Ready for a confession?
Last week, I covered the collapse of rents in top-tier cities across the country. It was a data-driven piece, and I was originally planning a follow-up as a snarky op-ed about how housing activists will miss Millennial gentrification when all the Millennials move back out to the suburbs.
But I decided on a different direction. Readers kept asking about this “second wave of suburbanization,” and as I got deeper into the research about it, slowly more and more data kept creeping into my rant.
At a certain point, I realized that my best intentions to be a jerk had been utterly sidelined. I conceded defeat and gave up on the idea of an op-ed altogether—because a second wave of suburbanization is coming, and it will shake up housing markets. Many of the assumptions made even three years ago about Millennials and Baby Boomers are turning out to be wrong, and their actions will have a profound impact on markets.
Here’s what real estate investors need to know as we pass “peak urban Millennial” and the country’s demography continues to evolve.
Make no mistake, it is Millennials who drove the re-urbanization movement. Attracted by walkability, urban amenities, the search for career-launching jobs, and the low crime rates of the mid-2000s to mid-2010s, they moved into cities and stayed there longer than previous generations of young adults.
Re-urbanization! Gentrification! The rebirth of cities! Housing activists whined, crime rates declined, and more Millennials arrived.
OK, maybe a few vestiges of the rant remain. But it’s true: Lower crime rates attract higher-income residents, which in turn lowers crime rates further, which attracts even more residents. Classic virtuous cycle.
That’s changing now. In looking at Millennial trends, the National Association of Realtors found that roughly two-thirds of millennials are married, and about half have at least one child. Millennials have waited longer to marry and have children, but “waiting longer” doesn’t mean “never.”
Those numbers will undoubtedly rise, as more Millennials reach median marriage age (roughly 29.5 for men, 27.5 for women).
When young adults marry and start having children, they have historically moved to the suburbs. There’s no reason to believe that won’t continue to happen with Millennials.
In fact, a professor of demography and urban planning at the University of Southern California published a paper two years back predicting this very phenomenon. He maps out why cities have reached “peak Millennial” and saw the changing landscape before most.
The Millennial Exodus
It makes sense to move out of the city when you have children.
Zillow recently ran a study on the cost of raising a family in the city versus the ‘burbs and found that it costs an average of $9,000 more to raise a family in the city. Why? Higher taxes, childcare costs, and higher housing costs were the largest culprits (more on this later).
And Millennials are leaving. Last week, we referenced Zillow’s findings that most Millennial homebuyers are opting for suburban and rural homes. The NAR report (referenced above) found that only 15% of Millennial homebuyers were buying in cities.
Nor is it only Millennial homebuyers. Even among urban Millennial renters, surveys indicate that many would prefer to be living in suburbs.
Of course, Millennials aren’t the only kids on the block. What about the upcoming Gen Z or empty-nester Baby Boomers?
First, it’s worth mentioning that Millennials are the largest generation in America. Pew estimates there are 75.4 million Millennials today, and their ranks will swell to 81.1 million by 2036 (due to immigration).
That’s larger than Baby Boomers, whose population has peaked and is now declining. It’s much larger than Gen X-ers, who were never a large generation to begin with and who are also now declining in number.
Besides, Generation X is currently in its prime “suburban years,” in their late 30s to early 50s. Don’t count on them to move into the city any time soon.
And Boomers—well, everyone expected Baby Boomers to sell off their sprawling suburban homes, downsize, maybe even move downtown. Except they’re defying expectations, like they’ve always done.
The Demand Institute ran a comprehensive study among Baby Boomers and found that nearly two-thirds (63%) have no intention of moving at all. Ever.
Of the minority who do plan to move, a third plan to upsize! And many of the others want a similarly-sized home.
What about the next generation after Millennials, Gen Z? Won’t they fill in the gaps left by Millennials?
First, they’re a smaller generation than Millennials. They’re also less collaborative than Millennials, less interested in sharing space or being on top of each other. They’re more private, more individualistic, and more conservative than Millennials.
In short, they are not likely to be the laid-back, urban-loving, roommate-sharing, hipster-downtown-neighborhood-living types that Millennials have been.
It makes sense, in a way. Millennials grew up in the ‘80s and ‘90s, with fond childhood memories of Nintendo games and big hair, in a relatively stable era of peace and prosperity. Their parents were laid-back ex-hippie Baby Boomers. They grew up watching the cold war end and America’s star rising to new heights.
Generation Z has grown up in the post-9/11 era of terrorism, ongoing wars, the Great Recession, and the rise of totalitarian superpowers like China and Putin’s neo-Soviet Russia.
When Millennials pack off for the suburbs, there will, of course, be some younger adults to replace them. But Gen Z doesn’t have the numbers, or apparently the inclination, to fill all the urban demand left unmet as millennials take their leave of city living.
Developers Have Noticed, Too
Homebuilders have stopped building so many urban apartment buildings.
Ready to be rocked? Housing starts for apartment buildings are down 35.2% year-over-year in July (the most recent data available at the time of writing).
But detached single-family homes, the staple of the suburbs? Housing starts for them are up 10.9%.
The numbers remain similar for building permits; permits for apartment buildings are slumping by double digits, while permits for single-family homes are soaring with double digit growth.
Homebuilders spend an incredible amount of money and time on market research. They know more than you or I do about where the market is heading because they make multi-million dollar bets every day on how demand is evolving.
Recent Census data backs this view up, as the Brookings Institute points out. For the first time this decade, suburban population growth has outpaced urban growth.
Skeptics might argue that this last year could be an anomaly. But that logic crumbles in the face of two facts: First, the gap between urban and suburban growth has clearly been closing over the last five years. More importantly, it’s the previous urban growth that was the anomaly. For 40 years, the U.S. saw more growth in suburbs than in cities; the Millennial influx was simply an aberration.
Urban Neighborhoods and the Reversal of Gentrification
Are cities dead? Long live cities?
No, of course not. Most cities are still seeing population growth (see the chart above); it’s merely that the momentum is shifting away from cities and back toward suburbs. That means housing activists can take a deep sigh of relief, right? No more pesky Millennials moving in and peddling their coffee and craft beer?
I believe the “evil gentrification” narrative has played itself out. Sure, there will be cases of once-decayed urban neighborhoods becoming trendy. But on a macro level, the population shift to the suburbs will mean less demand for urban housing among these maligned Millennials.
This, of course, will mean housing activists will complain about that instead. When those hated hipsters leave, housing activists will then complain about evaporating tax revenues, higher vacancy rates, and all the social problems that come when wealthier residents leave one neighborhood and move to another.
It happened back in the ‘60s and ‘70s, remember?
For a group of people who consider themselves progressive, housing activists seem awfully opposed to change. They objected when the Millennials moved in, and they’ll object when they move out. (I did warn you this was originally an op-ed piece, right?)
Crime Rates, Tax Rates, Schools
Crime rates had been dropping since 1991, which laid the foundation for a re-urbanization movement. It meant higher-educated, higher-income residents moving back into cities. Incidentally, the study above found that gentrification did not displace original residents (one reason is that most previously struggling neighborhoods suffered from high vacancy rates).
Then 2014-2015 hit, and crime rates suddenly spiked in the largest cities. Research shows that higher crime rates do drive higher income residents out, and that’s exactly what we’ve started seeing.
Last year, murders were up 11% in the largest cities in America.
Remember our case study of Chicago last week? Crime up, taxes up, population down?
By nature, I’m an urban dweller. I love cities. But until cities like Chicago learn how to govern themselves to be competitive on crime rates, tax rates, and school quality, they will continue to lose young adults as soon as they start having children.
Takeaways for Real Estate Investors
The largest, most expensive cities have seen rents decline, as we explored last week. That spells trouble for rental investors.
Keep an eye on suburbs and rural areas, which have their own advantages. Watch population shifts, especially where adults aged 22-35 are moving. Look at where developers are building new single-family homes.
For those of you who like investing in cities, look to mid-tier and smaller cities, rather than the most expensive cities. Rents there continue to climb at a more sustainable pace.
Watch out for “up and coming” neighborhoods that have seen fledgling hipster or Millennial interest, but remain transitional. They may wane again as soon as Millennials move out to have kids.
Be extra careful of areas where crime has been growing over the last two years. As touched on above, rising crime rates cause the higher-educated, higher-income residents to move away—not a winning recipe for real estate investment.
Perhaps most of all, keep an eye on “surban” areas, that bring the best of urban living to the suburbs: more walkability, more cultural amenities, and diversity of people and businesses, without the crime, taxes, and shoddy schools that plague many of America’s largest cities.
Well! I’ve shared my opinions. Now you get to share yours! Counterarguments welcome, preferably without name-calling and the throwing of rotten vegetables.
Excited to hear everyone’s reactions, the good the bad and the ugly!