When it comes to apartment renters, two distinct phenomena are occurring in Seattle, where I live. First, job growth is occurring at a dizzying pace: In 2015 we are again on track to create more than 50,000 jobs year-over-year, with many of these new residing in the renter-age cohort. Second, more people (read renters) desire a work-live-play lifestyle located closer to core-located job centers, which are generally described as urban locations.
It is 2015. No one should be shocked that Seattle, like many cities, is urbanizing, especially with respect to Millennials. Understanding urban rentership is extremely important — like what exact locations renters choose and for how long renters stay in one location.
This post discusses the distinction between “first-move locations,” where renters just landing in a city or native residents moving to urban areas for the first time tend to locate, and “second-move locations,” where renters end up after already settling into an urban lifestyle. Finally, we will discuss why this is important and how better understanding the renter preferences over time can lead to market-leading investment returns.
First-move locations are where new denizens land. For example, you just took a job at Amazon.com and you have to move to Seattle from Boston or Mumbai or Dubai. Or, you graduated from college back East and were lured to Seattle by a tech startup. Just as relevant, you’re from Spokane or Ellensburg (or some other part of Washington state) and found a higher-paying job in Seattle. Notice anything? Most all examples are based on an economic driver.
Where do these renters cluster? Locations that:
- are well-advertised (which generally correlates to newer buildings)
- offer easy and quantifiable commutes to work
- seem fun and exciting
- are well-understood and discovered with the tools they possess (a web browser, smartphone or corporate recruiter)
Accordingly, many of these renters cluster near the core of cities.
The second-move location choice is an interesting one. Call it urban maturation: The choice of where a renter moves after his or first location is a decision primarily driven by a deeper understanding of the city, its neighborhoods and “fit.” These renters consider neighborhoods that fit best for their lifestyles, that best facilitate time spent with their group of friends and that also allow easier access to recreation they enjoy. Notice that there is no mention of work: Young renters do not want to be right next to work. They want to be relatively proximate to work.
Renters, at least those with high means from good paying jobs, want lifestyle and identity. They pick neighborhoods with the activities, character and scale that match their individual identities. The commute to work is just a box to check to ensure commute time is not a pain point in their overall lifestyle. What is the first predictor of a first-mover’s choice of a second-move location? Where they meet their friends for brunch on Saturday-morning. After many Uber rides to brunch, these renters eventually ask, “Why don’t I just live here?” Can you imagine a Millennial getting to work on Monday morning and asking, “Why not just move across the street from my office?”
Why does this all matter?
Understanding renters on a granular scale is key to keeping apartment buildings full, at the highest possible rental rates. The most important considerations are: How long do these first-move residencies last? What happens to these locations when the spigot of new residents throttles back to a drip? Finally, what are the “best” second-move locations?
Investors want durability and predictability in any analysis on return of an income stream, whether it’s bond yields or apartment NOI. Understanding first-move and second-move locations is key to this analysis and vastly important to making profitable investment decisions.
What do you think about first-move and second-move locations and how they impact your urban portfolio and future investment decisions?