Christy Lockridge, principal with the Chicago office of Prudential, has seen the trend: Today’s renters increasingly want to live in the center of urban areas. They want to live near public transportation. They want to be able to walk to restaurants and shops. They want to live largely without having to jump into a car each day.
She’s seen, too, the impact that this trend has had on urban areas across the Midwest. Developers are descending on cities from Omaha to Minneapolis with plans for high-end luxury apartment towers, projects that are bringing new excitement to these urban areas.
And it’s a trend that Lockridge doesn’t see ending any time soon.
“We are continually and pleasantly surprised with how well the Midwest markets are performing,” Lockridge said. “There are new developments in pockets all across the Midwest.”
Lockridge, of course, isn’t the only commercial real estate professional seeing this. And much of the force behind this trend comes from the Millennials. These young consumers – for many reasons – are increasingly putting off buying single-family homes and choosing instead to rent. When they do rent, they’re increasingly choosing urban areas, in major cities like Chicago or New York and in so-called secondary markets such as Indianapolis and Cleveland.
The numbers back this up. The U.S. Census Bureau reported that in the third quarter of 2014, the homeownership rate for U.S. residents 35 and under fell to 36 percent. That is the third-lowest this figure has been since the bureau began tracking homeownership rates by age group in 1982. And the low point for this figure? That was 35.9 percent in the second quarter of this year.
Marcus & Millichap has reported on this trend, finding, for instance, that developers in 2013 and 2014 will have delivered about 2,220 new apartment units to Milwaukee. The company reports that developers brought 2,280 new apartment units to Indianapolis in the first three quarters of this year and about 4,300 units in Columbus during the last four quarters.
Across the Midwest
Just look at how strong this trend has become in Minneapolis/St. Paul. Marcus & Millichap reported that in 2014 developers will have added 6,600 apartment units to the Twin Cities market. About 77 percent of these apartments will be priced at market rates. In 2013, developers added 4,000 rental units to this market.
The new units, though, won’t cause vacancies to rise. Marcus & Millichap says that by the end of 2014, the multi-family vacancy rate in the Twin Cities should fall to 2.7 percent, down 50 basis points from the end of 2013.
Rents, too, will continue to rise. Marcus & Millichap said that effective rents in 2014 will rise 2.1 percent to an average of $1,039 a month. In 2013, effective rents in the Twin Cities market rose 3.8 percent.
Michelle McDonough Winters, senior visiting fellow for housing at the Urban Land Institute Terwilliger Center for Housing, said that Millennials are already having a significant impact on the housing market across the country.
Because Millennials are seeking urban living, planning officials in suburbs across the country might push for changes to their communities, McDonough Winters said. They might push for more urban amenities in their suburban communities. That could mean enhanced public transportation, more apartment communities and more shops, restaurants and entertainment venues to which younger residents can easily walk.
In other words, suburbs to compete with their urban cousins might have to become more walkable and pedestrian-friendly if they hope to attract Millennials who prefer an urban experience, McDonough Winters said.
“Suburbs can’t become cities,” McDonough Winters said. “But they might become more urban. They might offer their own pedestrian-friendly downtowns. They might need to add urban elements that appeal to today’s Millennials.”
Lockridge won’t disagree. She says that she’s seeing steady growth in the central business districts in major Midwest markets such as Chicago, Minneapolis, Cleveland, Columbus, Cincinnati, Indianapolis and Omaha. She’s seeing steady amounts of new development in Des Moines and Milwaukee, too.
The Midwest view
“What is surprising is all the focus that is paid to the coastal markets,” Lockridge said. “There is so much talk about how the job growth is going there. Job growth, of course, drives apartment development. But what we are seeing in the Midwest is that we do have these pockets of job growth, mostly in the central business districts. That is driving the multi-family development in this part of the country.”
Lockridge cites Chicago as an example. Tech firms are moving into the city’s Loop in its central business district. This is bringing several younger renters to the area, which is inspiring developers to target these areas for new apartment projects.
“The live/work/play lifestyle is bringing renters to the CBDs,” Lockridge said. “The younger renters want to be close to all the amenities, whether restaurants or cultural activities. They don’t want long commutes. Thankfully, there is a variety of products that people can choose from when they decide to rent in the CBDs.”