This past October, an article in Business Insider described the lifestyle of a 23-year-old Google employee who decided to live inside the back of a delivery truck that he had purchased and parked at the company’s headquarters rather than pay an exorbitant rent to live in San Francisco. In the same month, the Washington Post ran a piece about a number of young professionals purchasing homes in the city and packing in as many roommates as legally and logistically possible—enabling the enterprising owners to cover their mortgage payments and the tenants to afford living space in the District of Columbia. The Guardian featured an article about U.K. Prime Minister David Cameron’s plan to make homeownership more affordable in the United Kingdom. And, just a few weeks earlier in September, the South China Morning Post published an interview with Miss Hong Kong, Louisa Mak Ming-sze, who discussed how soaring property prices have left young people unable to pursue better lives.
The lack of affordable housing in high-cost markets is, of course, nothing new. But what these stories illustrate are examples of a new take on the housing problem that persists in cities around the world. Affordable housing is being discussed as much as a generation Y issue as it is an income issue.
ULI’s Bay Area in 2015 report, released in conjunction with our 2015 Fall Meeting in San Francisco, offers a sobering look at the implications of the shortage of affordable housing. The report—a survey gauging consumer satisfaction with housing and the quality of life in the San Francisco metro region—found that 74 percent of millennials living in the Bay Area are considering moving over the next five years, and housing affordability concerns suggest that they will be more apt to move away from the area than within it. Only 24 percent are very confident that they will be able to own or rent their desired home in five years. This is a dramatically lower percentage than among the members of generation X, 38 percent of whom voiced strong confidence in their ability to own or rent their desired home; or among baby boomers, at 49 percent.
A recently released ULI Washington survey, Millennials Inside the Beltway, tells a somewhat different story—on the surface. Nearly two-thirds of millennials over 30 years of age now living either in D.C. or in inner-ring neighborhoods said they still expect to be in those locations in three years, and three-fourths of those renting said their current housing sufficiently meets their needs. Despite these optimistic findings, the survey cites affordable housing as the Achilles’ heel for Washington. Nearly 60 percent of the renters said they would have to move to the exurbs to find homes they could afford to buy—an unappealing prospect for this generation, which greatly prefers proximity to transit, short commutes, and easy access to fun. “The high cost of housing in the District and the close-in suburbs is the most critical factor limiting the potential for millennials to stay,” says the report.
And, the latest version of our Emerging Trends in Real Estate® report, copublished with PwC, offers yet another side to the issue, one reinforcing how millennials’ behavior is affecting development and investment decisions. Emerging Trends identifies middle-income multifamily housing as a best bet for investment and development next year. It also points to the continued investment appeal of 18-hour cities—smaller cities that are attracting young workers with recreational and entertainment amenities that rival those of the largest cities, as well as good job prospects resulting from the businesses that are drawn to these areas by the pool of educated, highly skilled workers. The top ten U.S. markets in the 2016 report include eight of these 18-hour markets—Dallas; Austin, Texas; Charlotte, North Carolina; Seattle; Atlanta; Denver; Nashville, Tennessee; and Portland, Oregon. (Global markets San Francisco and Los Angeles also made the top ten.) Raleigh, North Carolina—another 18-hour market—is ranked at 11, edging out Boston and New York City.
The evolution of these cities from “work and leave” into “live and play” places has been driven in part by their lower cost of living, including costs for housing. However, as these cities have become more popular, they have gotten more expensive. In each of these markets, rent as a percentage of household income has risen substantially just over the past year. For example, in Dallas, that ratio jumped from 16 percent to 29 percent between 2014 and 2015. In Nashville, it jumped from less than 18 percent to 31 percent. And in Charlotte, it jumped from under 18 percent to nearly 27 percent. To a large extent, this reflects a notable increase in high-priced apartments and condos being built in downtown neighborhoods—units that are affordable only to the most affluent, who tend to be members of the baby boom and gen X cohorts in their peak income-earning years.
What this suggests is that the housing being built in these markets may wind up pricing out many of the would-be residents and workers these cities are trying to attract. It also suggests that more urban downtowns—not just those of the largest global markets—are becoming more exclusive and less inclusive at the same time that the largest, most diverse generation in U.S. history—and the one least tolerant of exclusivity—is making up a major part of the housing and jobs market.
The fact that affordable housing is increasingly viewed in terms of the implications for a generation, not just an income group, is perhaps making more urgent the need for solutions. D.C. Mayor Muriel Bowser and New York City Mayor Bill de Blasio are among many large-city mayors who have made augmenting the supply of moderate-income housing a major priority, and it is a top concern for London Mayor Boris Johnson and Hong Kong Chief Executive C.Y. Leung.
Recent and forthcoming reports from ULI offer insights into ways to address the affordability problem. A new report from our Terwilliger Center for Housing, Preserving Multifamily Workforce and Affordable Housing, documents the loss of affordable rental units in the United States and profiles several case studies of financing programs aimed at preserving the units, including below-market debt funds, private equity funds, and real estate investment trusts. The Density Dividend, just out from ULI Europe, makes the case for greater densification in both growing and shrinking markets, in some cases helping alleviate rising housing costs. And, ULI Hong Kong is planning to issue recommendations early next year on how to address that city-state’s lack of housing options and affordability.
All the attention being paid to housing gen Y is an important wake-up call for our industry and our cities. For as much as we have already scrutinized millennials’ behavior, we need to be watching and responding even more closely. Millennials will determine the economic fortunes—or misfortunes—of our urban areas in the years ahead, exerting an influence more powerful than that of the baby boomers or generation X. The millennials’ time has come, and the biggest impact they make on the way cities grow will stem from their decisions on where and how they will live.