Millennials, who are currently between ages 26 and 41, have been the driving force behind the exceptional growth of the single-family rental (SFR) and build-to-rent (BTR) asset class in recent years.
Many of the millennial generational cohort have formed families, requiring more space and good school districts, but homeownership is out of reach due to being saddled with student debt amid record prices of for-sale homes.
Generation Z, the next generation of Americans of whom the oldest are 25 this year, looks poised to continue the growth of the SFR and BTR asset class. While younger people tend to desire city living, evidence suggests that SFR and BTR properties in smaller cities are attractive to this rising generation of adults.
In a National Apartment Association (NAA) survey last year, 44% of Gen Z respondents expressed a desire to live in “vibrant suburbs” after graduation when asked about location preferences. Alternatively, 29% of the respondents were interested in living in “quiet suburbs,” 23% in the city, and 5% in rural areas. Additionally, when asked about desired property types, 43% of respondents desired SFR homes.
Gen Z Americans have just begun graduating college and entering the workforce. However, in 2020, Gen Z surpassed Generation X (ages 42 to 57) to become the second most active renter group behind millennials. For context, 69.1% of Gen X and 78.8% of Baby Boomers are homeowners. This means Gen Z’s importance to the rental market is only going to grow as more members of this generation come of age over the next decade.
Why Gen Z Renters Are Choosing SFR and BTR Communities
An astounding 86.2% of Gen Z Americans eventually want to own a home, according to a Rocket Homes survey. The main factor holding them back from homeownership is affordability, much like with millennials.
Renting has become a preferable choice at the moment for most of these younger Americans because it provides a more flexible living arrangement compared to owning, the NAA survey indicated.
While some evidence suggests that many Gen Z renters are also signing leases for apartments in urban areas such as San Francisco and New York City, the largest share of Gen Z residents are remaining in smaller cities where SFR and BTR communities are more prominent, such as Davis, Calif., Boulder, Colo., and Conway, Ariz., according to a recent RentCafe analysis of rental application data. Texas, the state with the largest net population gain in the U.S. last year, is also seeing an influx of Gen Z renters in the Dallas-Fort Worth metro suburbs Denton and Irving.
Potential reasons why Gen Z renters are choosing smaller cities and suburbs include:
- Millennials, the older siblings of Gen Z renters, moved to cities after their college years, but most of them still can’t afford to own homes, which may have “been a lesson” for Gen Z residents, according to a Realtor.com economist
- Today’s apartment prices in cities are even higher than it was for millennials, and wages have not kept pace
- The vibrant suburbs of today can be similar to small downtown areas with strong employment opportunities and nightlife, offering all the advantages of suburban living without giving up the big city attractions
- The COVID-19 pandemic accelerated the trend of remote working, allowing employees, including Gen Z, to choose wherever they want to live. This reignited the suburbs as many people moved outside of dense cities to live in areas with more space and privacy
Gen Z renters’ top desired in-unit amenities include strong internet speeds, spacious floor plans and premium appliances, such as washers and dryers, according to the NAA survey. The top neighborhood amenities Gen Z wants include guaranteed parking, a wi-fi enabled community and security. These amenities are typical of the type of properties found in professionally managed SFR/BTR communities. Many also include pools, clubhouses, and fitness centers.
The Future of SFR/BTR and Gen Z
The SFR and BTR asset class has strong growth potential due to high demand and double-digit rent growth, which was 13.5% last year, according to Arbor Realty Trust’s Q4 2021 SFR trends report. Amid a shortage of homes and record home prices, institutional investors are intensifying their focus on SFR and BTR investments.
The BTR model of single-family rental investments in particular is exploding. According to John Burns Real Estate Consulting, 51% of the 651 build-for-rent communities in its database were built only in the last five years. And 27% of build-for-rent communities were completed in just the last two years. John Burns also emphasized that based on its consulting assignments in the past four years, they “are highly confident that supply will increase dramatically.”
This increase in homes could be the right fit for Gen Z workers, who prefer flexibility and the ability to work remotely. While many Gen Z people are still in college or younger, a recent study by research and advisory firm Gen Z Planet found the collective Gen Z group currently has $360 billion in spending power. Moreover, the number of Gen Z workers is expected to triple to 51 million people by 2030 and make up a third of the U.S. workforce, according to a report commissioned by Snap Inc., the developer of the social media platform Snapchat. That report indicated that Gen Z workers after tax-income would be $2 trillion in 2030. Additionally, according to Glassdoor, the top companies Gen Z employees are applying to are in the technology and business services industries, which have high median annual salaries.
With Gen Z getting ready to transition from college dorms to offices, there could be an influx of demand for SFR and BTR properties from this new generation of renters in the coming years.