What unemployment, apartment fundamentals can tell us about today’s commercial real estate market

According to a recent National Real Estate Investor article, two of the top ten issues affecting commercial real estate companies include the impact of technology on office space and the shifting priorities of an upcoming generation called 'Echo Boomers'.

According to a recent National Real Estate Investor article, two of the top issues affecting commercial real estate companies include the impact of technology on office space and the shifting priorities on an upcoming generation called 'Echo Boomers'.

As cited by John Orehek of the Puget Sound Business Journal, owners and operators were able to attract commercial real estate management companies, investors and capital for new multifamily developments when the rental rates justified a healthy return on total development costs. For the past few years, rental yields on apartment projects have exceeded the yields on existing asset purchases, yields that typically hover around 5 percent.

This push by investors for multifamily units has created a solid expansion that has, for the first time in 10 years, overtaken the office segment. However, according to Peter Muoio of Multifamily Executive, the growth varies geographically, indicating shifts in demand and vacancy rates that may affect investor decisions.

Still, the multifamily sector has experienced 15 consecutive positive quarters of seasonally adjusted absorption. But with homeownership back on the rise, Muoio notes that high unemployment among the millennial population will continue to drive strong absorption and low vacancy rates.

Echo Boomers
High unemployment rates are not just the only thing contributing to high multifamily absorption, according to Orehek. He notes that the demographic trends favor longer-term demand for rental-housing in urban locations, particularly, because young people between the ages of 20 and 34 – the prime rental age group – are seeking economic opportunities and generally prefer city living.

Born between 1982 and 1995, there were nearly 80 million 'echo boomers'. And according to David Lynn at the NREI, these young people are changing the real estate landscape. They favor urban lifestyles with diverse activities, cultural amenities, and restaurants. They are a highly mobile generation, preferring walking, bicycling, and centers of mass transit and tend to be renters.

Echo boomers generally are not interested in, or are financially capable of, purchasing a home as many witnessed parents or grandparents lose properties and pensions to foreclosure. 

Technology on Office Space
As this young generation flocks to the city, the suburbs face decreased revenues and retailers struggle to survive. This has left retailers to make more sophisticated use of smaller spaces, focusing on flexibility and collaborative workspace models that seek the benefits of technology. This may be one reason why the multifamily sector has overtaken the office segment.

With rising home prices, high cost of homeownership barriers, and a skeptical, mobile generation of renters, the apartment rental segment isn't going anywhere.

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