The Skinny on Gen Y

The December issue of Units, published by the National Apartment Association, includes an article about Gen Y renters. Written by Jay Parsons of MPF Research, the article points out some interesting things you might not know about your new target audience.

What is Gen Y, anyway? Basically, the term refers to anyone born between 1980 and the millennium. Because your 29 year-old renter, her 20 year-old college-going brother, and their 12 year-old cousin are all Gen Y-ers, tastes and trends will vary quite a bit within the generation. But there are some characteristics which can be applied to the group as a whole:

  1. Diversity: According to the Pew Research Center, 39% of Americans in their twenties are Hispanic, African-American, or Asian. When combined with the wide age range of Gen Y-ers, we’re looking at a generation of people who have varied wants and needs when looking for housing—much more varied than the Baby Boomers.
  2. The Urban/Suburban Split: While Gen Y-ers in their twenties are generally looking for walkable urban communities, they’re likely to prefer renting a single-family home, when available, after they start a family (a conclusion supported by the 2010 Census).
  3. Natural vs. Forced Interaction: While Gen Y-ers do want to live in rentals with a strong sense of community (where “natural interactions” are fostered), they would prefer not to have to personally interface with a leasing office or agent (a “forced interaction”). When it comes to communicating with the management company, online communication is nearly always preferred.
  4. Bandwidth Required: According to J Turner Research, 25% of younger residents have three or more internet-ready devices, and 64% of those asked said they would relocate rather than live with slow or sub-par internet service.

Jay Parson’s full article can be read here. How is the latest wave of Gen Y renters changing the way you do business? Weigh in below.

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‘Apartment Advisor’ Forecasts Fair Weather Ahead

Dupre + Scott’s Apartment Advisor just put out their annual Review & Forecast, looking at predicted trends for the next five years and offering advice based on the past ten years. Here’s a recap of the full report.

Multifamily Housing Prices are Up

Good news for sellers–the average price for multifamily housing is up 7% from this time last year.1.2 billion dollars worth of 5-unit and larger properties have been purchased this year; that makes it the sixth-highest volume year in history. This is true even though there have been fewer than 200 sales this year (in contrast, for example, to 2005 when there were 660), due to the rising cost of buildings.

Don’t Underestimate your Costs!

Capital expenses averaged $750 per unit in 2010, but “investors typically budget an annual replacement reserve ranging from $250 to $350 a unit.” Typical replacement reserve budgets include appliances, water heaters, window coverings, carpeting, perhaps roofing…but people should also be budgeting for decks, parking lots, cabinetry, windows, water lines, plumbing, and more.

Another cost to factor in is credit loss. Even in strong rental markets, the long-term economic cost of rent concessions and credit loss is an issue (in 2007-2008, credit loss was at 0.6%). Credit losses should be included in buyer expense budgets, but usually aren’t.

Demand for Units is Rising

According to Conway Pedersen Economics, our region will add 170,900 jobs in the next five years. While this isn’t as high as the number of jobs added between 2003 and 2008, it’s still a strong number. Based on both that number and the projected influx of 20-34 year old new renters, there may be demand for 27,000 additional rental units in the next five years.

And some Really Good News:

Market vacancy went up by almost 1% (from 4.6 to 5.3) between March and September, but is expected to fall through 2012 to about 4%. Based on vacancy, rents should climb 6% in 2012 after climbing 4.5% in 2011.

Net Operating Income (NOI) should climb 20% in the next five years, despite being dinged by rising vacancy and conessions in 2013-2014.

We have positive financial leverage again. This means cap rates are higher than interest rates, which allows for cash flow. We haven’t seen positive financial leverage since before 2005, so enjoy!

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Coming Soon: A Happy New Year!

No, it’s not 2012 yet. But a new forecast for the year ahead predicts continuing gains in the rental market.

Good news, everyone! Marcus and Millichap Research Services have put out their annual Economic and Apartment Outlook. As expected, things are still looking up for the rental market, and should remain strong throughout the new year.

First, some context. While the US economy isn’t exactly robust at the moment, we can safely assume that we will avoid recession in the coming year. Marcus and Millichap came to this conclusion due to several factors. Exports are currently strong, and corporate profits are good–higher than 2006. We also have retail sales that are stronger than they were even before the recession.

While unemployment is still fairly high, there is promising job growth in the private sector (24% of the jobs lost in the recession have been restored), and “all expectations point toward business investment to propel the economy through the doldrums,” despite the obvious challenges.

Those challenges include an uncertain economic forecast in Europe, a stable but lower-than-average GDP of around 1.8% (forecasted to increase slightly next year), and the continuing vulnerability of the residential sector. But hey, that vulnerable residential sector–that’s where apartments come in for the win.

According to Marcus and Millichap, the rental sector has entered a full expansion cycle. There was solid growth in the rental market throughout the third quarter, despite the relatively weak GDP, and apartments have posted “universal gains in net absorption” this year, (meaning, of course, that more total square feet has been leased than vacated–see a full definition of net absorption here).

As we know, the uncertainty of the economy over the past few years has caused a profound shift in the way people think about where and how they want to live; and as home ownership has been hit hard by foreclosures, lack of available credit, etc., the rental market has become increasingly robust.

Based on the numbers, this rental momentum will continue through 2012. Third-quarter vacancy was 5.6%, a decline from quarter two, while asking and effective rents posted gains this year of 2.1% and 2.4%, respectively. This may be at least partially due to the fact that 68% of recorded job gains since the end of the recession (that was June 2009) have been by displaced homeowners and people ages 20-34 who are forming new households.

Renting is simply a more viable option these days for many people, professionals and families alike–and that’s not a trend that will be changing any time soon. Cheers to the year ahead!

Marcus and Millichap’s full forecast can be read here.