CoStar Portfolio Strategy Client Update

Playing The Millennial Life Cycle In The Office Market

By Paul Leonard (pleonard@costar.com) | December 10, 2015

Like their Baby Boomer parents before them, Millennials are redefining all aspects of society as they age
and move through the different stages of life. The commercial real estate market has already been
significantly impacted by this generation. For example, the apartment market has greatly benefited from the
large increase in 2034-year-olds, the age cohort most likely to rent. During this same period, the retail
market has suffered as sales continue to migrate from bricks to clicks, thanks in no small part to the
shopping habits of this tech-savvy generation.
The office market is being noticeably impacted as well. Employers are moving away from cubes toward
shared workspaces. More and more we are seeing tenants migrating from the suburbs to emerging urban
submarkets, choosing the converted warehouse over the sprawling campus.
This trend is starting to show up in the numbers too (see Exhibit 1). While fundamentals are improving
across all districts, urban areas are clearly leading the expansion with significantly tighter fundamentals for
all three urban districts: CBDs, Secondary Business Districts, and other Urban districts. CBDs, for example,
collectively have the lowest vacancy of any district type at 10.2%. This is a far cry from 2002, when
vacancies rose to as high as 15.2%. Conversely, Prime Suburban submarkets combine to have the highest
vacancy today (12%). Despite being generally more desirable than other Suburban submarkets, these areas
also tend to receive more interest from developers, keeping vacancies elevated.

But like Baby Boomers, Millennials arent a static generation. Theyre growing older every day, and their
priorities and interests are changing as they age through the life cycle (see Exhibit 2). Today, Millennials are
peaking in the prime renting age cohort. Fast forward a decade and it will be a much different picture.
Though Millennials are putting off marriage and children much longer than previous generations, a majority
will likely choose to start families at some point (lets hope so, for the sake of all future demand!). The
average age at which a U.S. woman gives birth to her first child is 26 years old, up from about 21 years old
in 1970.1 Assuming a college education delays this move for four years, the average for Millennials with a
bachelors degree is likely somewhere closer to 30 years old. This means that in 10 years, when Millennials
are peaking in the mid-30s, many of their children will be entering, or in the early years of, elementary
school.

Then it will be decision time. Will these Millennial families remain urban renters, or move out to the suburbs?
Evidenceas well as historysuggest that many will make the move to the land of backyards, quality
schools, and safer communities to raise their families. The Boston/New England chapter of the Urban Land
Institute (ULI) recently polled its members and other young professionals aged 20 to 37 in the Greater
Boston area.2 This polling revealed that though about two-thirds of the respondents lived in urban areas and
were renters today, 83% planned to become homeowners in the next five to 10 years, including 30% that
specifically planned to buy a single-family home. While only 12% of the survey respondents had children
today, more than 30% are planning to have children in the next five years, and nearly three out of four
respondents plan to have children at some point (biology says you can only wait so long). And even in their
prime renting age, fewer than 30% thought they would never make the move to the suburbs at some point.
So why should an office investor care? Because the most important element to a Millennials satisfaction
with her or his workplace is not the work environment itself (green offices and open floor plans scored
relatively low in importance), it is the trip to that workplace. A short commute, access to transit (to make the
commute shorter), and a flexible work schedule were of highest importance. Millennials dont want to work
nine to five, and the lines are being blurred between work and home life. This does not suggest that we will
see an exodus away from urban centers over the next decade, rather it suggests that the suburbs
particularly well-located suburbs with good demographics and a supply of quality office stockshould not be
written off. Investors being priced out of CBDs and Secondary Business Districts today should consider
expanding their search to Prime Suburban submarkets. While pricing is 15% to 30% above the 200607
peak in CBDs and Secondary Business Districts respectively, pricing in Prime Suburban submarkets is just
now reaching the previous peak.

Note: For in-depth analysis of this trend, look for our upcoming REPS on the topic.
1 According
2 ULI

to the Centers for Disease Control and Prevention. Data as of 2012.

Boston/New England Survey of 660 Young Professionals in Greater Boston: http://boston.uli.org/wpcontent/uploads/sites/12/2015/11/Topline-2015-10-ULI-Boston.pdf

Any Questions or Comments?

Contact: Paul Leonard (pleonard@costar.com)
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