Covid-19 has brought significant changes to how we live, how we work, and how we go to school. More people are staying inside (not always by choice, of course), millions of people are working from home and millions of students are logging into class from their bedroom, kitchen, and living room. This leads to Zoom calls from a cramped space that was retrofitted for work or study. The result? People realize they want and need more space.
If you are a builder or real estate investor, this is an important trend to monitor. To be sure, it will shape consumer housing demand for years to come.
According to Global Workplace Analytics, 56% of all jobs today are compatible with working at home. This shift to remote work — which, for many, is here to stay — is likely to lead to a move away from three-bedroom, new-home construction, particularly in the build-to-rent space where my firm operates. We are seeing more households seeking build-to-rent single-family rental homes, in general. Millennials, born between 1981 and 1996, are now the largest demographic cohort. Many now have or are ready to start families and they want a single-family home of their own. However, since millennials hold a large share of the United States’ $1.6 trillion in student debt, new home purchases are often out of reach. The desire to build a family leads to an interest in a bigger home, but their student debt often keeps this from happening, driving more Millenials to seek four-bedroom rental houses when homeownership remains out of reach.
Another significant factor driving demand for four-bedroom homes is that household sizes are actually going up for the first time in 160 years. According to an October 2019 Pew Research study, household size had grown from an average of 2.58 people in 2010 to 2.63 people in 2018.
How have builders responded? Many include rooms designed to be used as a home office. Some are adding a fourth or fifth bedroom that can be converted into an office or study space. Many builders are typically working within their existing footprint and reconfiguring the space to add a dedicated home office. This is done in order to provide the dedicated home office space without driving up the cost of homes and pricing themselves out of the market. In fact, our firm’s current building plans are based entirely on four-bedroom, build-to-rent subdivisions. The market for new construction is moving in this direction and we expect resale value for four-bedroom homes to outpace three-bedroom homes in the next several years.
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So, where does the real estate industry go from here?
Develop a game plan that takes these emerging consumer trends and needs into account. New three-bedroom houses may be heading for a steep decline in demand, and I assert that builders’ focus should be on four- and five-bedroom models.
From an investor standpoint, we see more likely higher returns from new four-bedroom homes than three-bedroom homes. This will be true not just for new construction and build-to-rent subdivisions, but also for existing homes bought as single-family rental properties.
For builders, innovation is the key. Develop designs that revolve around the new paradigm of work and school from home. In my opinion, four-bedroom homes are a minimum point of entry. Plans with four bedrooms and an office, or perhaps a fifth bedroom that can be converted to an office or school space, will likely be hot sellers for years to come.
When you factor in overall household growth and an aging baby boomer population of parents moving back in with their kids or downsizing to more manageable spaces, the formula for growth in four-bedroom new home construction appears to be here to stay for the foreseeable future.