Contrary to popular opinion among many in the multifamily industry, Gen Y is already starting to abandon city living. Here's why.By Ryan Severino
Flickr: Ian Sane/Creative Commons/https://www.flickr.com/photos/31246066@N04/
Millennials are going to shun material goods, never own a car, and live in small spaces in utopian urban cores riding their bicycles or taking public transportation to their green, open-space offices. Forever!
This, or something like it, is the conventional wisdom in the market and wishful thinking in the apartment industry. Although some surveys results seem to agree with this popular opinion, research shows that people’s needs and preferences change over time and that people are terrible at thinking about and planning for the future, especially when they’re young.
Imagine what the baby boomers would have said in such surveys when they were that young! Moreover, the conventional wisdom is already proving untrue. The older tranches of Gen Y are already moving out of urban cores and into the suburbs. While you might be shocked to read that, let's examine why this is true based on data, and not conjecture.
First, the portion of Gen Y that’s been living in urban cores is getting married and having children. Wait, what about the death of marriage in the United States and the rise of the single-person household? While that claim is undoubtedly true to an extent, it reflects a rather sophomoric understanding of the data.
The reality is that marriage and children continue to be popular among the well-educated—exactly the kind of Gen Yer living in urban cores. The marriage rate for males with a bachelor's degree is 76%, while for those with a high school diploma, it falls below 50%.
Make no mistake—millennials are the best-educated generation in history and have similar goals as prior generations. They want to get married, be good parents, and send their kids to college. Living in urban cores is incompatible with that lifestyle for most of them. All of the arguments that follow derive from this fact.
The Quest for Space
Let's start with the size of the living area.
If Gen Yers are going to rear their 2.1 kids (the replacement rate, which is approximately the rate at which nonimmigrant domestic couples reproduce in the U.S.), they’re going to need more than the 861 square feet that can be found in the average apartment in urban cores. Believe it or not, Gen Y doesn't actually enjoy having their bed in their kitchen! And as anyone with children knows, one spends more time at home with their kids than without them. It’s not so easy to set up camp at a Starbucks for hours at a time with toddlers in tow.
Although there’s been a construction boom in urban areas over the past few years, most of the units being constructed are too small for a family of four. Families are not the source of demand for apartments today, and so units aren’t being built to suit their preferences.
Once they start reproducing, or at least thinking about it, Gen Yers are going to seriously consider the quality of the school system where they live. Of course, most urban cores have notoriously bad school systems. Sure, there are some bright spots, but, by and large, they’re few and far between, and rolling the dice on one's children's education is something most responsible parents won’t do.
Despite a renewed focus on education in urban areas, it’s highly unlikely standards are going to increase significantly in the next five to 10 years—certainly not to the level of the nearby, beckoning suburbs that are well funded through local property taxes.
Additionally, many cities are sitting on massively underfunded pensions. As we’ve recently seen in Detroit, while public obligations might be scaled back a bit, they aren't going away completely, and they’re indeed massive.
Morningstar estimates, for example, that Chicago’s unfunded pension liability is $18,596 per inhabitant; New York’s, $9,842 per inhabitant. So, one of two things, or some combination thereof, will have to occur: Either taxes are going to have to increase, or services are going to have to be cut.
As anyone who has studied basic urban economics knows, a sure way to get people to move out of a municipality is to either raise taxes without a commensurate increase in services or cut services without a commensurate decrease in taxes. As residents flee the ticking time bomb of unfunded pensions for the suburbs, it will only make the problem worse.
Gen Yers might be young and idealistic, but they’re not stupid. The closer they get to marriage and having children, the more they’ll begin thinking about these things, just as previous generations did. Surely, some of them, likely the best paid (who can afford private schools), will stick around urban areas. But that’s always been true, even during the 1970s and 1980s, when cities were rather dirty, dangerous places.
When Gen Y disembarks for the suburbs, it won’t be to the strip-center–ridden dystopia you’re likely imagining. Rather, they’ll look for places that have urbanlike downtowns and excellent access to infrastructure (especially public transportation) that can take them in and out of the urban cores where the jobs are located.
These “diet urban” nodes are already popular with the Gen Xers and older Gen Yers that have already fled for the suburbs. This, of course, will mean owning a car. But don't worry--Gen Y actually bought more new cars than Gen X in the first half of 2014.
Believe in hard facts and data, not what some 20-somethings say they might do 10 years from now.
L5 Real Estate Investments, LLC is a privately held investment firm focused on stable, income producing multi-family opportunities in emerging U.S. markets.