Will Millennials destroy multifamily market when they buy homes?

25 Replies

We know the multifamily market is on fire, largely due to low interest rates, plentiful debt and equity, and demographics. The largest group of millennials are currently 24 and 25 years old and in their prime renting years.

My personal belief is that these demographics are pushing the apartment markets to heights it had never seen before. This run of strong performance may last a few more years.

It has also been widely publicized, however, that studies say 90% of millennials want to own a home someday. Do you think the single family market, most likely entry level homes, will see a similar incredible run in the coming years when we have more job growth and these millennials start buying?

I understand the challenges with high levels of student debt and other obstacles, but marriage and then kids are usually what people people to move out of apartments and into homes.

Curious what people think and if this is on anyone else's mind?

Brian Burke Steve Olafson Jay Hinrichs J Scott @Ben Leybovich

Where are the Baby Boomers moving to that sell them their first home?

Better get ready for the Boomers, then the next generation will be coming in. It's a natural progression and there will always be young ones leaving the nest. :)  

Interesting, Sean.  Here's what I know:

The argument for SFR growth is predicated on job growth. However, job growth has some very stiff winds in its face, not the least of which is automation!

Some friends posed it to me this way just yesterday - there are more, better educated young people today than ever, who are willing to work longer hours than ever, for less pay than ever.  Why is it that these guys are taking it on the chin?

McDonald's, as far as I am concerned, could have displaced tellers a long time ago - machines can do the job.  Automation is a huge issue, and so is efficiency.  And then there are the demographics and all the rest...

So - do I think SFR is poised? No idea - not smart enough to know. I do think we have a few years still in the strong apartment market driven by millennials, and then we are going to convert the apartments to senior housing, which is going to come out swinging by 10 years from now...


I was recently thinking along the same lines.

Standing out of the multi-family market is one of the toughest decisions that I have had to make.  The problem is not that there is no growth to be realized.  The problem for me is the starting points right now.  There are constant reminders of what people are willing to pay for properties these days.  Perhaps it is different in markets outside of Arizona but some of these deals are not going to cashflow without growth. 

I just can't buy like that.

The real money to be made is "chunks" at a time.  Big value growth that doubles your down payment.  The faster that you can make this happen the better.

This is the reason that I choose apartments over houses.  It is for the scale of the POP!  It just take a lot more work to purchase 30 houses and make that growth happen on each of them.

The Arizona market will not allow me to purchase fixer apartments at a price worth pursuing right now.

I feel like I am in a dilemma.  What direction makes sense? 

I do believe that once the trend moves back toward home ownership that apartments will decline rapidly.  Investor sentiment has a major affect. 

Then I can go back to buying apartments again!

The question is how long will it take?  The trends seem to move slow and by the time we realize what is happening, it is usually well down the path.

I've been in the multi family side and got out, in my market it's apartment city, almost over built IMO, it's a corporate arena. When mom and pop look at a property they are wanting cash flow, they need to eat off their investment, the corporate owner looks 15, 20 years out, cash flow can be at a lower ROI (can be, not necessarily is) but they are long term players.

The larger players also have greater tax advantages than mom and pop, look at Section 42 of the Code, there is more profit from management being subsidized than can be pulled from cash flow that small investors can realize, very profitable, very political and very expensive.

It's a very market dependent business. :) 

I think the issue is that people don't want to "raise" families in apartments. I got into single family homes because it was what I could afford. While I have looked at apartments because it is a "larger" junk bought in one transaction. At the same time my single family have better numbers when comparing to A class apartments, there equals. 

I think the issue is growth. The apartment are going to need a generation following the millennial. When the baby boomers die off and the millennial move into homes to raise a family. Who is going to fill the "need".

Account Closed 

  I think its totally regionalized.  really depends on the Median price point in a given metro market.. And how that relates to a mortgage payment Vs rent.. To me for instance why anyone would rent in the mid west for instance instead of own.. when you have 100

s of thousands of SFRs that can be bought for 150k and under which comps nicely vis a vi rent and mortgage payments.

In the markets I am funding these days we see pretty high demand right now for very well rehabbed homes under 150k  but above 100k.. It seems you get under that and schools and demographics of neighborhoods affect home ownership.

I think that demand for SFR will be steadily on the rise as the millenials age and seek to get out of apartments and into homes. What that demand looks like, however, is the real question. Will they be renters or buyers? High student loan debt, big down payments and loan underwriting will all play key roles in the direction these home seekers take.

Pricing, both rents and values, will rise if there isn't supply to absorb the demand. Here in CA, the challenges to development from a regulatory perspective make development undesirable for business people who take risks in exchange for profit. I don't think it'll change until prices get so high that developers find the reward to be worth the hassle and the anti-development crowd gets drowned out by the people who can't afford to live in their own town.

I guess all of that makes it obvious why I've been buying a lot of rental houses.  Geography plays a big role, however. Depending on where you invest your mileage may vary.

@Ben Leybovich I agree 100% about automation. It frightens me that we we going to end up with a two-tiered society where one is either rich or poor, nothing in between.

I think there will certainly be a senior housing boom, but I think that demand is going to be filled by new development. Seniors will likely want bigger units (they have a lot of stuff) and I'm not sure today's apartments will fill that need. My mom now lives in an apartment, my dad and stepmom just downsized from a house to a townhome and my mother in law just sold a large house and bought a 1,500sf condo. So I'm seeing this surge begin within my own family.

@Steve Olafson have you considered venturing out of AZ, or at least smaller markets outside PHX? I think it depends on your goals a bit today too because we are still finding deals (I toured one in Columbus and one in Indy this week) that both should provide that pop if bought right. But they are certainly fewer and far between now.

I've been approached recently with an opportunity to start a multifamily division for a large developer here in town and be the president of that arm of the company. I am floored by the opportunity, however, I'll need to buy a ton of units over the next few years to keep my family fed and feels like it might be the wrong time due to where we are in the cycle. I think I can buy the deals, but concerned about performance of them 2-5 years down the road. As you know, you have to buy right on your first few otherwise you can't play anymore.

@Jay Hinrichs good point about it being market specific.

@Brian Burke I agree with the SFH demand you mentioned. I know a large engine for growth in the US will be immigrants (just read 70% of new household formation between now and 2030 will be immigrant families) and I would think SFH rental would appeal to them.

I don't think in LA...just too many people of all ages want multis in prime locations. 

Account Closed 

It sure is nice that you have options.  When you are presented with opportunities, you get to decide which one makes the most sense.  Good luck with your decision.

I made a large push outside of my location a few years ago.  It was a lot of work for the money. 

About a year back, I considered firing up the machine to syndicate deals again.  When I reflected back a bit, I came to the conclusion that I can do better if I just stick to my market.  Seems like it makes sense to just be patient.

I have enough passive income to just sit and wait. My wife is going to start a business here very soon.  I may just help her out a bit.  Going out to hit the big game again would work if there was enough hunger involved.  :)

Dont forget about the big shadow industry of homes all that fannie and freddie sold to hedge fund investors ,they had to rent them for 5 years and they should be hitting the market soon, it was over 2 billion worth 

@Steve Olafson you bring up a great point. Having the passive income to decide not to chase deals is certainly a nice luxury to have. You don't "need" the income and can sit back and wait for the market to change, or as you mention, decide to stay local and just wait it out.

I'm curious though. Let's say you were faced with this market 10-15 years ago, or just as you were getting started in investing. What would you do then? Keep buying deals or what?

The long term/macro question is....how many people really ever want to live in an apartment long-term? My guess is that it is very low. 

I just went to the home show in Indy today....what was it still based on? A big demand for large, SFH. And it was packed. A show house that was a 4,000 SF home that was ready to be built in any burb of the consumer's choice.

Every market is different...but outside of a handful of cities in the world that have incredible density....I see no chance that the demand for SFH will do anything but grow.

The recession stopped new housing starts....and we haven't even begun to catch up to what the demand will be for millennials once they really kick into full gear. The multi-family craze makes no sense to me....people live in multi family because 1) they are young (20s) and don't care about anything beyond location or 2) don't have the financial ability to live in SFH.

Naturally I would keep buying deals I cannot see the future too well but i am great on looking backwards

Originally posted by @Steven Picker :

Dont forget about the big shadow industry of homes all that fannie and freddie sold to hedge fund investors ,they had to rent them for 5 years and they should be hitting the market soon, it was over 2 billion worth 

 I heard they don't have enough market share to impact values that much. I also read they don't want to sell themselves out of a job managing these assets. Thoughts?

The hedge funds are the actual owners they are there to profit. The inventory is huge and would make a dramatic impact on the markets Don't forget they are from the most hard hit areas, California, Florida, Nevada etc. I don't believe that they will flood the market it would lower the prices too much. I remember that after the bulk purchases  inventory was dramatically reduced , so conversely it would make a huge impact if released too quickly

Originally posted by @Account Closed :

I'm curious though. Let's say you were faced with this market 10-15 years ago, or just as you were getting started in investing. What would you do then? Keep buying deals or what?

 I had "retired" 15 years ago.  I spent my days running, hiking and drinking on Whiskey Row (in Prescott, AZ).  Just hanging out and doing what I wanted.

When this got boring, I moved to Phoenix and started buying like crazy.  You know the story.  After crashing and burning in the downturn, I had wished that I had cashed out and pocketed the millions.

Things are different now.  The economy is rolling along and does not feel in danger of a crash.  The apartment fundamentals seem a lot like they did back then.

So 15 years ago? Yeah, I would still be buying.

We are not going to loose the middle class anytime soon in western Washington. Its all about jobs. In my area, Frederickson, we have Boeing and other large employers. Sierra Pacific is building a 276000 sf lumber mill, with 3,000,000,000 sf of warehouse space. These new employees will need housing. They will be able to afford a sfr but many will choose multi because they don't have the discipline to save a down payment or they just want a crash pad with no maintenance. So its all about the microeconomics, or whats going on in your hood.

I think it all depends on how much the economy improves. I suspect another dip and can't imagine too many in my generation being able to buy homes within the  next 5 years at least.  I am very pessimistic and don't see the next 10 years going over well economically. That's why I am investing. Got lots of silver coins, looking to buy some gold and I WILL HAVE MY FIRST PROPERTY BY THE END OF APRIL!

I would bet that the hedge funds will exit by selling with owner financing.  That way they can keep the cashflow coming in but eliminate the management expense.

Not in danger of a crash? That's what they said in 2008 and before every other crash. Except this time, the leverage is much higher, most other countries economies are struggling worse than the us, they're handing out 3% loans again, AND they took the punch bowl away. There's no saving the economy by lowering the rate this time. That doesn't sound too stable to me.

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