Are Millennials Shifting From Apartments in Urban Areas to Purchasing Single-Family Homes in Inland Areas?

By Joseph Janczyk

During the 2013 to 2016 time period, many Millennials exhibited strong preferences to reside in urbanized areas near their place of employment. But due to their limited financial capabilities they rented apartments, rather than commuting to Inland areas for moderately priced homes. Recent data suggests that this pattern is currently in a state of transition as more Millennials are purchasing single-family homes in Inland areas, potentially signaling a return to the pattern of prior generations.

Recap of Millennials Shift During 2013–2016

The aggregate level of new residential construction activity approached its long-term average during 2013–2016 for the first time since the Great Recession of 2008–2009. But this housing market recovery exhibited characteristics that were much different from a traditional recovery due to complex economic, financial and cultural factors. A major contributor to these differences was that Millennials (those between the ages of 18–34), the largest demographic group, choose to reside in urbanized areas in apartment rentals rather than seeking home-ownership in suburban/rural areas.

For example, during 2013–2016, Southern California had a total of some 203,000 new housing units (for-sale and rentals building permits). Utilizing the long-run shares of for-sale and rental units, and comparing these to the actual number of units developed, there was an enormous shift of about 43,000 units from for-sale (primarily single-family) to apartment rentals. This may be used as an approximate estimate of the amount of new single-family homes in the Inland areas that were displaced by new apartments in the urbanized areas.

Recent Shift in a Critical Indicator

For Southern California, during January-September 2017 (most recent data available), total new residential for-sale development activity (building permits) increased by +26% from 2016 in the Coastal areas (Los Angeles, Orange, Ventura and San Diego counties) and by +36% in the Inland areas (San Bernardino and Riverside counties). While new apartment rental activity declined by -21% in the Coastal areas. The combined impact of more for-sale homes and fewer rental units resulted in the share of for-sale homes rising to 51%, a significant increase from its relatively low share of only 38% during 2013–2016, but still well below its long-term average of 62%.

New For-Sale Homes — Graph #1:

This graph shows the number of new for-sale homes in the Coastal (green solid line) and Inland (blue solid line) areas on an annual basis during 1991–2017, along with their long-term averages (horizontal green and blue dashed lines, respectively).

For the Coastal area, the level of activity for new for-sale homes returned to its long-term average in 2017 (green solid line intersecting with green dashed line).

While for the Inland area, the recovery has been much slower. Although the level of for sale homes increased substantially in 2017, it is still significantly below its long-term average.

New Apartment Units — Graph #2:

This graph shows the number of new apartment units in the Coastal (green solid line) and Inland (blue solid line) areas on an annual basis during 1991–2017-Est., along with their long term averages (horizontal green and blue dashed lines, respectively).

For the Coastal area, the level of activity for new apartment units significantly exceeded its long-term average during 2013–2017 (green solid line above green dashed line) due primarily to the preferences of millennial to reside in urban areas; however, the level of activity is expected to declined slightly in 2017.

While for the Inland area, the recovery has been much slower, with the level of for new apartment units being below its long-term average during 2013–2016 (blue solid line below blue dashed line). However, for 2017, the estimated level of new apartment activity appears to have increased above its long-term average (blue solid line above the blue dashed line).

Potential for Emerging Trend to Continue

While the share of for-sale building permits as a percentage of all new building permits has risen significantly to some 51%, it is still well below the long-term average of 62%, especially in the Inland areas. The potential for this emerging trend to continue depends upon a complex set of factors. The primary driving factor will be the choices made by Millennials who are entering the critical ages for being married and starting a family.

Potential scenarios are as follows:

  • Some Millennials may continue to reside in apartments in urbanized areas, primarily singles.
  • Some with higher incomes (mostly college educated) may be able to afford homes in urbanized areas.
  • Some that desire home-ownership but have only lower or moderate incomes may need to commute to more affordable homes in suburban or rural areas, following historical patterns.

The potential impacts of a continuation of the transitioning from the 2013–2016 pattern would include the following:

+Increased commuting between employment centers in urban centers and moderately priced new single-family homes in Inland areas.

+Diminished demand for apartments in urbanized areas, with some experiencing higher vacancy rates and/or slower rent increases.

Closing Remarks:

Recent evidence on new construction activity indicates an increase in new residential single-family homes activity in suburban and rural areas. Since residential construction activity is a significant component of the Inland area economies, this would substantially enhance their economic growth. However, additional time and data are required to evaluate the magnitude and duration of this emerging pattern.

Nevertheless, reflecting upon Millennials’ choices during 2013–2016 may provide useful insights into the housing geographical/product type development patterns. Specifically, given that many Millennials prefer to reside in urbanized areas, they may be more accepting of higher density for-sale housing products in urbanized areas near their places of employment more so than prior generations.

Joseph Janczyk, Ph.D., is President of Empire Economics. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the treasurer, his office or the State of California. Job data used in this article is compiled by the Fermanian Business and Economic Institute for Point Loma and is not meant to be used as an official State of California source or replace official information released by the State of California and/or State Department of Finance.