SPECIAL REPORT: Generation Y, Baby Boomers Will Help Multifamily Developers Make Fortunes

By Anuradha Kher, Online News Editor San Francisco–Great fortunes in the real estate industry have often had their roots in downturns, but the industry needs to understand the trends that will make those fortunes for them. That is what Bob Gardner, managing director of Los Angeles-based Robert Charles Lesser + Co. (RCLO), discussed at a session titled “Multifamily Housing Market Outlook: Rental and For-Sale,” held at the Multifamily Trends 2008 Conference on June 24.Knowing demographic or economic trends, however, is not enough. It is essential to get to the crux of what a demographic wants or how the economic trends will affect them. “There are favorable trends in the future, if you look beyond the grim reality of today,” said Gardner. ‘Demographic shifts’ over the next 10 years is one such trend that is set to favor multifamily development. “Generation Y [born between 1979-1996] and baby boomers will be highly influential demographic groups. As a developer, you should spend a lot of time thinking about Generation Y. They will have a major impact on housing development as they move through the cycle,” said Gardner. Much has been discussed about the baby boomer generation and its need for retirement and other such communities, which will fuel the growth of the multifamily market. But Generation Y is also beginning to come into focus.With regards to this generation, Gardner highlighted RLCO’s research, which can provide key pointers to developers: •    41 percent plan to rent for at least three years.•    77 percent plan to live in urban cores.•    They will pay for walkable, mixed-use communities in the heart of towns and will be willing to pay premiums for transit.”We think it’s worth it for developers to spend time cultivating this market,” said Gardner. The trends that developers need to know in order to make fortunes at the end of this downturn: •       Gen Y will become renters starting next year and first time buyers by 2012, •       Rising costs will have a huge impact on multifamily housing, •       Proximity to urban cores will be a winning trend, •       Smaller units and lower prices will be in demand, •       Premiums will be paid for locations, •       Ultra-luxury apartments and condos with high finish, high service and views will be popular, •       Three-bedroom condos, also known as family condos, will be increasingly in demand when Gen X starts having children. This is because Gen X is nearly as urban in choices as Gen Y.Gardner also advised developers to invest in cities with employment growth higher than the national average and cities with household growth. “You should closely consider demographics, monitor prices and watch vacancy rates to see if there is an undersupply,” said Gardner when asked where he would advise developers to invest.Gardner also outlined two scenarios for the housing industry in the next few years. The best-case scenario, he said, would be if there is no recession, low inflation, foreclosures are done by 2009, if elections cause no tax or law changes and pricing power returns in 2010. The possible scenario, he went on to say, would be if recession, inflation and stagflation all occur, foreclosures continue until 2010, elections result in higher capital gains and income tax, home prices decline 10 to 15 percent and pricing power returns in 2012.