Impact of Aging Millennials and New Construction on MF Values
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Houston, TX · Member since 2010 · 150 posts · 159 votes
8yEventually millennials will either accidentally or purposely start having kids. Whether it be by renting SFHs or buying homes sooner or later they are going to want to get their kids out of the apartment complexes. These same millennials are also currently watching interest rates slowly rise and real estate values steadily climb. Maturity will eventually set in and the progression to the suburbs will start. Contrary the what the media says the economy is getting much better. Barring a massive plague or nuclear war SFHs should stay in demand. Class A apartments not so much. Just an opinion.
26 Replies
- 8yHadar OrkibiPro MemberRental Property Investor · USA / NZ · Member since 2016 · 1k+ posts · 812 votes
No one know exactly whats going to happen. each market has its own local economy ans supply and demand fundamentals.
Some markets can have a large numbers of new build, A type communities that would create over supply in that space. that situation could affect the rental pricing between A and B type. while C type will keep servicing the Blue Collar demographic.
There is a somewhat trend for people to live in smaller lower maintenance homes, this is not necessarily against MFH. I think quality, amenities and location would be key.
With raising interest rates i personally believe that Cap rates will soften - well I hope so.
In saying that, in some areas that will continue to experience growth, the lower ca-prates could be the new reality "base line" for that market. Markets like Salt Lake City, Dallas, Denver etc.
- Ft. Lauderdale, FL · Member since 2017 · 64 posts · 22 votes8y
If you go back to the Cardone podcasts, I think the 2nd one, he talks about how millennials are doing the exact opposite and don't want to buy. They saw what their parents went through, they don't like being tied down, and they will rent for the foreseeable future. That insight is far above my level of expertise but he might know what he is talking about.
- Houston, TX · Member since 2010 · 150 posts · 159 votes8y
Eventually millennials will either accidentally or purposely start having kids. Whether it be by renting SFHs or buying homes sooner or later they are going to want to get their kids out of the apartment complexes. These same millennials are also currently watching interest rates slowly rise and real estate values steadily climb. Maturity will eventually set in and the progression to the suburbs will start. Contrary the what the media says the economy is getting much better. Barring a massive plague or nuclear war SFHs should stay in demand. Class A apartments not so much. Just an opinion.
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes8yWade G. The idea that millennials aren’t buying homes is a myth . Of course in high cost cities it’s tough for most millennials to buy a place . The millennial home ownership rate is 35.3% right now. So the idea that millennials aren’t buying homes just isn’t true. https://www.cnbc.com/2018/04/26/millennial-homeownership-suddenly-drops-after-a-good-run.html
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Good information and definitely a concern. Rising interest rates will also put pressure on cap rates.
Most prudent investors are adding value and purchasing properties that cash flow in good locations to mitigate risk. IRR sensitivity tables around rents and exit cap rates show that many B and C class properties can absorb a fairly substantial compression of rents and cap rates and still remain profitable.
Under that stressed scenario, what's interesting is that the passive investors on deals with preferred returns appear to do fine but the sponsors will not be making much money. But the sponsors (and passive investors) can do very well if market conditions stay favorable or if they exit prior to a correction. Some sponsors are using long-term debt to mitigate risk. And, it's very profitable right now to add value at low cap rates. In many cases, every $1 in added NOI = $15-$20 in added value (using a 5-6 cap). Make hay while the sun shines and mitigate risk for the uncertain future.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
The common denominator for most of my young couples moving from my b class 2 bed apts & townhomes has been predominately the same since I started owning them in 2003: 2nd baby.
I had one couple for 9 years through 3 kids, but only because a larger apt came open down the hall two times. They eventually bought a fixer upper in the country 2 hours north last month.
My sample set is too small to be statistically significant of course. But looking back, if a 1 child family tells me they are expecting again, I wince a little as I say 'congrats!' The notice comes about 7 months later... About 25% buy, 75% rent a house.
- 8yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
There will be a cry that every American has the right to own their own home. Incentives will be enacted legislatively (loyalty is purchased by incumbency) to encourage home ownership. More people will buy homes. Land lords not prepared will sell or suffer. People will not change spending habits and begin losing the home they have a right to own. Land lords and investors prepared will take advantage of the excess inventory and price dip to buy.
Oil changed the economy forever...
Dot com changed the economy forever...
The boomer retirement changed the economy forever...
The millennials are changing the economy forever...
Not so much!
The 1031 Investor5137 Reviews - Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8yLike a lot of you have said I think over time my generation will move away from apartments and more towards houses. I would question what grant Cardine says unless he’s providing evidence. In 5 years the oldest millenials will be in their late 30s and the younger millenials like me will be in their late 20s. Which makes Home buying much more likely. I personally plan to rent where I live for at least a couple more years and buy rentals where I can rent to others. I think that’s one good thing GC says.
- 8yBill F.Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votesOP
Thanks everyone for their great responses.
@Steve Vaughan very interesting point about the second child and the 3:1 ratio of SF renters to buyers. I had not thought about either points. So maybe the question isn't apartments vs SFRs, but one/two bedrooms vs three/four bedrooms?
@Mike Dymski great points about rents and exit cap rate's impact on overall return and how class dependent they are. I don't know what you see, but in most of the cities I visit, I don't see a lot of B-C being built, except for one guy in Dallas who has a few no amenity apartment. Also maybe rising rates will pull some capital from the RE market, which could expand rates. I also hadn't thought about what happens to the deal sponsor in syndication.
@Ian Whiteman either before or after Grant Cardone talked about how millennials aren't buying did he mention his syndication opportunities? Like @Caleb Heimsoth and @Joseph M. pointed about the data doesn't entirely support that narrative.
My totally uneducated theory and please poke holes in it, is that rents will gradually stop growing and/or decrease as developments reach the lease up phase. The combination of some over supply and out flow of tenants will put pressure first on the A class apartment rents then B class at the margins. The owners of 100+ units can sustain and adjust since they knew at purchase this was a possibility.
The new entrant to the MF space (possibly from BP since, along with the gospel of Cash Flow, another often repeated never questioned manta is that SFRs are a stepping stone to multi families) who has a few 5 or 10 plexes didn't underwrite the deal thoroughly, assumed rent growth keeping pace with expenses, and equal entrance and exit cap rates will feel the most pain. Another potential group this could impact is the new syndicators.
Now where exactly this could all play out, I have no idea. Probably someplace that has had a net migration of people for awhile and a few new employer openings that could get postponed/cancel leaving an over supply would be my first guess.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Originally posted by @Bill F.:
Thanks everyone for their great responses.
@Steve Vaughan very interesting point about the second child and the 3:1 ratio of SF renters to buyers. I had not thought about either points. So maybe the question isn't apartments vs SFRs, but one/two bedrooms vs three/four bedrooms?
@Mike Dymski great points about rents and exit cap rate's impact on overall return and how class dependent they are. I don't know what you see, but in most of the cities I visit, I don't see a lot of B-C being built, except for one guy in Dallas who has a few no amenity apartment. Also maybe rising rates will pull some capital from the RE market, which could expand rates. I also hadn't thought about what happens to the deal sponsor in syndication.
@Ian Whiteman either before or after Grant Cardone talked about how millennials aren't buying did he mention his syndication opportunities? Like @Caleb Heimsoth and @Joseph M. pointed about the data doesn't entirely support that narrative.
My totally uneducated theory and please poke holes in it, is that rents will gradually stop growing and/or decrease as developments reach the lease up phase. The combination of some over supply and out flow of tenants will put pressure first on the A class apartment rents then B class at the margins. The owners of 100+ units can sustain and adjust since they knew at purchase this was a possibility.
The new entrant to the MF space (possibly from BP since, along with the gospel of Cash Flow, another often repeated never questioned manta is that SFRs are a stepping stone to multi families) who has a few 5 or 10 plexes didn't underwrite the deal thoroughly, assumed rent growth keeping pace with expenses, and equal entrance and exit cap rates will feel the most pain. Another potential group this could impact is the new syndicators.
Now where exactly this could all play out, I have no idea. Probably someplace that has had a net migration of people for awhile and a few new employer openings that could get postponed/cancel leaving an over supply would be my first guess.
Hey Bill. The amount of exit cap rate expansion and rent compression that many of these value add properties can absorb is pretty high...that was my thought above. If the sponsor increases the value of the property by 25%, it can absorb a pretty significant market correction...or the sponsor can just hang on with long-term debt and cash flow the property until market conditions improve for an exit. It has taken me a while to come around on this thought process and IRR sensitivity tables provide a nice illustration...they show the investor IRR under varying stressed scenarios. It's not pretty to model a 150 basis point increase in cap rates but the returns remain better than idle cash and certainly better than what will happen in non-real estate asset classes if that happens. The right operators and locations are also key. I have recently invested more capital in MHPs and SS but am starting to participate in some MF offerings (got wait-listed on an offering last night).
I often hear that they are not building B class MF but I see it some in the southeast. Most people call it A- class but there are developers who are building and renting at pretty affordable rents (~$1.10/sq ft) and have full amenities.
Your theory is very plausible and likely. All we can do is invest in value-add, cash flowing properties in decent locations. For many investors, idle cash is very costly and the war-chest strategy only works with appreciation plays and a market timing strategy.
- Ft. Lauderdale, FL · Member since 2017 · 64 posts · 22 votes8y
Bill I would have to go back and listen again. I do not specifically remember him talking about syndication in that podcast. I think it was in his other one. His point that stuck with me was that there will always be renters in the $800-$1200 market no matter what happens. Im sure lots of young people will continue to buy but a lot of it is market specific. Where I live in Southeast Florida, they cannot afford to. Im sure that is a different story in other parts of the country.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8yTo my earlier comment here’s a story that basically proves my point. Millennials will be buying lots of homes in the coming years http://www.businessinsider.com/millennials-turn-30-housing-boom-demographics-2018-4
- 8yBill F.Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votesOP
@Mike Dymski thanks a lot for the perspective. Like I said, I spend very little time thinking about Multi family and so its awesome to hear the thoughts thoughts of people who do spend time on it.
The data tables in excel opened up a whole new world to me so you are preaching to the choir about IRR sensitivity.
Maybe its the value investor in me, but I'm not sold on the idea that ideal cash has the level of costs that is often attributed to it. Sometimes I feel that its gets used as a reason for activity for activities sake.
Also what type of MHP investments have you made?
@Ian Whiteman the point I was driving at is that Grant Cardone has a well known preference for MFH and actively raises money for his Apartment funds. There is no denying that that there will be a solid market for mid market rentals and apartment buildings will always have great attributes.
One issue is what happens to the small multi owner if supply increases in this B/C market, either through new units or higher class apartments at the margin dropping rents? Their rents gets hit and here is the distinction between the average BP'er and Grant Cardone; he can weather the 8-12 month storm and/or reposition his assets with cash reserves, lines of credit, pooling cash flow ect. Not everyone has all those options.
- Attorney · Durham, NC · Member since 2016 · 224 posts · 126 votes8y
Following up on the discussion on B class multifamily, this article speaks to the growing demand for this asset class.
https://www.linkedin.com/pulse/growing-demand-class-b-multifamily-what-means-tyler-stewart/
- Sunnyvale , CA · Member since 2017 · 373 posts · 362 votes8yI personally call ******** on Cardone’s theory that the millennials wont buy home. I think they will buy in droves as they build families. They may try to stay more urban vs suburban but the reality of public schools, parking, open spaces, short commutes will eventually catch up to them and most will head to the burbs and into SFHs much like generations before them. I am waiting to see some innovation in Home buying, like more lease to buy formats etc or something else that may change the transaction of Home buying but I bet the millennials will live in homes no different than the previous gens.
- Dallas, TX · Member since 2016 · 1k+ posts · 745 votes8y
Originally posted by @Sam Josh:
I personally call ******** on Cardone’s theory that the millennials wont buy home. I think they will buy in droves as they build families. They may try to stay more urban vs suburban but the reality of public schools, parking, open spaces, short commutes will eventually catch up to them and most will head to the burbs and into SFHs much like generations before them. I am waiting to see some innovation in Home buying, like more lease to buy formats etc or something else that may change the transaction of Home buying but I bet the millennials will live in homes no different than the previous gens.
I think they might well not buy SFH's vs prior generations but I expect them to rent SFH's. MY reasoning is they have had their formative years in a low interest rate, low inflation period with a major real estate crash. I think they are used to renting and assume owning a home is a poor decision.
I think that MF rentals will become tiresome at least for those millennials who end up having kids. Furthermore we are building fewer SFH's than we did in the 50's, and last I heard fewer than are being torn down.
My sense is class "A" luxury MF apartments are at or near a glut, and if I am right that millennials matriculate to SF rentals, those will be in short supply. And I think there is a real chance that interest rates AND inflation kick in over the next 5-10 years. SO it seems to me that owning SF rentals, or reasonably priced ($1,200-$1,700/M rent) is probably the best place to be.
I do think millennials who wait to buy are making a big big mistake, if we ever get back to inflation like we had in the late 80's or early 90's, many will wish they owned something.
- Sedalia, MO · Member since 2017 · 29 posts · 9 votes8y
One thing that I haven't seen anybody mention is that the actual millennial generation is substantially smaller than the baby boomer generation is I watched a YouTube video making the argument that it wasn't millennials refusing to buy houses that was going to be a future problem for speculation builds but the fact that they're just weren't as many millennials available to buy or rent at all.
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes8y
Originally posted by @Michael Niemeier:
One thing that I haven't seen anybody mention is that the actual millennial generation is substantially smaller than the baby boomer generation is I watched a YouTube video making the argument that it wasn't millennials refusing to buy houses that was going to be a future problem for speculation builds but the fact that they're just weren't as many millennials available to buy or rent at all.
I don't think that's true though.
http://www.pewresearch.org/fact-tank/2018/03/01/millennials-overtake-baby-boomers/
- Sedalia, MO · Member since 2017 · 29 posts · 9 votes8y
I believe the argument was based on birth rates and pew research includes everyone within an age range including immigrants which offsets the difference I'm looking to find it now.
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes8y
Originally posted by @Michael Niemeier:
I believe the argument was based on birth rates and pew research includes everyone within an age range including immigrants which offsets the difference I'm looking to find it now.
Yes, I'm pretty sure you're right on the front that there are less babies being born during the generations following the baby boomers. But we're looking at the number of home buying households here, so we should be including everyone, right?
- Sedalia, MO · Member since 2017 · 29 posts · 9 votes8y
I'm thinking of Harry dents book the demographic cliff . He uses Japan as a model for comparison their Real estate is apparently still stagnant from a bubble in the 70's. I don't have numbers to substantiate that though. His argument is that with the standard of living increasing the availability of birth control etc. Was the reason for their following generation being smaller than the proceeding generation and That north America has a mirrored demographic that could put us economically in the same position. I haven't done nearly as much research as he has on the subject but I do think it's worth considering.
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes8y
Originally posted by @Michael Niemeier:
I'm thinking of Harry dents book the demographic cliff . He uses Japan as a model for comparison their Real estate is apparently still stagnant from a bubble in the 70's. I don't have numbers to substantiate that though. His argument is that with the standard of living increasing the availability of birth control etc. Was the reason for their following generation being smaller than the proceeding generation and That north America has a mirrored demographic that could put us economically in the same position. I haven't done nearly as much research as he has on the subject but I do think it's worth considering.
I haven't read the book but from what I've read previously you're right. If it wasn't for US immigration we'd have a negative growth right now.
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes8yMichael Niemeier Speaking of Japan , their real estate market is interesting as home sales are mostly new homes while in the U.S it’s mostly existing or “used” homes . “Raze, rebuild, repeat: why Japan knocks down its houses after 30 years Unlike in other countries, Japanese homes become valueless over time – but as the population shrinks, can its cities finally learn to slow down and refurb?” https://www.theguardian.com/cities/2017/nov/16/japan-reusable-housing-revolution
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes8yBart Hedgcock Everything is local of course , in L.A and much of Southern California things are built out for the most part and vacant land is scarce . There are quite a few of these small lot subdivisions being built. There are basically like detached downhomes with a small yard . There are some being built in my area starting at $650,000 for 1500 sq ft . It is possible to find some single family homes in the area for that price but the they are going to be 50s/60s build and most likely not updated . Or at least not look like something from HGTV . I think a lot of millennials would like to buy but can’t afford it , at least here.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
I would tend to agree that we will see some issues with multi-family loosing occupancy. How much will depend on the new inventory being built in your specific location as well as the desire to move out and buy a house. One other factor, however, that could make the run of MF last longer is the baby boomer's moving into apartments. Time will tell, but in the mean time stay conservative on your purchases!
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