Demographic Shifts in Urban Centers: A Boon for Multifamily Investors

Executive Summary:

• Buy and hold investors should consider adding properties located in urban centers
• Shifts in economic conditions, trends and demographics are boosting the demand for properties in urban centers.
• If current trends remain we can see a lot of upside to owning properties that cater to “generation rent”.

The American dream entailed owning a home with a white picket fence, two cars, two kids and a dog (or a cat in my case). Sadly, that utopian outlook has given way to the harsh realities of the “Generation Rent”. The term “’Generation Rent” became popular in 2012 referring to the group of 20-somethings forced to delay life’s milestones such as careers, marriage and children due to lack of opportunities and/or underemployment. This phenomenon is creating a unique landscape of opportunities for the buy and hold investor.

“A report from economists at accountancy firm PwC suggests the number of new homebuyers is set to fall over the next 10 years, as the high cost of raising a deposit locks large segments of society out of the housing market.”

Recent economic data also shows the decline in rental vacancy surpassing that of homeowners in the US. This effect is further exacerbated by the drop of 5% in home ownership rate since The Great Recession.

In December 2016, the FOMC forecasted medium term inflationary growth of 2% annually (2016-2019). Along with rising interest rates, this combination of economic factors is not conducive for home ownership for Generation Rent. Furthermore, looking at the Urban Price Index as a proxy for the cost of living in urban areas, one can witness a clear uptrend in costs as well as an increase in home prices as shown by the S&P/Case National Home Index.

Indexed were set at 100 in 2009:

What’s driving this trend? Lately, millennials have gravitated to towards urban centers. According to Nielsen Insights, “the markets where Millennials are most highly concentrated reflect their desire to live in more socially conscious, creative environments”. The top cities with high millennial concentration include Austin, San Diego, Houston and San Francisco.

What are the implications for the buy and hold investor?

The good:

• Clear market target with homogeneous tastes. (Developing/Rehabbing 3 bedroom apartments in urban centers and targeting couples with kids might not be ideal)
• Great opportunity to acquire/develop cashflow generating properties. The risk of purchasing with high leverage can be mitigated by above market rental rates.
• Properties in urban centers are currently riding the tail winds of shifting in trends, economic conditions and demographics. Making them attractive investment options for the buy and hold investor.

The bad:

• Competition. Large developers are aware of this trend and have been positioning themselves in the market accordingly. Thus, creating high barriers of entry in terms of opportunities and price.
• "Generation rent" might not have the flexibility to purchase a home but they have the flexibility to relocate… and often. Scout properties near entertainment centers and vibrant cultural scenes to limit vacancy rates.

Osborne, Hilary. "Generation Rent: The Housing Ladder Starts to Collapse for the Under-40s." The Guardian. Guardian News and Media, 21 July 2015. Web. 06 Mar. 2017.

Neuman, Scott. "Generation Rent: Slamming Door Of Homeownership." NPR. NPR, 07 June 2012. Web. 06 Mar. 2017.

"US Inflation Forecast 2015-2020 and up to 2060, Data and Charts." Knoema. N.p., 06 Mar. 2017. Web. 06 Mar. 2017.

'http://www.governing.com/authors/Mike-Maciag.html'}], [{title: 'Mike Maciag' Url:. "Millennials Remade Cities, But Will They Keep Living in Them?" Governing. N.p., n.d. Web. 06 Mar. 2017.