Wang certainly fits this description. “It’s important to live in a lively neighborhood,” she says. “Even though we work all of the time, we still like to go out.”
Unfortunately, apartment values are a lot higher in these urban infill markets. Cap rates are lower for more expensive properties such as mid- and high-rise developments usually found in the urban core, currently hovering at around 5.75 percent; at garden-style properties typically found in deeper suburbs that rate is a more affordable 6.25 percent, according to New York-based research firm Real Capital Analytics (RCA). RCA also reports that cap rates in tertiary markets are 7 percent, but Gen Yers don’t want to live in rural areas—they want downtown digs in primary markets.
That means more expensive rents. In a random sampling of 13 cities, M/PF Yield-Star reported that rents in downtowns averaged $1,488, while rents in the larger metro area were $1,155. Consider three top cities for 20-somethings: Downtown rents versus metro area rents were, respectively, $2,196 and $1,458 in Boston; $1,340 versus $779 in Dallas; and $2,406 versus $1,997 in pricey San Francisco.
“The most expensive housing is in the urban cores, and that is where they most want to live,” says Payne of AvalonBay. “They don’t have the ability to reach too far [in what they can pay for rent].”
That leaves apartment owners and developers with a dilemma. “It’s very challenging,” Payne says. “Can you get close to those events [downtown activities] where they [want to] live at a price that makes sense to them?”
Some developers have acknowledged that achieving affordable rents for younger Gen Yers is next to impossible unless they have a roommate or parental support (about three quarters of 18- to 25-year-olds in the Pew survey said they were supported by their parents). “In their first and second job, they’re doubling up,” Lange says.
To find a way around the dilemma, multifamily operators have a few options. One is building a little farther from center city. “They’re living approximate to but not right there, where land prices may be cheaper, and you can get subsidies and support for redevelopment,” Payne says. “It’s getting land prices where you need.”
AvalonBay is also re-evaluating its floor plans, design features, and price points to make them more attractive to Gen Yers. Meanwhile, BRE is creating more studios and one-bedroom units and is developing more living space with movable walls and open floor plans. The firm also has done away with office nooks, landline phones, and full-size televisions. “The gross unit can shrink, but the net square footage for living can increase,” Lange says.
Indeed, amenities seem to be the way to lure Gen Yers. Take Chicago’s One Superior Place, a property managed by Riverstone Residential Group, a Dallas-based firm with 143,200 units under management. The property comes loaded with places for Gen Yers to meet, including a swimming pool, fitness center, fitness classes, an Internet cafĂ©, business center, club room, and a ground-floor Whole Foods. Though its 93 percent occupancy rate is on par with the average rate in its market, the property also boasts the highest rents in the neighborhood, which happens to be within walking distance of shopping on the Miracle Mile and the bars and restaurants of Rush Street.
Still, the ultimate way to achieve the right balance of affordability and amenities for this demographic set probably isn’t in new construction. Payne contends that despite Avalon’s luxury portfolio, he’s seeing more Gen Yers in properties that have been renovated.
Not everyone is so eager to stock up on luxury amenities and frill features. Adler of AIMCO says that apartment owners can make “fringe” adjustments such as changing from stainless-steel to black or white appliances in order to make units more affordable. But he won’t go any further. “You can work around the edges, but our floor plans are larger because they’re older; you don’t want to take away that advantage because that’s what you are,” adds Adler, who nevertheless says AIMCO won’t go out of its way to court nonaffiliated roommates, the bulk of which are usually Gen Yers.
Even though AIMCO has a lot of two-bedroom, two-bath floor plans, “roommate structures tend to be a tad riskier than committed couples or singles,” Adler says. “We’re happy to have them as customers, but I’m not going out of my way to change my mix.”
MYTH #4
Gen Y doesn’t want to be sold.
When Gen Y renters come into Camden to visit apartments, they are armed with a different attitude—along with local rental data. “They’ve done their homework, and they come in ready to tell you what’s going on down the street,” Selindh says.
