Daniel Calano, Prospectus, LLC

There are many models to predict the movement of stocks, with much research on the predictive factors. But in some work done by a combined Citibank and Stanford University, economists found a significant factor that was something surprising: that is, what the news press reports can move markets. When the press predicted a downturn, sure enough there was a correlative response in the stock market. Similarly, when the press was bullish, so was the market.

I thought about this particular model in regard to real estate. Could the news be a major factor in real estate bearishness or bullishness. After all, the press has been saying there is a critical need for multi-family housing over the last several years. And developers have clearly been responding in Boston and other major cities around the country. But, I thought, the “news relationship” is clearly not a decisive factor among more accepted demand/supply metrics, and real estate cannot respond as stocks do, since it is an extremely more illiquid asset. But let’s explore what’s been going on in the market recently.

When it comes to the multi-family housing boom, who are the biggest demand drivers? We all know that baby boomers are hoping to shed their suburban houses and move into the city. In addition, the biggest population, recently overtaking the baby boomer population, are millennials. Many have written about them and the reasons why they will occupy much of the multi-family housing under construction, particularly in urban areas. An over the last five years, they have more than satisfied pundit predictions.

But recently, the press has been talking about occupancy rates falling off while supply of new construction continues to grow. Some of us real estate people have been considering this for a couple of years, while the broader press has just seemed to pick it up. Last week, the Wall Street Journal reported on “vacancy rate increase and decline in rent growth, pointing to a possible end of the apartment rental market boom.” They report that “the national vacancy rate has spiked over the last consecutive three quarters and this year, and effective rent growth has declined.” The article further states that “most alarming to housing economists, is that the demand for new apartments in the first quarter was about half its typical level.”

I thought to myself that America’s press opinion has seemed to have turned on a dime. Of course, it has actually been somewhat more gradual with some earlier articles predicting a potential reversal. What about the huge millennial group who want to be renters because they have limited resources and want to find a cool apartment in an urban setting, without the baggage of home ownership? They wouldn’t turn on a dime, or would they?

It turns out that millennials of five years ago are vastly different from millennials of today. Five years ago, the median age was round 24 or 25. Today, it is around 29 or 30. A lot can happen in five years in those lives: people get married, they find steady jobs, they move out of their parents’ home, they think more about the future, they may even have had children. A recent Urban Land Institute study points out some very interesting contradictions in the past characterization of millennials. While they say that 50% are still renters, only 60% of those rent apartments and the rest rent single family homes and are clearly in more suburban settings. They also state that only 13% of millennials live in or near downtown.

Still, can they turn on a dime? Among the factors mentioned above, millennials are also highly responsive to vast amounts of information. As they marry and have children, and find they need more space, they share such thoughts with their friends, who share with their friends, who share with their friends. What they read, and what they think, and what has happened to them, can coalesce very quickly over social media, and soon become a trend. As renters, it is not so hard to pick up and go, and it is becoming easier for them to “pick up and own.” As I think about it more, the stock model finding the press is an important factor in influencing quick changes, may in fact have relevance to millennial choices. While it won’t happen in a day, we will find that desire to rent will change to a desire to own, and maybe out of the city, in a relatively fast time frame.

Daniel Calano, CRE, is the managing partner and principal of Prospectus, LLC, Cambridge, Mass.