Multifamily in most markets continues to remain resilient. In particular, affordable markets throughout the Southwest and Midwest are achieving accelerating rent growth even in the midst of a recession.
Youthful cities have a perpetual stream of new demand for housing units and retail goods, creating upward pressure on occupancies and rents across their commercial real estate markets. Meanwhile, older cities continually fight an uphill battle from subdued population and business growth, depressing real estate returns.
The best way to measure the youth of a city is to assess its Millennial Share (% of the population from 25 to 44). The Millennial age demographic is important for future growth because they have the most children and spend the most money in the local economy.
Austin is the runaway leader in millennial share at 33.0%, with a smattering of Rocky Mountain and West Coast growth cities like Denver, Seattle, and Portland dotting the top of the list. At the other end of the spectrum are a collection of former Rust Belt cities like Pittsburgh, Rochester, and Cleveland, with Millennial Shares around 25%.
But just how important is an eight percentage point difference in millennial share? Extremely important. The graph below plots the relationship between a metro’s millennial share in 2005 and its growth in households through 2018.
The relationship is quite robust with a 0.45 r2, indicating that Millennial Share explains nearly half of household growth on its own.
How could such a simple indicator explain so much of a city’s growth? The answer lies in the inverse relationship between new births and deaths. Metros with a high Millennial Share gain a growth advantage by producing more children than older metros. But their youth garners a second growth advantage through experiencing fewer deaths each year than an older metro.
Austin, based on the age distribution of its population, experiences 2.4 births for every death. Growth markets like Denver, Nashville, and Columbus measure around 1.8. Former Rust Belt towns like Pittsburgh and Cleveland fall in stark contrast with a Birth to Death ratio hovering around replacement level.
These contrasts existed over the last decade and are likely to persist into the future. Pittsburgh’s Birth to Death Ratio was 1.15 in 2005 and lowered to 1.05 in 2018. Cleveland’s lowered from 1.43 to 1.14. These cities could fall below the 1.00 mark soon, at which point organic population decline sets in.
Of course, there’s more to growth than just births and deaths. Metros compete with each other to attract adult migration, which is typically allocated on the basis of jobs and economic opportunity. However, economic opportunity and Birth to Death ratio are inextricably related.
More births equate to more consumer spending on homes, furniture, food, cars, schooling, and entertainment across the local economy. This increased spending creates jobs, which magnetically attracts inward migration. Moreover, large companies tend to value a youthful labor force when picking expansion cities, further amplifying the growth divide.
This isn’t to say cities like Pittsburgh and Cleveland should be ignored from a real estate investment perspective. Their older population provides a higher demand for specific services, such as senior living and healthcare (Pittsburgh has the 3rd highest share of doctor and nurse employment while Cleveland is 5th). Perhaps independent living facilities or market-rate apartment communities near hospitals are good investments in these metros.
However, when it comes to general real estate investment, youthful cities should be prioritized, even accounting for the likely lower returns offered in markets such as Austin and Denver. Their growth advantages are going to persist over the next decade at minimum, and likely well into the future.