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April 9, 2019

Near-record levels of debt among young American adults is contributing to a decrease in homeownership and an increase in renting, but it’s just one of the factors at play.

Debt among 19 to 29-year-olds in the U.S. exceeded US$1 trillion at the end of 2018, the highest level since 2007. But, according to a recent Federal Reserve report, that debt explained only about a fifth of the falling homeownership rate among young adults, which is at a 50-year low.

The other four-fifths can largely be attributed to urbanization. Since 2000, rural counties have lost 11 percent of their prime-aged workforce to cities and suburbs. As more and more people move in to cities, demand for rental accommodation is booming.

“It’s important to note that even if we eliminated all the debt Millennials have, homeownership might not return to levels we’re used to seeing in the next few years, if not much longer,” says David Martin of JLL’s Capital Markets team, who specializes in the sector.

In cities where apartments are for sale, they are often unaffordable, even for those unburdened by student loan debt. An apartment overlooking New York City’s Central Park which recently sold for US$238 million is an extreme example. But in many U.S. cities, apartments aren’t even available for sale. These cities primarily offer apartments for rent – whereas houses and condos are available for purchase.

Investors get the benefit

The lack of affordable and available housing in urban areas has boosted the multifamily market across the country, Martin says. Apartment transaction volumes rose 15 percent last year to US$167.5 billion—a historic high for the sector, and the third year in a row that multifamily was the most traded asset class in the U.S.

New construction is also getting more expensive, especially in major metros, making existing multifamily buildings more valuable. Total building input costs (including labor, materials, and equipment) grew by 3.4 percent in 2018, a continuation of the 3.4 percent cost growth seen in 2017, according to JLL research. Labor costs, especially in large, coastal cities, drove these increases, which are expected to continue this year.

Looking toward the future, the demand from seniors for rental units is expected to fortify the sector, Martin says. There will soon be an unprecedented influx of retirees and empty-nesters, as America becomes a nation with more old people than children. By 2030, there will be more Americans older than 65 than under 18, according to recent projections by the U.S. Census. Retirees typically downsize, which means more demand for apartments.

“Some seniors will choose senior living facilities and others will choose to be in apartments that are accessible to everything they need,” Martin says. “It’s just one of many reasons we expect longevity for multifamily.”

Click to read why investors are shifting to the safety of major cities.

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David Martin

JLL’s Capital Markets team

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