Millennials Seek Apartments, Not Homes

SAN FRANCISCO-When looking at the economy, you can't underestimate the importance of the housing sector. That was the overall message during a discussion of the apartment versus housing market at ULI's Real Estate Finance and Investment 2013 conference here.

“There is nothing like economic growth to get you a job, get you out of the house, and get you into an apartment,” explained Richard Sinkuler, partner and global real estate markets leader of Ernst & Young.

Andrew Nelson, director of research and strategy at Deutsche Asset & Wealth Management, said that the economy is on an upward trajectory with fewer homes are underwater, consumer confidence rising, more construction jobs to build homes, and the manufacturing sector is making some recovery, he explained. “Tech and energy are very fundamental to our economy and are growing.”

Having said that, Nelson points out that although housing affordability is at a historic high, and the economic fundamentals are all there, “Millenials are a little less likely to buy a home and be tied down.” 

Sinkuler agreed, pointing to new apartment amenities—such as higher-end common areas—and smaller studio spaces, more flexibility and less responsibility, as a few attractive factors.

David Lynn, EVP and chief investment strategist of Cole Real Estate Investments, expects apartment demand to continue to occur for the next 10 years. “A lot of people also dropped out of the for sale market. A lot of people also can't qualify for a mortgage today and can't come up with a down payment, so there is stronger fundamental structural demand for multifamily going forward. It can be much more affordable in many cases. I expect low vacancy over the next few years.”

For San Francisco specifically, Lynn said that the younger generation and job growth are driving the market. “The Bay Area is very supply constrained,” he said. “Those types of markets are much better places to invest in multifamily.”

And while panelists agree that there are plenty of reasons to support the demand, panelists still question whether the demand be enough to absorb the amount of new supply that is coming online. Andrew Nelson, director of research and strategy at Deutsche Asset & Wealth Management, said that the new supply “will really start hitting in 2015 and 2016.” 

When asked about the private sector using housing as investments, Lynn explained that it is a great thing. “It is great that the private sector has come into housing in hard hit markets like Vegas and Phoenix at great prices and they filled those units. They did a pretty good job and made it more efficient. And a lot of the people occupying these homes are long-term occupiers.” Those occupiers, he said, aren't the same people that would look to rent, so it shouldn't have much of an effect on the apartment market. 

Nelson agreed, saying that “Those homes aren't competitive with the apartment rental stock. They tend to be larger families with kids with a dog and they don't necessarily want to move into the small studio.”

Another cause for concern among panelists was the rising rents. Panelists pointed out that apartment rents have been rising 14% since 2009 and income has only been rising 10% relative to that, so it can't go on forever.

One trend panelists say is unstoppable, is the trend of urbanization. “People want to be where the action is and you will see that play out in a number of properties,” explained Sinkuler.

Keep checking with GlobeSt.com for more coverage from the ULI event.