The pandemic prompted millions of young adults to stay at home with their parents, weakening demand for apartments and helping spur a wave of downtown vacancies in the U.S., according to a new special report by Marcus & Millichap.
Job losses and college closures drove the number of people aged 18 to 34 that are living with their parents or relatives to a record high of 27.7 million in June. Though that number steadily declined in subsequent months, it remained well above the four-year average at 25 million in September, the report finds.
While the change may be exasperating to some parents, it has also complicated the multifamily outlook in Millennial-heavy cities. Metros with a disproportionate share of young adults, such as San Francisco, Orlando, Fla., and Columbus, Ohio, have seen a surge in apartment vacancies in their central business districts since the fourth quarter of 2019.
Overall, the nationwide core vacancy rate rose to 5.8 percent by the end of the third quarter, the highest level since at least 2000, according to the report. That represented a gain of 170 basis points over the previous nine months. CBD vacancies climbed more 200 basis points in half of the markets that had the highest share of young adults.
Job losses in higher-priced downtown areas have contributed to those increases by forcing many people to relocate even as a wave of new apartments are delivered. Marcus & Millichap noted that developers with projects in lease-up in these markets are likely to provide more concessions in the coming quarters, as are landlords that have recently seen significant move-outs.
There are silver linings for real estate investors. First, young adults cohabiting with their parents may need more space to store their belongings. The self storage sector responded well to the health crisis, with vacancy declining 230 basis points from April to June, and up to 25 million square feet of additional supply is projected to come online during the second half of this year.
Looking ahead, an economic recovery, continued job growth and the reopening of college campuses is expected to prompt more homebound young adults to move out and sign apartment leases. Investors may therefore target multifamily assets in markets that have relatively low unemployment rates or metros in the Midwest and Florida that have lower rental rates and rely less on young adult renters than the nationwide average.
The report adds that new acquisition opportunities may surface as developers look to sell recently completed projects in challenged CBD areas prior to stabilization, allowing investors to potentially purchase at a discount and assume lease-up risk.