The choices and spending patterns of the millennial generation will have a profound future impact on investing and the real estate sector, says Chris Kelly, head of commercial real estate lending at Amherst Capital Management
For millennials in the US - the 80+ million individuals born between the early 1980s and early 2000s - the financial headwinds are now legion1. While previous generations grew up with the understanding they should never need to spend more than a third of their income on rent or housing costs, some millennials may now have to allocate some 45% of their income just to keep a roof over their heads.
Millennials are facing a range of increased pressures due to rising debt and lower wages. Student debt is one of the critical issues this generation is facing. According to some estimates there is now $1.5trn (£1.18trn) in student debt outstanding1 and the average student loan per capita for a millennial is just over $37,000 dollars2.
In addition to student debt, US home prices have increased exponentially since 2000 while millennials' real median income has seen only minimal growth.
These pressures mean that millennials may need to consider housing options that other generations wouldn't - such as co-habitation, smaller-sized apartments or, increasingly, micro apartments or living in single family homes that they don't own but rent. Specifically, home ownership rates declined dramatically from over 69% in 2004 to 63% in 2016. While now up to 64%3, many believe this is a permanent shift in how people chose to live. And this choice is fueling growth of for-rent housing. In turn, this is driving new investment strategies around this segment of the real estate market.
Finding a space
Millennials are a demanding generation. They want speed, and to use the latest technology - in part to seek comfort and convenience via online retail and other channels - and that's having a very significant impact on many different industries and services, including retailers and the design of the places where they live and work.
And while many millennials have different housing requirements to earlier generations, they also want workplaces that are highly amenitised with coffee bars, wellness centres, rest areas and even games rooms. All of this has an impact on how US real estate, particularly office buildings, are being developed and redeveloped by owners and investors.
Increasingly, physical US office space is being reimagined by developers to move away from traditional enclosed offices and centralised work stations. Modern office layout is increasingly open plan, requiring very little in the way of traditional build construction such as high ceilings, exposed duct work or concrete floors.
An increasingly popular investment strategy in the US office space sector is to refit or repurpose existing office buildings to make the building more attractive to those driving demand - primarily younger businesses and millennial tenants.
In terms of preferred location, many millennials also want to live and work in urban areas or very infilled suburban locations that are now providing new opportunities for the development of and investment in residential apartments and flexible, technology friendly office space and buildings that also acknowledge the growth in virtual offices and sharing of office space.
E-commerce
Technology is also having a major impact in the retail and industrial sectors. Retail is a sector that is widely known to have been disrupted by e-commerce, leading to the overall retail space being oversaturated. From an investment perspective, retail assets that have greater viability in this changing marketplace are those properties that offer services and/or provide a unique experience. These assets are expected to be better protected from e-commerce competitors.
The disruption in retail caused by e-commerce has resulted in the explosive growth in industrial/distribution centers. E-commerce businesses are requiring well-located warehousing to provide just-in-time delivery of online products.
Some clear trends are now being established by millennials in terms of what they want, how they want to live their lives and what they expect from their employers, and this has an impact on both the US economy and, more specifically, its commercial real estate sector and investors.
For more information, please contact Kenneth Tomlin, managing director, BNY Mellon Investment Management at [email protected]
Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds
1 US Federal Reserve as at end Q3 2018
2 Make lemonade. Student Loan Debt Statistics For 2018
3 The US Census Bureau as at October 30 2018
For Professional Clients only. Any views and opinions are those of the investment and is not investment advice. This is not investment research or a recommendation for regulatory purposes. BNY Mellon holds a minority equity stake in Amherst Holdings, LLC.
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