NUMBERS MAY NOT LIE, BUT SOMETIMES they can make a liar out of conventional wisdom.
Throughout the recession, demographics have served as a beacon
of hope to apartment owners. “Things may be bad
now,” went the refrain, “but just
wait until Generation Y comes along."
Turns out, we didn't have to wait long. The
demographic trends that will shape the next decade arrived this
year, with absorption rates so strong they turned conventional
wisdom on its ear. A hefty 77,000 apartment units were absorbed in
the first half of 2010, the strongest demand in a decade. But where
did all of those renters come from?
Traditionally, the answer would be found in
employment—the more jobs, the more renters. But
given the anemic job market (unemployment was hovering at 9.5
percent in the third quarter of 2010), there had to be another
After all, 2009 was brutal. Household formation totaled about
930,000 in 2009, the lowest mark in 30 years. Young adults
increasingly doubled up, moving in with roommates or back in with
their parents to ride out the recession. The number of those aged
18 to 34 living with parents increased by 2.2 million from 2005 to
2009, reaching 20.3 million, the highest number in 25-plus years,
according to the Census Bureau.
What's more, baby boomers are returning to
rentals in droves, thanks to the housing bust, during which many
boomers lost their homes. In fact, the homeownership
rate—which fell to 66.9 percent in the second
quarter, down 1.6 percent since the beginning of
2006—is projected to keep falling.
“It doesn't sound like a lot,
but 1.6 percent translates to 3.4 million households that are now
renting,” says Mark Obrinsky, chief economist of the
Washington, D.C.-based National Multi Housing Council.
“That's another burst of
absorption that has very little to do with employment growth right
Yet once the economy settled down, the tide of layoffs was
stemmed, and inklings of job growth emerged, there was a
sociological effect. Young adults who had doubled up started to
decouple, or “unbundle,” as they felt
more confident signing a lease.
And boomers began to look for higher-quality properties in more
“Demographics can move markets, and
we've seen evidence of that in the first half of
2010,” says Hessam Nadji, managing director of research
for Encino, Calif.-based Marcus & Millichap.
“One of the things that confirms this short-term
demographic release is that studios and one-bedrooms have led the
While job growth will always be the key driver of demand, it
looks as though these days demographic trends have become an
influential co-pilot, allowing the apartment market to outperform
Specifically, the demands of Gen Y, boomer, and immigrant
renters, whose population growth and specific needs will shape the
next decade of apartment development, design, and day-to-day
“We're seeing a lifeboat of
demographic data that will get us through the soft patch,"
Nadji says. “Even if the economy slows way
down, the worst that can happen is for demand to run out of steam.
And that's not bad for a worst-case
Leading the way are young adults. Generation
Y—those between 18 and
34—totals about 77.4 million, already larger
than the baby boomers, which number about 76.2 million, according
to the Census.
And since new immigrants tend to enter the country as young
adults, Gen Y will only keep growing.
The size of this “Echo Boom”
generation is a sharp contrast to Generation X, which demographers
sometimes label the “Baby Bust”
generation, given its small size. People aged 20 to 34 hit a low
point in 2005, when the group grew by fewer than 200,000 people.
That year, the youngest members of Generation X turned 18.
In 2009, the number of 20- to 34-yearolds grew by more than
800,000. Next year, it peaks with another 964,000 coming; and in
2012, 856,000 new young adults will join the prime renter age
group, according to the Census Bureau and
But there are numbers, and then there's
behavior. Beyond its sheer size, Gen Y's impact
is bolstered by cultural trends. Mainly, it's
taking longer for these young adults to settle down. Gen Y stays in
what demographers call “emerging
adulthood” for longer periods of time than its
“People are putting off getting married and
having children, and the more you elongate that interval, the
greater the potential pool of renters,” says Ryan
Severino, an economist for New York-based Reis.
“In the past, it might be into the mid-20s, but
now it's probably into the early 30s."
Indeed, young adults are marrying and having children later in
life. For the first time in more than a century, more than half of
those aged 25 to 34 have never been married, according to
Chicago-based research firm Council on Contemporary Families. And
birth rates continue to trend downwards.
If the denizens of Gen Y are waiting longer to settle down, that
means they're not worried about finding that
good school in the suburbs. The average age of first-time home
buyers is now around 34—at least six years older
than it was in 1980—according to a study by the
Washington, D.C.-based National Association of Home Builders.
Household composition is also evolving in a favorable way for
There's a lingering perception that the
typical household is a married couple with 2.5 children, but that
hasn't been true for some time. Less than a
quarter of U.S. households today fit that bill. Instead, the
fastest growing segment has been single-person households. And
going forward, married couples without children will grow at a
faster rate than single-person households, according to the
Boston-based Joint Center for Housing Studies of Harvard
But is Gen Y really so different from previous generations? The
prevailing wisdom is that Gen Y has a less rosy view of
homeownership given the strife of the past few years.
That's wrong. A recent survey of 1,241 Gen Yers
conducted for the Washington, D.C.-based Urban Land Institute
suggests the opposite. “A surprising percentage
of Gen Yers own homes already—as high as 36
percent,” says M. Leanne Lachman, a demographic analyst
for the real estate industry who conducted the survey.
“I think these young people really aspire to
ownership in the same way their parents did."
The good news? They're taking longer to do
Joining Gen Yers in the new rental pool are baby boomers, who
will soon create a senior citizen population unprecedented in size.
Three-quarters of retiring boomers said they want to live in
mixedage and mixed-use communities, according to a 2009 survey by
Washington, D.C.-based real estate market research firm RCLCO.
The survey suggests that, much like Gen Y, seniors seem
attracted to amenity-rich centers, walkability, and access to
public transport, as opposed to being sequestered in a gated
The impact of the baby boom generation on seniors housing is
only just beginning to be felt. The oldest boomers are turning 65
this year, the first trickles of an eventual flood. The number of
people aged 55 to 64 increased by 10.4 million over the past
decade, a whopping 43 percent increase, compared with total
population growth of just 9.4 percent, according to the Census.
And contrary to popular belief, not all baby boomers own homes.
About twothirds of renter growth in the past decade was among
households aged 45 to 64, and renter households over age 55 will
increase by more than 3 million in the coming decade, according to
the Harvard Joint Center's State of Housing 2010
“Looking at the numbers is easy,”
Obrinsky says. “The hard part is figuring out
what kind of housing they want."
Indeed, as more Americans remain active later in life, the
demand for seniors housing—particularly
independent living facilities—may grow more
slowly than the raw numbers suggest. “People are
going into independent living later and later, so the real growth
is in assisted living,"
Lachman says. “People are healthier longer
now, and we're going to have more boomers
working longer. I wouldn't get totally excited
about independent living."
In the near term, the independent living
sector—which is more of a lifestyle choice as
opposed to need-based assisted living—has taken
a hit due to the depressed single-family market. Among all seniors
housing sectors, independent living has shown the lowest occupancy
rates throughout the recession, in the mid- to high-80 percent
range, as opposed to occupancy levels at assisted living facilities
in the mid-90 percent range.
Continuing Care Retirement Communities (CCRCs) often require
entry fees, which is a taller order these days.
“The readiness and willingness of a senior
household to make this transition depends upon the salability of
their home,” says Sam Chandan, global chief economist
at New York-based market research firm Real Capital Analytics.
“An improvement in overall housing outcomes
should support a larger number of people making the transition to
There's also a seniors component to the
doubling up trend. More families are taking in older relatives due
to the recession, which has cut into the historically strong
need-based sector. “It used to be you had waiting
lists to get into assisted living,"
Lachman says. “That's no
In fact, the vast majority of seniors prefer to age in place.
They are often rooted in their communities. And given advances in
medial science, the refrain that “50 is the new
40” has become a cultural clichÃ©.
The question is, will these coming seniors behave as their
parents did? “They're a very
active group, and I'm not sure we have the right
models for them yet,” Lachman adds.
For all the talk of Gen Y and baby boomers, the people not yet
in America loom just as large as a demand influencer.
The foreign-born component of renter households increased to
19.6 percent in 2009, up from 17.4 percent at the start of the
decade. The number of Hispanic renters has more than tripled in the
past 30 years, up to 7 million from just 1.9 million in 1980,
according to the Harvard Joint Center.
“The challenge looking further out is that
endogenous population growth in the U.S. will not support
significant growth in apartment demand,” Chandan says.
“We'll rely on the continued
openness of U.S. immigration policy as a significant factor."
Yet the pace of immigration has slowed.
There was a sharp decline in the amount of foreign-born
households under the age of 35 from March 2007 to March 2009
(338,400), a much bigger decline than in same-age native-born
households (2,100), according to the Census.
As city centers become more desirable for both Gen Y and baby
boomers, the closer-in suburbs are also undergoing a
transformation. “More immigrants are ending up in
first-ring suburbs, instead of the urban core,” says
Greg Willett, vice president of research and analysis for
Carrollton, Texas-based M/PF Research.
“The urban core markets have gotten so
gentrified that it pushes them out of the price range."
Just as Gen Y's movement into city centers
signals a trend toward smaller units, the immigration movement
toward outer rings necessitates larger units. Many developers in
gateway cities with large immigrant populations believe that
they'll need to build bigger, more
child-friendly configurations—such as more
three-bedroom units—to accommodate this
After all, there are many more multigenerational households
today than at any time in the past 60 years, a trend driven by
immigration. In 1980, 28 million Americans lived in
multigenerational households; by 2008, that figure was up to 49
million, according to the Census. One of the defining
characteristics of minority households is their size. Minority
renter households aged 35 to 44 had an average of 3.2 people,
compared to 2.6 for whites, and the average number of children per
minority household is 1.1, versus just 0.6 per white household,
according to the Harvard Joint Center.
Still, regardless of whether demand is driven by Gen Yers,
boomers, or immigrants, the market's unexpected
strength today appears to be just an appetizer. Over the next
decade, the total number of renters is expected to rise by up to 5
million (with high immigration levels), according to the Harvard
Joint Center. Compare that to a mere 3.1 million new renter
households in the previous decade (1999 to 2009). And the
simultaneous lack of new supply—in 2009, the
industry started fewer than 100,000 multifamily units, less than
the natural loss of units annually—should
position the multifamily industry for a great run.
Marcus & Millichap, for one, is forecasting a decline in the
national vacancy rate to 6 percent by the end of 2012; the firm
sees rent growth in the 4 percent to 6 percent range in 2011 and
2012. As Nadji says: “By then,
it's going to be very popular to add space."
EYE FOR DESIGN
Gen Y, in particular, will have an impact on the
type and location of apartments built.
UNLIKE THE RAPID suburbanization that characterized the
post-World War II years, the coming decade will likely be what the
Urban Land Institute calls “a great
The increasing gentrification of city centers like New York,
Philadelphia, Chicago, Seattle, and Denver has made city living
“There's definitely a shift
toward urbanism both by young professionals and renters by
choice,” says Ryan Severino, an economist at New
Yorkbased Reis. “Many cities have gentrified.
They're cleaner and safer, and the amenities
that have always been there are now much more attractive."
In fact, more than three-quarters (77 percent) of Gen Yers want
to live in urban cores, according to a survey by Washington,
D.C.-based research firm RCLCO. “They want to be
close to it,” says Mark Obrinsky, chief economist of
the Washington, D.C.- based National Multi Housing Council.
“They're willing to give up
space, but they don't want to give up
Indeed, amenities are a big deal to Gen Yers. That third
space—not work, not home—is
an important social destination. “They
don't necessarily spend a lot of time within the
says Greg Willett, vice president of research and analysis for
Carrollton, Texas-based M/PF Research. “Nobody
used the business center, gym, or movie theater in the past, but
Gen Yers do. The leasing center clubhouse has become like
But urban areas are also more expensive than outer rings, and
renters today don't earn as
much— for the first time since 1970, median
household incomes for all age groups will end the decade lower than
they began. And the unemployment rate for Generation Y is by some
estimates as high as 30 percent. So the trend is toward smaller,
more affordable units and greater social connectivity.
Up next? The children of Gen X, dubbed Generation
Z—a smaller group, but just as social. Stay
SUNNY SIDE UP
Here are four markets poised for growth.
Talk about a tech-heavy, diverse
economy—Dell, IBM, and Freescale Semiconductor
(formerly Motorola) are major employers in Austin, Texas. It also
happens to be the nation's No. 1 market of the
past year for household and population growth. The metro will see
population gains of more than 2.5 percent for at least the next
four years, while household income is projected to grow more than 3
percent by 2014, according to Reis.
In all of the key metrics—population growth,
employment trends, household income, household
formation—San Antonio continues to rank among
the fastest growing cities in the Sun Belt. The metro is forecast
to see employment growth of 3.5 percent next year, and household
income should rise at about the same levels through 2014. The city
adds at least 2 percent annually in population, which should
continue for the next four years.
Fort Lauderdale has a great long-term balance between supply and
demand, perhaps the best in all of Florida. The market has an
overhang of about 42,000 units, in line with near-term job
forecasts, meaning they will burn off their excess inventory in
about two years. Meanwhile, household income growth is expected to
be in the 5 percent to 6 percent range though 2013.
Like Austin, Raleigh- Durham is a tech-heavy, youth-oriented
market that continues to grow in size. It's not
called The Research Triangle for nothing—Duke
University, North Carolina State University, and the University of
North Carolina at Chapel Hill anchor the
area—and many tech and life sciences companies
have big presences. The area is projected to add 75,000 new
households in the next four years.