Millennials in the Context of LIHTC
A Jan. 23 New York Times article entitled, “Peak Millennial? Cities Can’t Assume a Continued Boost from the Young,” noted that the cresting wave of Millennial migration to center cities that had fuelled a rental boom in many American downtowns. Regardless of whether this trend is due to rising incomes, younger households getting priced out of central neighborhoods, or the outmigration of young families, the trend will shape the future of center cities. And importantly for the affordable rental housing community, this trend will have significance for low-income housing tax credit (LIHTC) properties.
The table below illustrates population growth among renters earning above and below $50,000 annually in the 25 to 34 age cohort to the maximum income for a one-bedroom apartment restricted to 60 percent of the area median income (AMI) for the Washington, D.C., metropolitan area.
This table confirms what the Times article posited: that the migration of young households to center cities has reached its peak and will decline over the next few years. Interestingly, the decline is projected to be more significant among lower-income renters in this age cohort, which are predicted to decline by 2.7 percent annually in the Washington, D.C. area, compared to 1.8 percent annually for renters earning over $50,000. As the one-bedroom maximum income at 60 percent of AMI is predicted to reach approximately $50,165 by 2021, LIHTC properties offering one-bedroom units will be competing for an increasingly smaller number of income-qualified, young renters.
Income Disparity within Neighborhoods
This disparity is even greater in “hot” center city neighborhoods, such as the U Street Corridor in Washington, D.C. and Wicker Park in Chicago. Both neighborhoods experienced explosive growth among renters aged 24 to 35 from 2010 to 2016, particularly among households earning over $50,000 annually. Through 2021, the young renter population is projected to decline steadily in Wicker Park. However, in the U Street corridor, while the population of young renters earning less than $50,000 is projected to decline 2.5 percent annually, the population earning over $50,000 is projected to grow at a modest 0.45 percent. These trends indicate that the U Street Corridor, undoubtedly like many other amenity-rich center city neighborhoods, is becoming unaffordable, with an increasingly narrow band of younger renters able to afford the maximum LIHTC rents.
Lower-income neighborhoods, such as Anacostia in Washington, D.C., will be less impacted by these demographic trends. In Anacostia, the number of renter households earning under $50,000 is projected to decrease 0.8 percent annually through 2021, while the population of renters earning over $50,000 is projected to increase 1.8 percent annually. Anacostia exemplifies one possible outcome of this demographic shift, which is that middle-income renters will look for less-developed urban neighborhoods where they can afford to rent. However, these renters will continue to be over income-qualified to rent at LIHTC properties, which in these neighborhoods typically struggle to achieve the maximum allowable rents. LIHTC markets in these neighborhoods will likely remain softer than their “hot” neighborhood counterparts.
If the area median incomes of metropolitan areas continue to grow at predicted rates, LIHTC properties may be able to recapture some of the young renter population whose income growth has been slow. However, it is possibe that the gap left by young renters will be filled by older households, whether they are retirees and empty nesters who are downsizing to downtown areas or lower-income working adults and small families. Rental housing property managers and owners may come to expect a rent growth plateau, as has been experienced in the broader Washington, D.C. rental market, particularly in hot neighborhoods like the U Street Corridor. With a smaller demand pool, it may become more difficult to support the maximum allowable rents. In lower-income center city neighborhoods where it is already more difficult to achieve the maximum allowable rents, those maximum rents may grow further out of reach unless older households can replace the demand gap left behind by young renters.
These are the outcomes that LIHTC practitioners can expect if these demographic trends continue to play out as predicted. However, the trends also raise policy questions for LIHTC developers, housing finance agency professionals, and urban planners. Where will LIHTC housing fit into center city markets with a decreasing number of low and middle-income renters wedged between high-income and very low-income renters who are either over or under income-qualified? Future qualified allocation plans (QAPs) may need to take these trends into consideration when awarding tax credits, and LIHTC developers may need to be increasingly savvy to find center city markets where new properties will be supported by demand.