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Nov. 13, 2013

When Millennials Leave the Nest

By Erica Rascon, Contributing Editor

Millennials who flocked to their parents’ nests during the recession are a huge source of untapped revenue for the apartment industry. The trick, however, is getting them to leave a place that is so cozy, convenient, and inexpensive.

Millennials, or Generation Y, already make up a notable portion of renters. Yet there is another wave of them, approximately 2.4 million strong, that is dancing on the peripherals of the rental market. Developers are pushing forward with construction plans, optimistically expecting that these young adults will soon form their own households. There are quite a few challenges that may further postpone, if not deter, the young adults’ entrance to the rental market.

The 2013 Current Population Survey data suggests that there are 2.4 million “missing” households in America. Thirty-one percent of this group is comprised by young adults ages 18-34 who are currently iving in their parents’ households.

Forty-four percent of the missing households are unemployed, meaning that they do not have the financial means to establish their own households—rentals or otherwise—anytime soon.  Even if every adult gained employment today, most leasing offices like to see six months to a year of work history. Some approvals require two years. As young adults accumulate work history, they must also save money for deposits, fees, bills, furniture, and so forth. For the currently unemployed, leaving their parents’ household won’t be an option for quite some time.

Of the 25 percent of missing households that are employed, multifamily developers face other challenges in drawing them into the rental market. Millennials in general are less likely to have established credit. Experts point to the decline in credit card usage as the main culprit. FICO reports indicate that at the end of 2012, 16 percent of Americans ages 18-29 passed their days without the use of a single credit card. That is nearly double the amount of plastic-free young adults from 2007.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 has limited younger people’s access to debt while also promoting a stronger understanding of the credit system. While Millennials (as well as their parents) may be proud of debt freedom, it hasn’t helped them to establish a strong credit standing.

Likewise, Generation Y is opting out of auto loans. A Federal Highway Administration study shows that the amount of driver’s licenses issued to young adults is decreasing. The number of 18-year-olds with licenses fell to only 65 percent in 2008.  Without licenses, members of missing households aren’t driving, much less financing their own cars.

This demographic’s lack of credit makes them unscorable through traditional credit evaluation methods. Services such as VantageScore may help leasing offices evaluate credit worthiness but it is an additional expense that isn’t being utilized across the board. Without a credit history, leasing offices are taking a gamble on which renters are the most desirable.

Millennials that do manage to have credit don’t have shining reports. Experian warns that these young adults have the lowest average credit score, nearly 80 points lower than the national average. The easiest candidates to evaluate may not be the first picks for a selective rental community.

The industry is working around the credit issue thanks to the development of new software. But until software can generate home-cooked meals, in-house laundry, and free daycare by trusted individuals, multifamily faces another hurdle with these missing households. The financial benefits and conveniences of multigenerational houses are hard to match. Multigenerational households save significant amounts of cash, which is appealing to gun-shy families who have been recently scarred by the recession. But they aren’t the only ones combining households. DailyFinance reveals that the number of adults who opt to live with their parents has been increasing since the 1970s, well before the recession. The reasons are multitudinous.

Working adults in a multigenerational household can combine daily expenses, thus saving money. It costs just as much to light a living room with four people in it as it does to light a living room with two. The difference is that the bill can be split in multiple ways. Childcare costs are another huge money-saver. The most recent national averages for childcare cost, released by the Census Bureau this April, explains that childcare has risen to an average of $143 per week in 2011, up from $84 in 1985. Most grandparents will mind their precious grandchildren for free, not to mention free meals, snacks, and gifts. Relatives are also more likely to monitor children’s health and entertainment activities more closely—and more in tune with family values—than the well-intentioned professionals at the community daycare. High quality, free help makes parents’ homes seem a bit sweeter than a rental.

A whopping 83 percent of young adults that moved back in with their families during the recession did so to ease financial hardships. They also seem to be happy with the arrangements. Pew Research Center suggests that only 25 percent believe that returning to the nest adversely affected their relationship with family members, leaving a pleased or otherwise unaffected majority.

Darshini Narasimhan, a young tech professional in Atlanta, recently moved back in with her parents. Like many 20-somethings, she moved to the city after college to be closer to friends and her favorite activities. Things didn’t pan out as expected: she landed a job outside the city, which led to a time-sucking commute. She also discovered that higher rent payments meant less money to spend on travel and leisure. And while there were certain freedoms that she enjoyed as an independent woman in the city, there were parts of her former lifestyle that she began to miss.

Moving back home provided the break that she needed. “The commute is a lot easier,” Narasimhan begins. The shorter commute and shared household responsibilities has increased the time she is able to socialize. “My schedule may be busier now, which is a good thing socially,” she laughs. “I go out more and I have time allotted to activities with my parents.”

Narasimhan is part of the majority who feels that moving back in with her parents has been a good decision. “A friend asked if I felt [moving back] was a sign of weakness or failure. I didn’t see things that way at all. It was a positive event for me as I was able to improve my relationship with my parents,” she says.

The downsides to moving back into her household of origin have proven to be very few. “It’s possible that people may have judged me negatively after learning that I moved back, but I don’t worry about that,” Narasimhan says. “I can’t invite friends over as much as when I had my own place, for distance and other reasons, but it’s compensated because I go out more.”

The apartment industry has attempted mightily to provide young renters with enticing amenities, spending countless dollars in research to determine what renters want. Luxurious standard features, community experiences, and top-notch locations are must-haves for just about all developers, no matter the price point of the property.

But the middle ground of renters, those who often compose our missing households, face another deterrent in entering the rental market: once employed, they may not qualify for affordable housing yet they can’t afford the slew of luxury rentals.

Narasimhan falls into that middle ground. In order for her to move out from her parents’ place, she says she will need: a good central location that isn’t too congested; a hip area that’s close to a variety of shops, restaurants and service providers; a unit with a laundry machine; a stunning exterior design and smart interior layout; and of course it should offer competitively priced studio or one-bedroom options, something to the tune of $1,000 or less per month.

That’s a tall order for developers to fill, particularly in her desired price point. That’s the main reason why Narasimhan, and other renters who have most of what they want now, won’t leave home until they find all the amenities they want at a mid-range price. Many markets simply aren’t offering that balance of pricing and features.

To comment, e-mail Diana Mosher at
dmosher@multi-housingnews.com

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