Scroll to Top

Apartment Building Developers Pin Their Hopes on Millennials

Posted on Mar 8 2017 - 6:00pm by Lance Edwards

millenials-apartmentBy Bendix Anderson (NREI Article)  —  Developers still hope that Millennials will help fill the slowly growing number of vacant apartments across the United States. They might be right.

More than a million Millennials still live at home—less than a few years ago, but still a substantial number, including some who are likely to eventually rent apartments. “There’s potential upside in demand there,” says Ron Witten, founder of Witten Advisors, an advisory firm that focuses on the apartment sector.

The strong demand for apartments continues to surprise, so that even though the vacancy level is rising, it has done so very slowly so far. Developers have started construction on a large number of new apartments, but they are restrained by banks that are not eager to lend on new construction projects.

The result is a rental market that may be roughly in balance, as the vacancy rate creeps higher. “We don’t see much in the way of downward pressure on rents, but right now it is hard to underwrite significant pops in rent,” says Ben Sayles, director in the Boston office of capital services provider HFF.

Rent surprise

Over the last few years, demand for apartments—especially from Millennials—has filled apartment units almost as quickly as developers have been able to build them. Rents increased quickly as a result. “Nobody—developers, brokers, lenders, investors—could have foreseen this tremendous run-up in rents,” says Sayles. “Today’s effective rents are generally well ahead of what was underwritten two years ago.”

Millions of Millennials finally started looking for rental units in recent years, after putting off starting their own households during the Great Recession and the slow economic recovery. Between 2008 and 2014, the slowdown resulted in 5.1 million fewer households forming than normal, according to data and analysis from Freddie Mac.

Even this far into the recovery, there are still about 1.5 million more young people living at home than usual, says Witten.

The current slow, steady job growth could draw more of these young people off the couch and into rental apartments. The economy added 2.2 million jobs in 2016. That’s less than the 3 million and 2.7 million jobs added in 2014 and 2015, respectively, but still above the historical average. The labor force participation rate was still just 62.7 percent as of December 2016, which is only marginally higher than a year prior and lower than the post-recession average of 63.6 percent. The difference could potentially represent millions of new workers—and new households.

Household formation could also see another bump as Millennials reach their next life milestone. There are roughly 10 million Millennials who are 26 to 27 years old right now—historically the average age when people get married.

“There is no telling how this current cohort will behave,” says HFF’s Sayles. “If they decide to marry around 26 or 27, then we’ll see an increase in household formation. If they delay marriage, household formation is likely to remain flat.”

The long-term outlook: two years from today

So far, the percentage of vacant apartments has stayed well below 5 percent on average nationwide, though it has crept upwards into the mid-4-percent range, according to leading data firms.

The long-term trends of demographics and supply may keep the apartment market roughly in balance as long as two years into the future, when apartment projects planned today are likely to finally open.

Witten Advisors continues to forecast a relatively healthy apartment market two years from now. “Our outlook has remained about the same—slower rent growth, but still above average in most markets, as more supply opens,” says Witten. “The markets generally don’t have an oversupply problem, but many do have a supply concentration problem, with many new projects in the same neighborhoods leasing up simultaneously and softening rents in the short term.”