Generation Rent – the impact of changing demographics on apartment REITs
The rise of the Millennial generation and its implications for the residential market in the US is a current and informative case study of the impact of demographics on the real estate asset class.
- There’s been a fundamental shift within the US residential real estate sector over the last decade; American Millennials (born between 1980-2004) have become increasingly likely to rent, rather than own, their homes.
- A history of defaults through the global financial crisis, lack of financial availability and changing US workforce have been the primary drivers of the fall in home ownership, from over 10% in 2012 to around 4% in 2016.
- This propensity for Millennials to rent is manifest in the increasing use of rented apartments, particularly in the urban core, supporting valuations and creating opportunities for investors.
The Millennial difference: propensity to rent
The rise of the Millennial generation and its implications for the residential market in the US is a current and informative case study of the impact of demographics on the real estate asset class. A set of structural forces have combined to bestow Generation Y with the unofficial title of ‘Generation Rent’ in direct reference to the high impact change being wrought upon home ownership in the US by this demographic cohort. Most importantly, this is a trend that can be accessed by investors of all sizes through a set of listed, large, well-capitalised apartment REITs with seasoned management teams.
With Millennials expected to represent 75% of the US workforce by 2025, they are the largest source of new demand for housing and wield significant influence over the residential real estate market. Interestingly, there are a set of sociological, lifestyle and financial factors which affect the willingness and ability of Millennials to purchase a home.
5 reasons why Millennials rent
- Marry later in life; delaying the transition to home ownership
- Value proximity to urban centres (cultural and entertainment) that may otherwise be unaffordable
- Seek to cut down on expenses with rentable housing that offers communal and social spaces
- Greater need for flexibility and mobility; change jobs more readily and regularly than prior generations
- Financial considerations such as student loans and lack of savings and income may impede home ownership
Implications for US residential real estate
Cyclical affordability issues and demographic change has resulted in a larger share of the population living and renting in the city centre. Over the property cycle, the US apartment REITs should therefore be in a stronger position to push rents, given the larger demand base, and quality management teams with insight into the needs of Millennials will be best placed to deliver value for investors. The challenges in adding supply to densely populated city centres will further support valuations for existing, high quality assets, whilst exposure to those submarkets with the most favourable demand dynamics will continue to represent another key differentiator.
This is certainly not to say that the US apartment REITs will always outperform. Indeed, there will be times when better opportunities present themselves, particularly if investing in the listed real estate sector with a global remit. However, we believe that this subsector is a more attractive through-cycle investment because of the structural tailwinds described in this whitepaper.