Why a Millennial-Centric Investment Strategy – Part 1

The media is rife with attention to the predilections of millennials (born between 1982 and 2001) who form a demographic cohort of nearly 76 million, that is now the largest living generation in America. In this first of a two-part post, I will explain why an urban real estate investment strategy attuned to Millennial tastes is on target. In the second part of this post, I will describe how to implement a millennial-oriented real estate investment plan.

Millennials seek to live and work in walkable urban areas

Resurgent American Downtowns have long been attributed to aging baby boomers, who as empty nesters were eager to swap suburban homes for urban condos. Millennials are even more inclined than boomers to live in walkable urban areas, particularly if these neighborhoods re-enhanced by the availability of a wide range of transportation options. A Rockefeller Foundation survey in 2014 found that up to 86 percent of millennials said it was important for their city to offer opportunities to live and work without relying on a car. Nearly half of millennials who owned a car said they would give it up if they could count on public transportation options.  A 2014 Harris poll of millennials found that over three-quarters agreed to the importance of affordable and convenient transportation options other than cars in deciding where to live and work. For millennials the fifteen most desirable US metropolitan areas include those with some of the nations’s strongest mixed-use neighborhoods where residents can work, live and play without heavy reliance on owned vehicles: San Diego, New York, Boston, Denver/Boulder, San Francisco, Seattle, Chicago, Los Angeles, Portland, Washington, Austin, Phoenix, Charlotte, Atlanta and Miami.

Millennials need to rent

Most millennials are not financially equipped to purchase urban homes or apartments. Despite a persistently low interest rate environment, millennials are far less likely to purchase rather than rent because of tighter availability of credit and far more rigorous mortgage underwriting standards since The Great Recession. Not only do millennials have more personal debt (particularly student loan debt) than earlier generations, but having witnessed the distress caused by the housing bubble of the late 2000s, most Millennials believe that owning a home may not offer the kinds of financial benefits it once did. As a result, the rate of home ownership among millennials aged 25-29 is only 31.8%, the lowest rate on record for any adult age cohort, according to the US Census. In a rising interest rate environment, none of these conditions are expected to mitigate.

Supply of rental housing has fallen

Since The Great Recession, new housing production (single and multi-family) has fallen far behind the pace of new household formation and demand. Amidst this backdrop, the private equity firm Blackstone has become the largest owner of both private homes and multi-family apartments and its enormous portfolio across 25+ markets has a total vacancy rate under 4% and has seen rents rise more than 5% per year.

These conditions present an ideal opportunity for investors to focus on current returns and future appreciation from owning urban housing positioned to appeal to renting millennials. In the second part of this series, I will detail how to implement this selective investment approach. Stay tuned.