjoying a 2 hour brunch before heading to an art gallery or some equally highfalutin bar with wooden tables, rustic art deco, and patios filled with well-groomed pets. But from our experience, the scene above is not representative of all millennials. Most of the millennials we deal with aren’t your high earning, well-educated, professionals but often servers, car mechanics, low-level managers, or other similar lower-middle income occupations. Often with a high school diploma or some community college and plans to finish their education but lacking the resources to do so - life happens, a common refrain. They are either married, living single but in relationships or co-habiting and often, have kids either with their current partners or past ones and have regular visits from their kids. Rather than leisurely Saturday brunches, most of these millennials work Saturdays, probably cooking or serving these upper income millennials their brunches, baby sitting, fixing cars, or engaged in some similar hourly wage profession. And, far from being in the middle of a high-energy urban core, these millennials prefer quieter (some of these millennials work night or early morning shifts) suburban locations that provide more space for their dollar - to accommodate friends or relatives who may have fallen on harder times, or for visiting kids (kids often divide time between their two separately-living parents). Suburban locations also offer backyards a must have for pet-owning millennials with erratic work schedules. This is not to say that the urban core phenomenon and the live, work, play lifestyle aren’t for real, they most definitely are - even in sprawling, sun-belt cities such as Phoenix, and Dallas but this trend is, by no means, reflective of the aspirations of all millennials. In extrapolating trends seen in a handful of larger, denser cities where high-skilled professional services make a greater part of millennial employment, investors run the risk of over paying for assets in the urban core - a phenomenon already underway some my argue if one looks at current cap rates (often pro-forma!) offered by urban core properties. More importantly, investors may be overlooking a great opportunity to serve less well-off millennials - the kind who may be renters for a long time as they often lack the resources to buy homes due to other more pressing priorities - child support, student debt, medical debt, going back to college, helping older parents, or younger sibling. Problems that well-off millennials rarely deal with and who are also more likely to move out to buy homes once they start families and have kids - outside the really expensive markets such as NYC, and San Francisco, at least. This “renter-by-no-choice” millennial cohort, in the long-run, may emerge as a more promising market segment - especially in the sun belt as more economically pressed millennials move to these lower cost locations as well given the South’s ability to attract lower-income immigrants from Central and Southern America. But won’t supply catch up to satisfy the demand from these lower-income millennials? The answer so far has been, most likely not. Given construction and land costs, most new multi-family construction is economically feasible only as Class-A thus doing little to create new supply for those looking for Class-B and C level options. Theoretically, there may be a ripple effect from the creation of all this Class-A product but whether that will happen in practice, whether it would be able to absorb all the new demand for Class-B and Class-C product, and how quickly will new supply work itself through the entire multi-family value chain is anyone’s guess. As occupancy starts to plateau, new Class-A construction may slow down too as has happened in Washington D.C. Another factor constraining supply are zoning regulations, especially in suburban locations. Urban core land that is not already multi-family zoned is easier to rezone given that it don’t fall in residential sub-divisions as well given the emphasis by city leaders on urban renewal. On the other hand, getting infill or suburban locations rezoned multifamily - especially if they fall within larger residential subdivisions is relatively harder as cities often try to avoid spot zoning (different zoning on the same street or subdivision) or because of objections from existing residents. In any case, successful or not, a rezoning exercise is a considerable investment of time and effort on the part of the developer. Finally, as mentioned above - middle-lower income tenants are less likely to move out to buy homes even if they wish to due to financial constraints. Even if lending standards are relaxed, it is not clear whether we will ever go back to the go-go days of the mid 2000’s or even whether these low-middle income millennials would want to deal with the financial stress of having a mortgage and all the other costs that come with maintaining a house especially since the memories of the previous housing crash are still vivid in their minds. While most conventional wisdom and expert opinion seems to suggest that lifestyle choices made up upwardly-mobile professional millennials, often in dense urban locations, is the face of multi-family millennial housing in the days to come. This one size fits all approach may lead investors to disappointment. Attractively priced, suburban Class-B properties in good school districts, with decent amenities, close to parks and shopping, and a short drive to urban and employment cores have a bright future in our opinion and provide opportunities to realize above normal returns, especially in value-add situations.
