Prepare for the millennial migration, says USC

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Created by Madelyn Johnson, Valbridge Property Advisors*.

Millennials have flooded the downtown housing stock in Kansas City in recent years, but that trend may have reached its expiration point - at least for the millennial generation. Millennials are now moving away from their entry-level jobs and entry-level housing options, according to new research from the University of South Carolina, which is warning the real estate market to brace for a major migration.

"This is a dramatic human interest story with great implications for cities and real estate investments," says Dowell Myers, an urban planning and demography professor at USC School of Public Policy.

The study explains that millennials, the largest living generation in the United States, have been driving a decade-long trend of increased concentration in urban cores. Planners and analysts say this generation preferred to live in city centers moreso than previous generations.

But the driver of this phenomenon was circumstance, not preference. Myers highlights three cycles - one demographic, one economic, and one housing-based - that converged in the 200s to drive millennials into downtowns. Now, all three cycles have reversed their effects.

Myers compares the effect to a clogged drain. Millennials poured through the faucet into young singles neighborhoods, a temporary staging ground. But as the recession squeezed job opportunities and housing availability, millennials' progress through the normal life cycle (climbing the job ladder, moving into better housing) was blocked. That clogged drain prevented millennials from advancing forward.

Three cycles converged to clog the drain. First, cities were flooded by young people coming of age. Froma low point in 1978, the number of babies born each year climbed 42 percent by 1990. The peak millennials born in 1990 turned 25 next year, and going forward, smaller cohorts if millennials will arrive at 25 from now on.

"The tide has ebbed and fewer replacements will follow those who are moving on," Myers said.

The second cycle is the employment cycle. Depressed job growth during the recession blocked many millennials' entry into the job market, forcing them into the "sharing economy," where they live with roommates or parents.

Now, the job market is loosening and the unemployment rate for this generation is falling to pre-recession levels (from 10.4 percent in 2009 to 5.2 percent last year, compared to 4.8 percent in 2007). Now, a smaller amount of millennials are turning 25 as jobs open up again.

"This is a night-and-day reversal of the previous job competition, and so their economic progress should really start to accelerate," Myers said.

The third cycle that hindered millennials' progress was the housing life cycle. With the collapse of the housing market, homeowners were driven to rent and new home construction stagnated. This all coalesced to create extreme competition for rentals. Now, with new apartment construction and home sales on the rise, this generation has new opportunities to rise up.

"The millennials may have seemed frozen in time, but they are not living in a two-bedroom apartment forever," Myers said. "The restrictions that blocked this housing lifecycle are slowly being removed, but this generation will require even more."

Now as conditions reverse, expect millennials to partner up and demand more living space. Many will have kids, half or more will buy houses, and most will move to the suburbs.

Myers predicts that the three cycles, now in reverse, will draw smaller cohorts of people to replace their older peers, accelerate job success and career mobility, and open more housing options: both rentals and homes for purchase.

He says the housing supply should be increased to satisfy this generation that aspires to start their families and gain homeownership. Rental opportunities will likely remain the most constrained and see the steepest rental increases until construction catches up, or when far more millennials and Gen-Xers turn over their rentals for first-time home purchases.

Read a full copy of the study here.

*Valbridge Property Advisors | Kansas City provides unbiased commercial real estate valuation for local, regional, and national clients. In business for over 38 years, the firm is led by six MAI-designated members of the Appraisal Institute.  To learn more, click here.