Out with the Old: Phasing Out the American Dream
Here we are – 2020. New year, new decade, new trends. Cars are self-driving, Alexa orders our groceries for us, and conversations with robots are a real thing. While these technological advancements are eye catching and attention-grabbing, we are also seeing exciting changes in direction within the real estate industry, namely, multifamily trends and the evolution of development based on the needs of younger generations.
The End of Cookie-Cutter
You might be familiar with the scene from Edward Scissorhands: dozens of pastel, nearly identical houses with matching driveways and matching families inside. This fictional neighborhood was not far from many real-life ones – part of a developmental phenomenon that began after World War II, when millions of families were suddenly in need of middle-class homes, leading to the influx of cookie-cutter housing, more formally known as tract housing. These homes were designed to be easily constructed for the typical family at the time: a mother, a father, and their children.[i]
For decades since, we’ve continued to see large, single-family homes constructed in large quantities nationwide, and their construction is predicted to continue. Despite smaller households overall, Millennials moving out later in life than their predecessors, having children later, and having fewer children in general, large, expensive homes continue to be a huge part of the housing market. According to Urban Land Institute, homes over 2,400 sf have increased from 32% to 50% of the market since 1999, and smaller homes up to 1,800 sf have declined from 40% to 27%.
While this solution worked well after WWII, it is no longer a practical solution for younger generations today. Prices continue to rise while wages have stagnated, and young people are no longer able to follow in the footsteps of Baby Boomers and Generation X who typically graduated college, married, and bought a home.
The Affordability Crisis
While the ‘nuclear family’ still exists, those shopping for houses are now much more diverse in both numbers and needs. Real estate costs are increasing for both rental and single-family, student debt gets higher by the minute, and real wages remain stagnant. Millennials now often live at home longer to begin digging themselves out of debt, and frequently opt to rent instead of purchase a home. Urban Institute reports that 37% of Millennials owned homes in 2015—8% less than Generation X and Baby Boomers at the same life stage. With real estate prices increasing across the board, the evolving student debt crisis, and with both expected to keep climbing, it’s likely that both Millennials and Generation Z will continue to opt for alternative housing, such as renting or co-living.[ii]
In 2018, federal student debt hit $1.5 trillion, and 34% of all student borrowers were Millennials.[iii] Younger generations have proven themselves hesitant to commit to a mortgage when they already have tens of thousands of dollars in debt. Even if they wanted to purchase a home, there is a nationwide shortage of affordable housing for those with moderate incomes. The housing supply simply no longer meets demand. Millennials are choosing to avoid the large, single-family homes that don’t fit their budgets or their needs.[iv]
City Living: The Good, the Bad, and the Ugly
Big cities are attractive to young people looking to get their careers started, stay close to night life and peers, and have nearby, convenient amenities. As rental prices in major cities become just as unaffordable as higher-end suburban neighborhoods, however, people are looking for other options. In 2018, cities with over 500,000 people collectively lost close to 27,000 Millennial residents.[v] Those on the younger end of the spectrum (around 25) typically can’t afford an apartment in a major metro. Those on the older end of the spectrum (around 39) are also often sick of or unable to keep up with the high prices, or want to move to areas with more space to raise kids.
Congestion from large numbers of people commuting is also causing a small-scale exodus from metro areas for certain demographics. Many of those commuting into and around a major city to their workplace in the surrounding towns spend hours in their car getting to and from work. Even those traveling within the city see increased drive times due to commuter traffic. We also see many offices move to the suburbs to pay less in rent themselves, in turn creating a longer commute for those who choose to stay in the city. No one wants to waste precious time sitting in their car when they could be using that time elsewhere, so some are straying away from city living.
While we still see a high rate of expensive single-family homes under development and not enough affordable housing for the middle class, a shift seems imminent. According to PWC and ULI’s Emerging Trends in Real Estate 2020, moderate-income/workforce apartments ranks number 3 for investment prospects and number 4 for development prospects for 2020. However, the solution doesn’t lie solely within new developments of multifamily apartments and communities. To fully understand the needs of today’s housing consumers, developers, owners, and investors must pay close attention to location, community, and amenities. People want the lower costs of suburban areas accompanied by the walkability, entertainment, and recreation of a metropolitan area. Enter ‘Hipsturbias.'
In with the New: The Era of Convenience
The Future of the Suburbs: Hipsturbia
Over the past decade, we have seen the live-work-play formula previously seen in city revival efforts implemented in areas around major cities, creating a number of ‘hipsturbias’ around major cities such as New York, Chicago, San Francisco, and Boston. Coined in 2013 by the New York Times, the term ‘hipsturbia’ was originally used to describe the migration away from Brooklyn to surrounding communities such as Tarrytown or Hoboken. A hipsturbia, a combination of the words hipster and suburbia, is the result of Millennials bringing the youthful, “hip” vibes of city downtowns to surrounding suburban towns. The suburbs are, in many places, being transformed into small-scale cities, with stereotypically urban attractions all within a walkable distance.
Suburbs that once were known as quiet, low-key communities are being transformed to replicate inner city downtowns and these areas are growing rapidly.[vi] Millennials have been migrating out of the major cities due to budding families, unaffordable city prices, and the increasing ease and availability of remote work. While the prices of the suburbs are usually much more feasible for this demographic, many don’t want to leave the fun and convenience of downtown behind, and this is changing the way developers cater to this younger population. This is particularly the case with areas in close proximity to major cities, allowing easy access to and from downtown, and we already see increases in multifamily development in these areas.
This has proven especially true in cities with numerous colleges and universities, such as New York, Chicago, San Francisco, and Boston. Students are opting to stay close to where they attended school, preferring to stay in nearby communities with peers and an area they know very well.[vii] For example, Somerville, MA, a city just outside Boston, and Santa Clara, just 15 miles from Stanford University, have been a huge attraction for those that want the city feel with a smaller price tag.[viii] Somerville’s Assembly Row and Santa Clara Square attract those living in surrounding towns with shopping, dining, entertainment, fitness, offices, and apartment complexes, allowing people to live, work, and play to the fullest extent. Developments like these continue to pop up in more suburbs. The key to their success? Incorporating four staples: office space, restaurants, shopping, and multifamily living.
The Amenities War Evolves
The era of convenience continues to strengthen as technology continues to advance. Most consumers have what they need at their fingertips and expect this same level of convenience in other aspects of their lives, such as in dining, entertainment, exercise, child or pet care, and shopping. This need is changing the way developers design new apartment complexes and the surrounding areas. Athletic centers, coffee stations, and common areas have become an expectation for the typical apartment and condominium complex, and developers are getting more and more creative trying to surpass each other’s offerings. Luxury housing is no new concept. However, renters’ expectations are changing, and benefits once exclusive to more expensive luxury housing are becoming more commonplace for middle-income apartment complexes.
As many Millennials stray away from purchasing homes, they also avoid pesky costs of maintenance and upkeep, such as HVAC systems, lawn maintenance, updating appliances, and other expensive and time-consuming repairs. Developers and owners of multifamily properties know this and are using it to their advantage to reel in consumers looking for communities that go the extra mile. In addition to the maintenance responsibilities renters avoid, developers are implementing the live-work-play principle in many multifamily developments by encouraging community-building amenities such as community gardens, built-in restaurants, child-care facilities, enhanced gyms, dog walking services, and more to keep up with changing consumer preferences.[ix]
If you’re not building exciting, attractive amenities into your multifamily development, you’re falling behind. According to a Newmark Knight Frank study, apartment buildings with more amenities are earning higher rent premiums and leasing more units a month on average.[x]
Baby Boomers Want Amenities, Too!
While hipsturbias may sound Millennial-focused, the trend is also very appealing to both Baby Boomers and Generation X, who are both also opting to stay in the suburbs, but want the fun and convenience of entertainment, dining, and shopping all within walking distance.
Right behind middle-income apartments in PWC/ULI’s Emerging Trends in Real Estate 2020 list of investment prospects for the year is senior housing, ranking at number 4, and ranking at number 3 for best development prospects. Baby Boomers consist of the demographic between the ages of 55 and 75, meaning that many of them are or will soon be looking at options for senior housing. While Baby Boomers are waiting longer than the generations prior to move into senior housing, most expect to make the transition between ages 75 and 84. Those who aren’t in need of a senior housing community or assisted living may opt for a retirement community. Like Millennials, Baby Boomers also prefer amenities such as dining, exercise facilities, and community spaces.
Those looking for senior living communities are happier—and healthier—with those that support a well-rounded lifestyle. While the clichés like weekly bingo night and trivia may be enjoyable, people of all ages need variety. Golf courses, spas, restaurants, and athletic facilities are just a handful of the new amenities seen in senior living communities. Athletic facilities and other supports for active lifestyles are increasingly becoming commonplace in these communities, especially with the added interest in the benefits of exercise, including increased heart health, better blood pressure, and improvements in overall mood and wellbeing.[xi]
Considering the growing needs and preferences of Baby Boomers and Generation X will be what sets one senior living community apart from the others. Regardless of the generation, people need community and increasingly value an active lifestyle. Creating communities that boost community engagement and healthy lifestyles will continue to be a necessity as senior living evolves.
Despite high prices, increased migration to the suburbs, and a changing attitude towards the city, we still see an exciting new trend in major cities: co-living. A concept similar to dorm-style living, co-living often involves renting a private bedroom and bathroom, and sharing common spaces such as the living room and kitchen. It sounds like just having roommates, but the difference is that utilities, internet, and other amenities are included, the units are often furnished, and there is frequently an associated app that facilitates maintenance, repairs, and billing. These apps, such as WeLive and Common, promote co-living to Millennials that want lower rental costs, community engagement, and simplicity.[xii]
This trend is appealing to real estate professionals seeking to develop and operate multifamily spaces in the city and have the opportunity to reap the benefits of supporting apps that facilitate daily operations, maintenance, and rent. With technology and apps quickly taking over, co-living will likely be a big point of interest for developers, owners, and operators. As of May 2019, co-living companies had over 3,000 units in major U.S. cities, with that number expected to triple to around 10,000 in the ensuing years.[xiii]
Regardless of what sector of multifamily you’re looking to focus on in 2020—senior housing, middle-income, co-living, or luxury housing—community is the keyword. With today’s technology causing a major human disconnection and high levels of loneliness, people yearn for community and connection in their living space. Developing new multifamily developments in rapidly developing areas such as the Boston, Chicago, and New York suburbs makes it easier to incorporate the community and neighborly feel Millennials, Gen X, and Baby Boomers all crave. It’s also important to incorporate community environments within the larger multifamily development itself, promoting nurturing relationships and a sense of community between apartments and throughout the property in general.
Amenities like exercise facilities, lobby bars, and local retail will pull interest for those shopping for a new apartment. Community is what sets one apartment complex apart from another for all generations, from Millennials through Baby Boomers. Knowing that the person living in the adjacent apartment knows your name is comforting for those feeling isolated by today’s media- and technology-saturated world. It also can prove extremely convenient for sticky situations, whether you’re locked out of your apartment, running late for work, or need a cup of flour. Being able to knock on your neighbor’s door for your spare key, ask them to let your dog out for you, or borrow the last ingredient you need for your pancakes is what draws potential renters in, and helps beat the competition.
Staying on the Green Brick Road
As Millennials and Generation Z become more and more eco-conscious, staying or going green and environmentally-friendly will remain a must, and in some cases may become a new regulatory standard during development. Many states are implementing new rules for commercial developers to aim for carbon neutrality in newer buildings and structures. Millennials and generations to come are looking for sustainable homes and apartments with little impact on the environment. Designing buildings to be eco-friendly by installing solar panels, LED lighting, and eco-conscious appliances saves owners and operators in the long run and attracts consumers looking to reduce their carbon footprint.
Problem, Solution, New Problems, New Solution
Like most industries, real estate never ceases to evolve. New generations will bring new technologies, trends, and values, and with that, it’s important to remember that new ideas require new solutions. Right now, we know that today’s generations are seeking convenient, community-oriented, low-cost rental properties. Cookie-cutter housing might be a trend of the past, but the neighborly feel is still something craved by all generations who often feel lost in a world of technology and bogged down by busy schedules. Whether you are looking to cater to convenience-oriented Millennials, or community-craving Baby Boomers, the goal should be to create communities that nurture relationships, support healthy living, and make people feel like they are part of something bigger than just their rental unit.