Multifamily Executive Special Report: This is the second in a three-part series investigating the myths and realities of three controversial demographic groups that will impact multifamily housing demand in the next decade. The final installment on the emerging renter bracket of single women will appear in our November issue.
Check out Part 1 of Myth Busters: The Immigrant Experience
Katherine Wang is like many of her friends. And, in some ways, that's not a good thing for apartment executives. The 24-year-old graduated from the University of California, Los Angeles in 2006. After school, she took her first job in publishing but stayed in her college apartment—with four roommates. Then the economic realities of the real world hit. First, there were the student loans. Then the car accident, forcing her to buy a new car. Suddenly, she was back home with her parents, who lived 29 miles away in San Gabriel, Calif.
Wang isn't alone. She estimates that more than 50 percent of her friends have moved back home with their parents. Many make good salaries and want to put their money into cars and vacations. “A lot of us are working and saving our money,” Wang says. “It's really expensive to get a place by yourself—easily around $1,000 a month.”
It doesn't hurt that Wang and other members of the Generation Y demographic generally get along with their parents, according to a 2007 survey from The Pew Research Center for People and the Press. In the survey, “A Portrait of ‘Generation Next': How Young People View Their Lives, Futures and Politics,” nearly half of the people surveyed said they saw their parents daily.
The apartment industry knows this and realizes that the trend among Gen Yers to move home is a serious threat in an economic slowdown. “The thing with Generation Y is that they have a very close relationship with their parents,” says Ed Lange, executive vice president and COO of BRE Properties, a San Francisco-based REIT that owns 21,808 units along the West Coast.
Industry executives and property managers have been eagerly anticipating the arrival of Gen Y, although there is some debate over whether they've been living in apartments for a while or are just arriving. Some say the 74.8 million individuals born between 1977 and 1994 make up Gen Y; others say it's the 80 million individuals born between 1982 and 1995. No matter their exact age range, this tech-savvy, trend-setting generation—called everything from “millennials” to the “echo boom” of Baby Boomers—is believed to be armed with $200 billion a year in purchasing power, according to a 2006 report from Resources Interactive, a marketing firm based in Columbus, Ohio. For years, many in real estate clung to the notion that this wave of young professionals would emerge from college and enter leasing offices en masse, driving demand for rentals until almost 2030 (when the last of the generation turns 35 and homeownership rates skyrocket).
At least, that was the hope. Unfortunately, the economy seems to be slowing this migration. Even for those Gen Yers entering the rental market, the same rules don't apply—apartment owners can't use traditional playbooks to market, design, and serve the millennials. Whether it's using new technologies to market to them or figuring out how to make apartments affordable to them, apartment owners will need to think outside the box to lure this generation, which presents challenges that their older siblings, parents, and grandparents didn't.
This is the second in a series of stories exploring the myths and realities of three demographic groups that promise to drive multifamily demand over the next decade. MULTIFAMILY EXECUTIVE examined each trend, analyzed the data, and culled anecdotal evidence from executives in the field. Here's how the Generation Y phenomenon is unfolding at multifamily properties.
MYTH #1
Gen Y has some of your best renters right now.
For more than a decade, the apartment industry looked forward to the arrival of Wang and her peers. Between 2008 and 2020, the U.S. Census Bureau reports that approximately 57 million members of Gen Y will reach the age of 22—the beginning of prime rental age.
“There's a huge bottleneck coming through,” says Dan Oltersdorf, vice president of residence life at Campus Advantage, an Austin, Texas-based company that provides strategic planning, counseling, and property management services for student housing companies and has firsthand knowledge of Gen Y and its tendencies. “[The demand's] been hitting in higher in education for the past 10 years.”
Once those people leave college, they'll need a place to live. “I think the rental market should be a very strong one,” says Louis Pol, dean and professor of marketing at The University of Nebraska–Omaha whose research includes demographic applications, research methodology, and statistics. “I think the demand should be pretty substantial [considering] the qualities and characteristics of Gen Y—single people not interested in the responsibility of owning homes [but who] have to live somewhere.”
Even if they wanted to own homes, many Gen Yers probably couldn't right now. With the credit meltdown, first-time buyers have a much tougher time getting the 100 percent financing that they could a few years ago. At BRE, COO Lange sees the result of this greater difficulty in buying a home in the company's renewal rates. He says that over the past year, the length of stay in BRE's properties has moved up from 18 months to 20 months. “A lot of that may be because the homeownership option isn't as attractive as it was a few years ago,” Lange says. “They're hunkering down. A longer average length of stay is good for the bottom line.”
The industry seems in agreement: Echo boomers are en route to apartments. But are apartment owners enjoying the Gen Y boom yet? In some respects, it may depend on what type of product they offer. For companies with an older portfolio that tends to be more affordable to people fresh out of college, there are 4.2 million people entering the prime rental age of 22 and walking through the front door this year. “It is the bulk of the rental pool,” says Jeff Adler, executive vice president and chief property operations officer for the industry's largest apartment owner, AIMCO, a Denver-based REIT whose 197,158-unit portfolio makes it the largest apartment owner in the country. “You can't ignore it. They're in their prime.”
But for luxury operators, things are different. “They're kind of on the leading edge, [but] they're not the predominant renter target,” says Christopher Payne, vice president of development for AvalonBay Communities, a REIT based in Alexandria, Va., that owns 48,158 units nationwide.
Despite this, observers say luxury rentals will ultimately benefit from Gen Y's purported $200 billion in buying power. “Over a longer period of time, demand will be there and be pretty strong,” Pol of the University of Nebraska says. “The youngest of the millennials are still only 10 years old.”
MYTH #2
The economy can't stop Gen Y.
For an industry eager to benefit from the first wave of Gen Y renters, there's just one problem. The economy seems to be keeping them out of apartments—at least temporarily. The U.S. Bureau of Labor Statistics (BLS) reports that there were about 760,000 fewer employed persons between the ages of 16 and 29 in January 2008, versus January 2007. In 2006, the under-30 unemployment rate was also fairly high, according to the BLS. For 20- to 24-year-olds, it was 8.2 percent; for 25- to 29-year-olds, it was 5.1 percent. In 2007, the unemployment rate for each group roughly maintained its prior-year level.
“There is definitely some evidence that fewer job opportunities are out there for young adults,” says Ron Witten, president of Dallas-based Witten Advisors, an apartment market advisory firm. “In a down economy, young adults and recent hires tend to be more affected by recession in terms of losing their jobs.”
Wang says many of her friends, particularly those who work in the financial sector, are concerned about their jobs. “We're all feeling really scared,” she says. I don't think I have a single friend who isn't feeling that their job is at risk right now.”
Each year, Pol sees his students graduate into the “real world.” But he's not seeing them landing jobs as quickly as he witnessed in years past. “The way millennials are getting hurt is in job searches,” he says.
There's one other problem slowing millennials down as well—debt. In the 2003 to 2004 school year, 56 percent of all dependent undergraduates owned at least one credit card, and one out of four carried a balance from month to month, according to the U.S. Department of Education's National Postsecondary Student Aid Study (NPSAS) that year. The median credit card debt? $1,000. And one-quarter of students who carried a balance had debt exceeding $2,500. Meanwhile, two-thirds (66.4 percent) of students at four-year colleges and universities carried student loan debt, according to the 2006 “Trends in Student Aid” report from The College Board. “They're taking on a significant amount of debt, in particular credit card debt,” Pol says.
A Harris Interactive study commissioned by Northwestern Mutual backs this up. It says that nearly 40 percent of Gen Yers have more than $10,000 in student loans. More than 20 percent have credit cards with balances of at least $5,000. Gen Yers know this is an issue: 30 percent of the 18- to 25-year-old set cite money as their most pressing problem; 70 percent say they don't make enough money to lead the lifestyle they want to, according to the Pew survey.
Under these economic pressures, Gen Yers aren't making the impact apartment owners expected. Instead of forming the coveted new renter-headed households the industry needs to keep vacancy rates low, Gen Yers are doubling or tripling up, even moving back home. “Some are losing their jobs and are forced to move back home with their parents,” says Jack Mc-Cabe, CEO of McCabe Research and Consulting, a Deerfield Beach, Fla.-based multifamily research firm. “Others are putting five people in a two-bedroom apartment to lower expenses so they can afford it.”
The apartment industry sees this as well. “We're seeing more roommate situations,” says Jamie Gorski, senior vice president and chief marketing officer for McLean, Va.-based Kettler, a multifamily builder, manager, and owner with more than 1,200 units under management in the Washington, D.C., area. “In the past, people would take a one-bedroom [unit] themselves.”
For past generations, moving home or piling into a one-bedroom apartment may have been a lot to ask. But experts say millennials don't have a problem with either option. For one, they're extremely social. “They've been raised to be in a group setting,” says Charles Kennedy, senior vice president of DYG, a social and marketing research firm based in Danbury, Conn.
Wang, who grew up in a large family, says she would rather not live by herself at this point of her life. Even after she leaves her parents' home, she expects to live with a college friend. “I don't want to live by myself in a studio,” she says. “I had a little sister and brother, so I'm used to having a lot of people around. Even when I was in college, I had three, even four roommates.” And she's not alone. Eight out of 10 people in the 18- to 25-year-old crowd say they have talked to their parents in the past day, and three out of four say they see their parents at least once a week, according to the Pew survey.
That doesn't mean apartment owners aren't trying to do things to keep Gen Y. Laramar Group, an apartment owner and manager based in Greenwood Village, Colo., with 19,774 units under management, allows renters to move to smaller units and even offers roommate matching services in the leasing office. “They're your most valuable commodity,” says Dave Woodward, managing partner and CEO for the company. “You need to keep them in the system one way or another. If you keep them from breaking their lease or messing up their credit, it can help build loyalty.”
Camden, a Houston-based REIT that owns 52,716 units nationwide, also sees renters looking for solutions. “I hear of people coming in and saying they're getting a roommate or want a smaller apartment to save a couple of bucks,” says John Selindh, vice president of marketing for Camden.
MYTH #3
It's impossible to build affordably for Gen Y.
The economy isn't the only thing forcing Gen Yers to move home or double up. Rental prices are, too. “Some are moving back home by choice because their housing has become so expensive in many markets,” McCabe says.
The problem: Gen Yers want to live where the action is, meaning urban areas. In fact, 12 percent of Gen Yers are expected to move into central cities, according to RCLCO, a real estate advisory firm based in Bethesda, Md. “Generation Y wants to be around urban centers, and we're in those markets,” BRE's Lange says. “They are hip, current—and they want to live in close proximity to work, entertainment, and transportation.”
Wang certainly fits this description. “It's important to live in a lively neighborhood,” she says. “Even though we work all of the time, we still like to go out.”
Unfortunately, apartment values are a lot higher in these urban infill markets. Cap rates are lower for more expensive properties such as mid- and high-rise developments usually found in the urban core, currently hovering at around 5.75 percent; at garden-style properties typically found in deeper suburbs that rate is a more affordable 6.25 percent, according to New York-based research firm Real Capital Analytics (RCA). RCA also reports that cap rates in tertiary markets are 7 percent, but Gen Yers don't want to live in rural areas—they want downtown digs in primary markets.
That means more expensive rents. In a random sampling of 13 cities, M/PF Yield-Star reported that rents in downtowns averaged $1,488, while rents in the larger metro area were $1,155. Consider three top cities for 20-somethings: Downtown rents versus metro area rents were, respectively, $2,196 and $1,458 in Boston; $1,340 versus $779 in Dallas; and $2,406 versus $1,997 in pricey San Francisco.
“The most expensive housing is in the urban cores, and that is where they most want to live,” says Payne of AvalonBay. “They don't have the ability to reach too far [in what they can pay for rent].”
That leaves apartment owners and developers with a dilemma. “It's very challenging,” Payne says. “Can you get close to those events [downtown activities] where they [want to] live at a price that makes sense to them?”
Some developers have acknowledged that achieving affordable rents for younger Gen Yers is next to impossible unless they have a roommate or parental support (about three quarters of 18- to 25-year-olds in the Pew survey said they were supported by their parents). “In their first and second job, they're doubling up,” Lange says.
To find a way around the dilemma, multifamily operators have a few options. One is building a little farther from center city. “They're living approximate to but not right there, where land prices may be cheaper, and you can get subsidies and support for redevelopment,” Payne says. “It's getting land prices where you need.”
AvalonBay is also re-evaluating its floor plans, design features, and price points to make them more attractive to Gen Yers. Meanwhile, BRE is creating more studios and one-bedroom units and is developing more living space with movable walls and open floor plans. The firm also has done away with office nooks, landline phones, and full-size televisions. “The gross unit can shrink, but the net square footage for living can increase,” Lange says.
Indeed, amenities seem to be the way to lure Gen Yers. Take Chicago's One Superior Place, a property managed by Riverstone Residential Group, a Dallas-based firm with 143,200 units under management. The property comes loaded with places for Gen Yers to meet, including a swimming pool, fitness center, fitness classes, an Internet café, business center, club room, and a ground-floor Whole Foods. Though its 93 percent occupancy rate is on par with the average rate in its market, the property also boasts the highest rents in the neighborhood, which happens to be within walking distance of shopping on the Miracle Mile and the bars and restaurants of Rush Street.
Still, the ultimate way to achieve the right balance of affordability and amenities for this demographic set probably isn't in new construction. Payne contends that despite Avalon's luxury portfolio, he's seeing more Gen Yers in properties that have been renovated.
Not everyone is so eager to stock up on luxury amenities and frill features. Adler of AIMCO says that apartment owners can make “fringe” adjustments such as changing from stainless-steel to black or white appliances in order to make units more affordable. But he won't go any further. “You can work around the edges, but our floor plans are larger because they're older; you don't want to take away that advantage because that's what you are,” adds Adler, who nevertheless says AIMCO won't go out of its way to court nonaffiliated roommates, the bulk of which are usually Gen Yers.
Even though AIMCO has a lot of two-bedroom, two-bath floor plans, “roommate structures tend to be a tad riskier than committed couples or singles,” Adler says. “We're happy to have them as customers, but I'm not going out of my way to change my mix.”
MYTH #4
Gen Y doesn't want to be sold.
When Gen Y renters come into Camden to visit apartments, they are armed with a different attitude—along with local rental data. “They've done their homework, and they come in ready to tell you what's going on down the street,” Selindh says.
Camden isn't the only company seeing this trend. Seven or eight years ago, Lange says there was higher traffic at BRE's properties. But today's visitors are ready to make a decision. And 40 percent of that traffic is coming from the Internet. That's not surprising, considering that 86 percent of 18- to 25-year-olds regularly use the Internet, according to the Pew study.
With the Internet and social networks at their disposal, millennials want a deal. “They grew up with the Internet,” Pol says. “Their whole notion of how they get information and how they disseminate information is very different.” Indeed, more than half of Gen Yers have used social networking sites in the past, and four out of 10 have created a personal profile page, according to the Pew study.
In places such as Florida, the information available to Gen Y renters online can actually play havoc with traditional multifamily owners. The amount of shadow properties available to people on Craigslist in supply soaked Florida is astounding. Gen Yers know that. Tech- and research-savvy Gen Yers are able to easily find shadow rentals. And owners and managers in the shadow market are often more likely to negotiate. “We're seeing a lot more competition in rental business than just apartments,” Witten says.
But it's more difficult for the leasing staff at a large REIT, for instance, to barter with millennials. “We're not in a position where we can get into that kind of negotiation, typically,” Selindh says.
True, the bigger companies may not have as much pricing flexibility as shadow owners, but they usually have the better amenities. Gen Y expects these extras—maybe more than they can afford. Oltersdorf says they are accustomed to amenities such as tanning beds, fitness centers, gaming rooms, private bathrooms for every bedroom, and plasma televisions.
So how do apartment owners appeal to a generation that wants everything but really doesn't want to be sold to? There are a number of ways. “Merchandising, marketing, and advertising have to be fresh and attractive enough to catch the eye of that age group,” Selindh says.
People are looking at technological solutions as well. Apartments.com is trying to reach Gen Y's mobile phones by texting them property info and allowing them to surf its site with a mobile browser. The approach makes sense: the Pew survey reports that about half of Americans between the ages of 18 and 25 received a text message in the past 24 hours. In fact, BRE installed a 24/7 call service to answer the 25 percent to 30 percent of inquiries that Lange says come from online leads.
Meanwhile, Wang says landlords and marketers who expect Gen Yers to give up their cell numbers should be wary. “Not everyone has unlimited texting,” Wang says. “That's really annoying that it's using up your money and clogging up your in-box. I hate having to delete those texts.”
AIMCO invested in its Web site to reach Gen Y renters. “It's a way of allowing a deeper connection that's less spun,” Adler says. “There's obviously a distrust of anything artificial, manufactured, or commercial.”
This sense of distrust, however, may be unfounded. Given the amount of debt shouldered by Gen Yers—plus their penchant for technology (86 percent of 18- to 25-year-olds say they regularly use the Internet)—Pol of the University of Nebraska–Omaha thinks they're not as averse to commercialism as conventional wisdom dictates. “When you start looking at their behavior, and what they're buying and using in terms of technology, it's hard to make the argument that they're shy about consumerism,” Pol explains.
Finally, there are the parents. In some cases, parents are cosigners. Even, if the parents aren't the cosigners, it's very likely they'll have some sort of role in the decision-making process. “Parents are becoming a key part of the marketing and leasing process, even for post-college adults,” Campus Apartments' Oltersdorf says.
BRE, for one, isn't just revamping the ways it sells online. It's also looking at how its leasing agents work. “There's a much heavier emphasis on sales,” Lange says. “Most traffic was coming to the door. There was always the sales aspect, but it was mainly order-taking.”
Combat that with follow-through, Pol says. “You win their trust by doing [not] by telling them something. They trust you when you deliver,” he says. “Yes, they're skeptical, but it does not take a heroic effort to earn their trust.”
BY THE NUMBERS Generation Y has long been coveted by apartment owners. But what are the real factors affecting this demographic? The numbers are telling.
Individuals born between 1977 and 1994:
74.8 million
SOURCE: U.S. CENSUS BUREAU
Gen Y's purchasing power:
$200 billion
SOURCE: RESOURCES INTERACTIVE
No. of fewer employed persons ages 16 to 29 as of Jan. 2008 (vs. Jan. 2007):
760K
SOURCE: BUREAU OF LABOR STATISTICS
2007 unemployment rate for 20- to 24-year-olds:
8.2%
SOURCE: BUREAU OF LABOR STATISTICS
Median credit card debt of undergraduate students:
$1,000
SOURCE: U.S. DEPARTMENT OF EDUCATION
Gen Yers with more than $10,000 in student loans:
~40%
SOURCE: HARRIS INTERACTIVE
18- to 25-year-olds who see their parents daily:
50%
SOURCE: THE PEW RESEARCH CENTER FOR PEOPLE AND THE PRESS