Millennials are one of the most diverse and challenging demographic groups real estate developers have ever had to serve. They’re famously slow to form households and start families, more likely to buy and socialize online than in malls, and more interested in the latest trend than brand loyalty.
But with $200 billion in disposable income per year, they’re too big a market to write off. It is possible to develop profitable retail, residential and office projects for millennials, but they have to be carefully designed for their very specific needs.
The Millennial Mindset
Millennials, born between the early 1980s and the early 2000s, pose an interesting contrast with the Baby Boomers who were born in the late 1940s to early 1960s and those in Generation X, born between the early 1960s and early 1980s.
Boomers are aging and starting to retire in large numbers. They’ve shifted their lifestyles from accumulation of things to spending on experiences like travel and eating out. They’re also doing a lot of downsizing and are gravitating towards urban areas (like millennials). Gen Xers can be broadly defined as “Big Box” shoppers focused on value, sandwiched between saving money for retirement and often still subsidizing their millennial children.
Millennials are different in many fundamental ways. They tend to be trend conscious rather than brand conscious, are very technically literate and do much of their buying and socializing online. They are more heavily influenced by their peers through social media and gravitate more towards buying from socially responsible companies they feel they can connect with.
Development Wish List
In retail, office or residential space, the one word that sums up millennials is “efficiency,” whether that refers to a project’s size or its environmental impact.
In developing retail, millennials don’t always need a physical place to hang out with their friends. Gen Xers grew up hanging out in malls. For Baby Boomers, the gathering spot might have been the town square. Millennials are just as comfortable connecting with their friends on Facebook or other social media. This means you need to create a compelling experience to attract them in a space that’s often much smaller but more technology-rich than a traditional retailer.
This is one reason we’re seeing a shift from large stores with extensive inventory to a hybrid of traditional retailing and “showrooms” where customers can see or try on products but have them delivered to their homes. Ten years ago, what would have been a 5,000-square-foot store is now 1,500 or 2,000 square feet with no product in the store people can walk out with. You walk in, get fitted (if the product is clothing) and your purchase is shipped to you the next day.
At La Brea, Madison Marquette’s 90,000-square-foot adaptive re-use development project in Los Angeles, we’re seeing a lot of these trends take shape. One tenant, Bonobos Guideshop, has no cash registers. All transactions are done on an iPad. It features a “SELFY Mirror” that takes a customer’s full-length picture as they try on clothes, allowing them to text or email it to a friend for their approval. There’s no inventory, and all deliveries are shipped to the shopper’s home. That’s the sort of technology-infused experience it takes to keep millennials engaged.
As you think about the types of retail tenants you want your projects to attract, ask yourself if they are selling commodity or specialty items. For commodity products, millennials can go to Amazon or elsewhere online and get it shipped the next day. But for specialty goods, you want to make the retail environment more of an experience, and you can use technology when appropriate to make it more interesting. That’s the way to get millennial customers out to the mall and visiting the other shops and restaurants in your development.
Another technology enhancing the retail experience is digital storefronts that use large LED screens alongside, or even instead of, merchandise that lets a retailer create a new look for a store with a flip of a switch. It’s a cost-effective way to “reinvent” a store almost on a daily basis to reflect the trends your millennial audience is following. We’re also seeing, of course, the increased use of social media to track customer preferences and draw customers into the store.
Since millennials are into efficiency, they also prefer smaller residential spaces, but with proximity to good jobs, quality shopping and entertainment. Access to mass transit is even more important to them than other age groups because of their reduced affinity for car ownership and driving which some claim is a result of millennials’ somewhat lower incomes and student debt.
One thing that’s worrisome, though, is whether developers are overbuilding tiny studios and one-bedroom apartments. There’s a multi-thousand-unit development in Los Angeles, for example, that offered less than a dozen two- or three-bedroom apartments.
What happens when millennials start making life-changing decisions like getting married and having children? If we haven’t built somewhat larger units for them, or those units are too expensive, these millennials will be forced to move to the suburbs as they age. The generation coming after them may not be large enough to fill these units.
On the flip side, there may actually be a market for larger, but still space-efficient, two- to three-bedroom units in urban centers for millennials as they age that also caters to the retiring baby boomer generation. Amenities such as quality shopping and dining, employment and mass transit will continue to be key influencers.
In the office market, millennials again favor quality experiences and connecting with their peers over space. They don’t need a corner office with a mahogany desk and walls. They’re fine with pods (cubes are on the way out) along with nice gathering spots for groups.
Just as retail footprints have shrunk, we’re seeing the traditional office space dropping from 250 square feet per person to 150 or even 100 square feet today. With increased density comes the need for more parking and better amenities. This means not just the quick sandwich you’d see in the lobby of a traditional office building, but a more gourmet sandwich offering at a higher price point. Think about an interesting sushi restaurant where employees can hold meetings and the kind of stores where employees will want to shop on their lunch hour. By providing such things at La Brea, we’ve been able to realize accretive rents.
Success Story
Our La Brea mixed-use development in Los Angelesis a good example of how creative use of a site can deliver a profitable development catering to millennials.
Millennials are socially and environmentally conscious and respond to a location that has a story behind it. We spoke to this by featuring the building’s wood truss ceilings and exposed brick and steel beams. With specialty retailers taking less space than traditional retailers, we “short-sheeted” the building with shallower retail stores and used the extra interior space for creative office units. Since employers want their employees to stay longer and work harder, we structured the offices with break out rooms and attractive gathering places.
By being flexible and creative, we’re able to achieve a premium in rents. Offering amenities and building creative office space allowed us to achieve rents in excess of market rate; today, the retail part of the project is currently 100 percent leased while the office space is 94 percent full.
It’s also important to note that millennials tend to avoid anything that feels like a cookie-cutter approach. Every project, every property and every urban core is different. To reach them, it’s critical to understand the nuances of the project and of the specific subset of millennials you’re targeting: A creative district of struggling artists or non-profit workers demands a different approach than a higher-income cohort of young professionals working in gaming or ecommerce.
Millennials have an enormous amount of spending power but are probably the most difficult generation to fully understand. Stay nimble and creative and you can serve them profitably.
