Millennials Entering the Real Estate Market

About the Author

CED Program Interns & Students

mildevIt’s not a surprise that real estate developers, in recent years, have begun prioritizing the wants and needs of Millennials. Millennials say that they prioritize walkability, dense urban space, a sense of community, and the ability to frequent a favorite coffee shop. This year, Millennials are projected to overtake the Baby Boomer generation as the nation’s largest living generation. As mentioned in a previous CED blog, developers have already begun to adjust to this change. Most recently, some Millennials have entered real estate development with a distinct competitive advantage: knowing the customer.

An article written by Ben Steverman of Bloomberg Business (2015) details the emergence of a development firm founded by a Millennial that is tailored for Millennials. “Recently acquired for $7.2 Million, the firm started in the suburbs of Seattle. The two founders were living in a trendy neighborhood and didn’t want the typical ‘home out in the suburbs with a white-picket fence.’ Instead they began searching for properties that they themselves would actually want to live in. They’ve been able to focus on properties that have less space but offer plenty of amenities. It is the firm’s goal to ensure that the apartments differentiate themselves by creating an extension of the tenant’s living space. The firm provides amenities like fire pits, roof decks, entertainment rooms and communal space to support it’s 15 to 20 percent premium rents.”¹

Much of this Seattle-based firm’s strategy is fairly conventional: buy underutilized apartment buildings in rising neighborhoods, renovate, and sell to eager Millennials for higher rents. The difference is that this firm seeks to truly find the underlying wants of its Millennial tenants. “Popular and desired features include: historic architecture, exposed brick walls, refinished hardwood floors, a fitness gym with a yoga studio and climbing wall, and a large bicycle storage and repair room. Shockingly, parking is a non-necessity for most tenants.”¹

“The firm’s newest development is multifamily units in an up-and-coming Los Angeles neighborhood called Echo Park. After buying a property that had admittedly been treated poorly, the firm hopes to earn unforeseen value from the redevelopment. Aspects about the property may seem undesirable, such as a metal gate acting as a front door and a lobby that looks like a 1980’s funeral home, but the developer sees a project that is ripe for Millennials. Located nearby is a farmers market, a coffee shop, a surplus of food and shopping, and a recently-opened organic supermarket around the corner.”¹ As the property is restored back to its 1930’s heritage, all indications show that the property’s demand will grow.

That said, to what extent is this strategy paying off? “So far, the four-year-old firm has earned a 24 percent return on five buildings. Additionally, seven other sites are yielding an annual return of 11.2 percent. These numbers have resulted in additional investment and expansion into Salt Lake City in 2013 and Los Angeles in 2014 (firm is cautiously exploring over-priced markets like San Francisco and Denver). Likewise, the firm has doubled its real estate portfolio to $160 Million since 2013.”¹ The article claims that many of its investors are under 40-years old, which highlights Millennial-investors trust in this growing real estate market.

In contrast, one economic group argues that construction of these new millennial properties is misguided. This group contends that the Millennial market will have already moved-on after these new or remodeled multifamily spaces are built, and that aging Millennials will desire amenities for the next stage of life. Will Millennials truly prefer studios and one-bedroom apartments as they contemplate and form families? A U.S. News survey reveals that 75 percent of Millennials have home ownership as an important long-term goal, and of these prospective homeowners, 75 percent want a single-family detached home (only 4 percent desire multifamily units). Additionally, there are questions about whether or not these communities are able to provide the quality schools and low-crime that are important to young families.

Even with these concerns, the founders believes that properties like those in Echo Park will still be desirable in the 10 years. They are confident that there will always be a market for “cool apartments in walkable urban neighborhoods.” Honestly, if anything does change, the firm will likely be one of the first to know.

Paul Hogge is a second-year business school student at the UNC Kenan-Flagler Business School and is currently a Community Revitalization Fellow with the Development Finance Initiative.

 

References:

1.) http://www.bloomberg.com/news/articles/2015-09-30/meet-the-hipster-real-estate-developers-building-for-millennials

Recommended Articles:

http://www.realtor.com/news/trends/hipster-developers-target-millennials/

https://nextcity.org/daily/entry/philly-developer-design-building-for-millennials

 

Leave a Reply

We will read all comments submitted to us, but we will publish only those comments that serve to advance our readers’ understanding of a post and are consistent with our institutional commitment to non-advocacy.

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>