How the “Second Wave of Suburbanization” Will Change Housing Markets as We Know Them

by | BiggerPockets.com

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.

“Peak Millennial”

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?

vacancy-rates

Related: 4 Things to Understand BEFORE Investing in Markets with Declining Populations

Older Generations

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.

Generation Z

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.

kids-money-lessons

Related: Is the “Graduate, Find a Job, Get Married, Have Kids” Sequence Still Relevant for Millennials?

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!

About Author

Brian Davis

Brian is a rental expert with a passion for house hacking! He and his partner Denise are the founders of SparkRental.com, which provides free mini-courses, webinars and other education on passive income and house hacking.

46 Comments

  1. Cindy Larsen

    Brian,

    Great article. I think you are right on the money. Smaller cities and suburbs are the smart move for rentals, and probablu SFH. I’m currently looking at multifamilies within 30-60 minute commute of seatle, wa, and outside of King county (where prices have been driven up to nearly california levels). There are lots of great areas, some of which are large cities (but secondary to Seattle) where good deals with relatively low crime rates, good economic indicators, etc can be found.

    I decided to invest in WA for a number of reasons (no state income tax, housing prices a third of CA, good economy) and I keep finding new ones. yesterday’s find: when you buy a property, unlike in CA, the property taxes do NOT immediately shoot up. By state law they can only go up 1%/year, except for special assessments, which seem to not happen often, and also would affect everybody in an area, not just your new property. Gotta love it.

  2. Paul Merriwether

    If they do move out of cities and back to the burbs … the jobs will still be in the cities!!! Longer commutes less time with family & friends!!! In the Bay Area … crime increasing in the burbs as it gets better in the cities. Check out the 1973 movie Soylent Green. That’s the reality that is coming! We currently see it many South American cites.

    • Brian Davis

      That’s the model in many European cities – the city itself is expensive, so poorer residents live outside the city, which ends up making the cities safe and vibrant while it’s the satellites who struggle with social problems. Some cities (like San Francisco) have become so expensive that’s become the reality there too, although I don’t think that will never happen in poorer-run cities like, say, Baltimore or Detroit.
      Time will tell!

  3. Douglas Larson

    Great observations.
    I have noticed the same trend over the last few years in the state of Utah and I thought it was simply the ultra conservative and family oriented nature of our millennial’s. Your data nationwide confirms that the millennial generation, although a little delayed, wants the same things that all younger adults have always wanted. They settle down and have kids and want good schools and want a little house with a yard.

  4. Joe Scaparra

    I think there are some good ideas presented here but still a lot of room for debate. For example, what really is a suburb these days. Large cities have grown so much that many have merged with the so called suburbs. I think the idea that once someone marries and has children then their wants change greatly for safer and better education opportunities for their family is valid. Makes a lot of sense, however at least for now the better paying jobs still reside in the cities or urban merged suburbs. The problem that is developing fast in a lot of larger cities, together with the burbs, are experiencing property inflation that many young couples cannot afford or want to afford. They have seen their parents, family members and friends stress out over housing and they are taking a more cautionary approach to ownership. The other idea, is that the younger generations are accepting the idea that smaller homes are fine. Contrast that to the baby boomers who have wanted the bigger the better approach. I live in Austin, and I have seen rents climb beyond expectation, however in the last six months, I’ve begun to see a slow down or stagnation of rent prices, but I attribute that to unsustainable rise of rents over the past 5 years, not to a desire to move out to the burbs. Lower income families are moving out to the burbs because they can’t afford the rent in the cities and the rise of single millennials willing to share housing (rent out rooms) are moving in. It is not uncommon these days to be asked “is the rent your asking for your duplex per room?” Several years ago that would never have been a question.

    • Brian Davis

      There’s always room for debate! What makes the world go ’round, right? And as touched on at the very end, I think we’ll be seeing a lot more of the”surban” development trend over the next year, blending urban and suburban amenities.

  5. Joe Ayrika

    Not sure about this. Salt Lake City may be an example of this new, not-new trend. But this doesn’t factor in the rapid rate of suburbs transformation into slums (unless they’re gentrifying the burbs now). Yes, SOME Millenials are producing offspring, but they’re organizing “charter schools” and smaller-scale private schools, rather than going into debt for those $35K/year prep schools. Baltimore City and County are great examples. Many of the city’s poor have been relocated to Baltimore County, Howard County, and Ann Arundel County. As small-scale developers AND housing activists, we just don’t see any evidence of your suggestion where we live.

  6. Kevin Lefeuvre

    Very thorough. Great write up!
    I yet have to check external links, but here’s a key question :
    You wrote: “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.” How about these reasons why it’s not the same context:
    – down towns were not safe decades ago. Now they are, so safety is not a reason to move.
    – manufacturing related jobs were in the burbs. Those jobs almost gone. Now we have more office jobs which are mainly in the cities. Service jobs continue to grow and they are in the cities.
    – boomers love gardening. Not millenials.
    – boomers like big houses and when they are party buddies they love house parties. Millenials like small spaces, with minimum maintenance. They party a lot but outside.

    So a millenial couple with one kid living in a beautiful DTLA luxury condo (or SF or NYC) working at a walking distance Wework office with no car, using Uber for everything, who has been bored at parents suburb home until they left for college, why would they want to move to suburbs again ?

    • LA schools are low in performance, that is one reason. For me that was reason enough not to buy in Los Angeles proper but to look at surrounding suburban towns.

      Another reason is that like previous generations they come to realize that owning a home is one of the cornerstones of middle class wealth in the United States.

        • I didn’t need to, I wanted to. All you really need is a Home Depot and a Walmart to shop at. Proximity to a job is also a need, but with high speed internet connections in more places and video conferencing less so than in the past.

  7. Jason Barnett

    Thanks Brian! You’ve made some interesting (and valid) points. I’ve certainly seen this in the San Francisco Bay Area where the lower cost “East Bay” suburbs have seen an influx of new home buyers.

    Thanks again and have a great rest of your week,
    Jason

  8. Tim Martin

    Two words—“Spatial Reset.” Cities are inherently more valuable in a Global economy as they link people, talent, and ideas. Those cities and those parts of city that do this — their value will skyrocket. Suburbs that do not provide walkability, transportation links, and “new urbanism” features will decrease in value. You referenced Chicago–I would still bet on Chicago’s Northside any day over any suburb south, west or Northwest of the city. There is too much to go into in critiquing your “Case study” of Chicago. Chicago is a city of many economies but people are leaving the South and west sides because those parts of the city are still ordered around an industrial economy that has long left. People are not leaving the northside but staying and/or moving in. Property values are increasing faster in the Northside of Chicago then they are in the Northshore (historically affluent area) of Chicago.

  9. Joseph Duff

    Great insights. Titles need to be “clickable”, but the gist of the story was that aviaries still thrive, but surban dream is real.

    The issue I see is that Americans are starting to understand that the marketing about the American suburban dream is, just that, a marketing strategy.

    The fact is suburbs need cities to exist and not visa-versa. Surban options will ultumately only be niche because they are trying to recreate a community that only exist with the type of diversity that can happen with the synergies created by people occupying the same space.

  10. Christy Browning

    Hi Brian,
    Thank you for the excellent article. I really appreciate your perspectives, data, and discussion. I like the op-ed opinions in there as well! On a personal note, My husband and I recently purchased a SFH rental about 30 minutes north of Denver and had great success renting it out to a lovely family. Ther is also a new light rail station being constructed about 1/2 a mile from the home, which is great for a commuting option up north or into downtown. The suburban location, B class neighborhood with low crime, and location near great transportation options has worked well so far.
    Of course things can change! Thanks again for a thoughtful and helpful article.

  11. Eric Bilderback

    Brian,
    Loved it dude! Housing activists what kind of loser has the time to be a housing activist? I have not heard anyone talk about generation Z but I’m happy to hear they seem to be less fruity then the millennials, I have just been assuming this country was going to keep getting more and more hipster. Its creepy that people would live somewhere that you can’t send your kid to the neighborhood school. That is sad that either there are neighborhoods so bad, and/or parents that think their kids are to good to go to the same school as everyone else’s in their neighborhood. In South America and Central America rich people have big fences and walls around their house and if they were to go out unprotected it would be curtains for them. I hate to think of places like that popping up in America but they probably already are here.

    • Brian Davis

      Thanks Eric! I agree we don’t want to see the kind of inequity and dangerous neighborhoods plaguing many developing countries. For 25 years we saw violent crime rates decline, and I’m hoping that the last two years will prove to be just an unfortunate (and temporary) blip on an otherwise downward trend.

  12. Christie Gahan

    What’s wrong with being a housing activist ?
    Another angle to look at is the city that has too many rich people. Santa Barbara, CA is like this with locals discussing it. Housing prices have always been expensive there. No room for easy expansion for new housing due to geography. They have a really hard time finding public service workers because they can’t afford to live there. When you outprice your teachers, police, fire department etc you have a different set of problems.

    • Brian Davis

      Very true Christie, that it is possible for cities to become overpriced, especially when there is no room to expand and add more supply. But when an area becomes too overpriced (like we got into last week about rent collapses), the market tends to solve the problem by incentivizing people to move elsewhere in search of more affordable living. For example San Francisco got into a rent bubble, and now it’s burst, with rents down significantly.

  13. Mary B.

    this may be true in a few housing markets but not for everyone in the country. I just read an article on a very well known developer in my housing market who is planning on improving a down subdivision of Philly. Although the city tax assessment has been updated and property taxes in the city has increased its still just a small fraction compared to the suburbs. that has been and likely will continue to be the deciding factor along with location location location – shopping malls, plenty of public transportation, casinos, art galleries, coffee shops within walking distance – all play a huge part in the city of having the upper hand on the suburbs.

    The digital age is at the center of attraction when it comes to these homes no matter what. I’ve seen some of the most extravagant amenities in these newer developments that previously I’d expect to read about in a celeb’s condo or mansion. If the suburbs are going to compete for homeowners they will have to step up the trends to pull the millenials and definitely gen z’ers.

    • Brian Davis

      Very true that it’s market by market out there. Even last week when we talked about rents collapsing in the nation’s largest cities, there were still 3 on the top 10 list where rents were still rising. And to your point, in some areas the city taxes are actually lower than nearby county taxes. And it’s certainly true that walkability is far more important nowadays than it was 30 years ago. I think we’ll see more “surban” developments (and redevelopments of older suburbs) moving forward.

  14. Shelly Doris

    Interesting post. I worked in the urban market in KCMO for years and served as the neighborhood association president from 2007-2010. My personal experiences during that time are reflective of what your article states. Interesting to think of the differences with a younger generation. KCMO urban core will stay strong, for sure. However, I now live in an outer ring suburb that is a small town by comparison to most others in our area. So much so that it home buyers and investors can qualify for USDA financing. The population is booming here and there truly is a housing shortage in this area.

  15. Great article. Why is crime going up in certain cities? Police are afraid to do their job because of BLM and the politicians that pander to them. A quick trip to the FBI crime statistics for most major urban areas will show that it is disproportionately young minority males commiting violent crimes and the cases of police brutality are relatively rare. While looking up crime statistics, you may want to research the composition of the prison population, it reveals a lot about urban crime.

  16. John Murray

    Brian we are on the same sheet of music. I’m heavily invested in Portland Oregon suburbia in the SFH BRRRR biz. I have 8 FSH rental and will acquire 2 more in 2018. Then just wait until the millennials are tired of the hip urban dwellers routine and sell all my holdings. Life is grand here in Stumptown.

  17. Chris Jensen

    Brian, fantastic article and appreciate the supporting data and references. It really has me thinking. Question for you. If millennials were renting in the city and then wanted to settle down to the suburbs, wouldn’t they be more inclined generally to buy rather than rent? Traditionally, the concept of settling down with kids has meant buying a home. Does the data support that trend continuing, or will millennials redefine that concept and opt to rent in the suburbs as well? Trying to gauge the real opportunity for SF properties in suburbia.

    • Brian Davis

      Thanks Chris! And yes surveys among millennials indicate they do want to buy, even if they haven’t done so yet. I can’t speak to the SF market specifically, but I think there will be plenty of purchase demand in suburbs nationwide over the next 5-10 years.

  18. dave atchison

    Great article by an experienced real estate investor. I agree with it all. I am a baby boomer who has been investing in single family rentals the past 30 years . I have lived in phoenix az since 1979 originally from Fargo North Dakota. Small apartment complexes in phoenix have never looked good to me . As they are all bordering on slum lording . I never buy anything I would not live in myself , and my standards are not that high . When I was raising my children, I imagined if my wife were to have divorced me. And my kids were to come over to dads place. That was my litmus test for buying a rental property, if I would not live in it if I fell on hard times I would not buy it . It served me well , all of my rentals are free and clear and in the $200-300 k range . I am a baby boomer on the cusp of being a gen x …I was born in 1959.. I only want to caution all real estate investors to stay with the location location location theory . Do not buy rentals too far out in the burbs…people of any generation dislike huge commutes…so you need to stay in that suburb sweet spot for rush hour traffic…speaking of shady small apartment complexes…I would never discourage any young investors from buying one. I had one from age 27-40 but it takes a special owner to manage and maintain that type of place . Those tenants are typically hard to manage and they have no credit so when they damage your place you better be handy to do repairs . These can be gold mines . I bought my first house to live in when I was 19…real estate must be a passion or don’t get into it …my real estate investments have been a 30 year part time deal…I have a general contractor business and an air conditioning refrigeration business….I took all the profits each year out of both companies and would put them into more rentals…the part time business of real estate investments has been very very good to my wife and I ..but it’s been a 30 year road …and it’s not for the faint of heart …30 years of managing and maintaining all these property’s it breaks most people’s will . I hope this has been helpful to younger people the sooner you get at this the better off you are ….don’t buy too far out in the suburbs people hate too long of rush hour commuting….but the suburbs have and always will treat you good….it’s whete people want to live it’s safer less crime

  19. One point I think is glossed over on this piece, as I think relates to chicago at least, is the quality of schools. While CPS certainly has its problems, there has most definitely been a resurgence in the quality of students/parents/teachers at many public schools with neighborhood attendance boundaries. It started with Nettlehorst Elementary, and a book was written about how they turned this school around titled “How to walk to school”. This formula has been repeated at dozens of schools, and real estate values in these school attendance boundaries are stable.

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