Since the start of the pandemic in early 2020, multifamily sales have comprised 42% CRE transaction activity in the investment sales market.
MULTIFAMILY BOOM UNDERWAY
Multifamily has recently been dubbed “the darling” of real estate investors. Take one look at the investment sales data in the U.S. and it’s no wonder this asset class has received this moniker. Since the start of the pandemic in early 2020, multifamily sales have comprised 42% of all CRE transition activity in the investment sales market—up from 35% in 2019. And the dollar increase has been even more impressive with multifamily sales up 75% from 2019, totaling $320 billion. As a result, these investors have been rewarded with strong returns, second only to the industrial sector.
Having a strong foundation in supply-demand fundamentals has been key to multifamily investment. U.S. household formation rebounded strongly in 2021 to 1.3 million and is projected to increase further to a peak level of 1.5 million in 2023. The rental sector could absorb a higher than usual share of this new demand because of home affordability challenges and low for-sale housing inventory. Accordingly, multifamily market forecasts point to continued low vacancies and solid rent growth in the coming years, especially in fast-growing Sunbelt markets.
GENERATION Z WILL INCREASINGLY DRIVE THE MULTIFAMILY MARKET
As the multifamily market undergoes a demographic transition, Generation Z (those born between 1997 and 2012) will quickly supplant Millennials as the largest renter cohort. We estimate that there were 100 million renters in 2015, of which 48% were Millennials. By 2020, the Millennial share had already fallen to 37% as Millennials have increasingly transitioned to homeownership while Generation Z rapidly grew to 18% of renters. This is just the beginning. By 2025, Millennials and Generation Z will represent the same percentage of renters and by 2030, Generation Z will be kings of the “renterverse.” For landlords, the rental market is set to become more competitive by the mid-2020s as demographics suggest that the renter population will grow at a slower pace in the next 10 years compared to the 2006-15 period—at least absent significant further increases in renter propensity across age groups or major accelerations in immigration. It follows that multifamily owners and operators need to be increasingly focused on attracting and competing for this new generation of renters.
WHAT GENERATION Z WANTS
A number of factors are shaping Generation Z’s preferences on home renting versus homeowning. According to a survey of Generation Z by Freddie Mac, despite 82% of respondents desiring to eventually own a home, Generation Z overwhelmingly believes that home prices (92%) and down payment costs (82%) pose significant hurdles to becoming a homeowner. At the same time, respondents also note the benefits of renting: 68% believe that renting is more flexible than ownership and 63% believe that renting is less stressful than ownership.
Another reason Generation Z is opting to rent over buying is they are choosing to live alone more often than Millennials. The Organization for Economic Cooperation and Development (OECD) projects that the number of single-person households will increase by 35% from 2000 to 2025.2 Renting allows this demographic more flexibility, while homeownership is more cost prohibitive for a single income household.
While the market is only beginning to understand Generation Z’s preferences as renters, evidence suggests that their preferences are very similar to Millennials’ preferences. For example, a 2020 RentCafe Survey found that Generation Z and Millennial renters reported similar responses—albeit with some nuanced differences—across a range of dimensions, including the importance of technology, amenity preferences and apartment search process.3
Generation Z is the first digitally native generation, so it’s not surprising that they value high-speed internet not only more than any other amenity, but more than any other cohort. They also use Google more intensively in their search process and are savvier in discerning quality through online reviews, social media presence and targeted advertisements. Because Generation Z is a digital generation, best-in-class practices in media and marketing will quickly become the new normal, including A/B testing marketing campaigns and partnerships with local businesses that align with the lifestyle and brand of the asset.4 The more successful multifamily owners will likely focus on search engine optimization, buy paid advertising across social media channels, including TikTok and Instagram, as well as actively monitor their online reputations.
Millennials have garnered a reputation as a particularly urban generation—or at least one that has had a large effect on urban spaces. While many members of Generation Z will live in urban cores in coming years, there are some indications that Generation Z is more attracted to amenitized suburban living than their Millennial predecessors. According to a survey by the National Apartment Association, 23% of Generation Z renters intended to live in cities after graduation while 44% preferred “vibrant suburbs” and 29% preferred “quiet suburbs.”5 This could potentially add further impetus to the ongoing trend of suburban multifamily outperformance.
SUSTAINABILITY IS KEY FOR GENERATION Z
Sustainability is a major focus of the CRE industry. But while much of the discussion to date is on the office sector, where tenants and investors are increasingly requiring sustainable practices, multifamily is slightly behind the curve (see “Green is Good”). For example, LEED-certified properties make up just 1.4% of institutional-grade units and still less of the overall market.
Sustainability is likely to become more salient, however, as Generation Z becomes a larger segment of renters. Various surveys show that Generation Z is more concerned with environmental issues compared to earlier generations, though this was already a trend with younger Millennials. In fact, in a recent Pew survey, 37% of Generation Z said that addressing climate change was their top concern.6 While location, price and building quality will still largely determine Generation Z’s rental decisions, sustainability at the building and unit-level will offer ways of differentiating rental offerings. As Generation Z grows older and wealthier, they will have more budget to allocate towards their environmental values, so sustainability will remain key.
EMBRACING GENERATION Z
Generation Z pursues unique and personalized experiences—they know what they want and expect. Brands and companies that market to this generation have to understand their needs—and that includes multifamily owners. As the multifamily sector and “renterverse” continue to grow, it’s more important than ever for owners to keep these preferences in mind as Generation Z's influence will only continue to grow.