Affordability in Secondary Markets Attracting Younger Generation

February 19, 2024

The high cost of housing in major cities, compounded by the recently elevated cost of borrowing, is causing younger generations to set down roots in secondary markets. Some predict this transition will have profound implications for the future of commercial real estate. According to SmartAsset, 13 out of the top 15 cities that millennials (25 to 44 in age) moved to in 2023 were secondary markets. Aside from the affordability issue, this shift was buoyed by post-pandemic “work from anywhere” policies.

According to US Census Bureau data, San Antonio, Phoenix-Tempe, Newport RI, and Sacramento currently have a greater percentage of the population between ages 30 to 44 in 2023 than they did in 2020. These trends are expected to continue over the next five years with continued growth in this population segment predicted by ESRI through 2028.

This demographic shift has fueled unprecedented rent growth in these markets. For instance, from 2020 to 2023, the Phoenix MSA experienced annual increases in effective rent growth of 9.5%, compared to the national average of 6.8% (Moody’s Analytics CRE). Similarly, the 14.6% positive net residential rental absorption in Phoenix far exceeded the national average of negative 3.8% over the same period. High rent growth should incentivize developers and bolster multifamily development despite the rising cost of capital. Driving this growth is the unaffordability of housing coupled with millennials’ and Gen Z’s preference for the flexibility that comes from renting. Demand for this flexibility even extends to the increasing space needs of millennials starting families. This trend bodes well for the burgeoning Single-Family Rental (SFR) sector (see Capright’s quarterly SFR REIT Update).

Another important sociological trait that is prevalent in millennials and Gen Z is that they tend to prioritize lifestyle experiences over material possessions. Beyond the residential market, substantial demand for experiential retail will likely lead to an increase in these developments and live-work-play communities. Higher frequency of housing moves due to the lack of home ownership and accumulation of “stuff” from an aging population will also likely drive continued demand for self-storage (see Capright’s Quarterly Self-Storage Update).

With remote work options increasingly sought after among younger generations, office demand is expected to remain soft and may lead to a surge in redevelopment and adaptive re-use of unoccupied office buildings.

Meanwhile, in the retail sector, e-commerce and online consumer spending habits continue to erode store revenues; a trend tempered by the increasing demand for industrial distribution space, especially in key markets with good transportation linkages.

The trend of Millennials and Generation Z opting for an urban-suburban mix instead of the major city hubs is likely to persist. At the same time, one preeminent question remains about the long-term implications of these shifts: Will the classic economic principle of equilibrium quickly lead to the evaporation of secondary markets’ lower-cost advantage?

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