Co-Living and Millennial Real Estate Trends with Steve Basten #577

Steve Basten

Steve Basten joins us from John Burns Real Estate Consulting where he supports the firms building products research, including their in-depth forecasts of building products spending in new construction and remodeling end markets and, additionally, is responsible for demand forecasting and sector coverage of all residential building product categories. Before joining John Burns Real Estate Consulting, Steve worked for Kohler Co. as a product manager, responsible for new product development priorities and scheduling and, prior, in Kohler’s Corporate Development office as an M&A analyst where he was responsible for valuation analysis, deal-flow management, and competitive benchmarking for all of Kohler’s business units. He has an in-depth understanding of the residential construction industry from financial outlook to interior design trends and is very passionate about new product development and innovation.

Episode Highlights

  • What does John Burns Real Estate Consulting do, and what is their main goal they strive for?
  • Where does design specifically start, specifically for buildings and products featured at Home Depot and Lowes?
  • What are some major housing trends, and where should we expect to see them?
  • How would he describe micro-living?
  • John Burns and a couple others at the term coined the term “surban.”  What does this mean, and what is its target market?
  • Are the unique living trends here to stay?
  • What is co-living, and who would benefit from this?

Episode Notes

Steve began by giving a brief explanation of what John Burns Real Estate Consulting does. They are located in Southern California and based out of Irvine. They provide really in-depth consulting services related to the housing industry. They give expert advice to homebuilders and investor clients as well as building manufacturers. They strive to be the most trusted and respected U.S housing market analysts and consultants that they can be. In 2001, John Burns really saw a need for better analysis in the housing market, and the company has really grown into this highly passionate team of research analysts and consultants across the country. They work together to provide the best, most trusted U.S. housing analysis. Their purpose is to help everyone make smart investment decisions.

Aaron always looks forward to his emails and are the entire reason he reached out to him. They emailed back and forth before the interview, and what interested Aaron was that new construction is only 30% of the product which worries Steve the most. He works with Home Depot and Lowes, and their main focus is average consumers and rehabbers. The market opportunities for various building block categories is different. For plumbing, the end market opportunity might be 60-70% repair and remodel and 30% new construction. He is mostly talking about residential, although there is some commercial in here as well. Roofing is more like 80-90% repair and remodel and 10% new construction. It is tied less to housing starts than some other categories. Lumber, for example, is tied more to housing starts.

By category and market type, there is much different market opportunity. However, in general, for everything from HVAC, windows, plumbing, doors, flooring and appliances the market tends to be more R and R than new construction. The general rule is 60-70% of the end market opportunity is R and R. This is where he and his boss spend a lot of their time. In this case, R and R stands for repair and remodel. This means repair replacement and repair remodel. You are repainting your walls or swapping out an old appliance. You could also be doing a full remodel of your kitchen, including plumbing and lighting.

Aaron asked about the National Association of Home Builder’s index and if it would capture everything from the consumer repairing their home all the way to real estate investors completely renovating it. Aaron said he was part of the building association locally for a while, and there was a sub-group of remodelers. He was curious where their main focus was. Steve said it’s possible it checks repair and remodel, but he is not as familiar with this index.

Aaron and Steve next went on to discuss design and overall trends in housing stock. Aaron asked where design typically starts. For example, he pictures fashion starting in New York or Italy. He wondered if HDTV is driving it or builder research. He wondered where they make their designs for building as well as the products they will feature at Home Depot and Lowes. Steve said it depends on the channel. People at Lowes will design items for their customer base, whether it is wholesale or plumbing. Kitchen distributors, on the other hand, will design products for modelers. Wholesale channels would design specifically for architects and designers. It really depends on the customer base; but a general rule of thumb for preparing and remodeling, especially for remodeling that tends to lead design, inspiration for design comes from a wide variety of places.

At one place Steve worked, the designers were very in touch with color trends and textures, materials, and matte finishes. Sometimes they take cues from the fashion world, whether it be clothing or other industrial product designs. Steve has seen inspiration boards with everything from silverware to cars to clothing. It really depends on what they feel is the most inspiring part of that design ascetic and group it together to build it into an appliance. Great design tends to start in New York and the design hubs of the world such as Chicago and Los Angeles.

Aaron said he will actually be at a fashion show in New York City this weekend. One of his nieces has a product that is being featured on the runway. He used to live in New York City, so that’s why he was curious about where design stemmed from, especially when it comes to architecture and design products.

They next went on to talk about trends in housing, including tiny houses and micro-living. Aaron wondered what the difference was between them and what micro-living even is. Steve said this is simply the smallest format of apartment living. It is very minimalistic in lifestyle. Steve actually lives in a studio apartment himself that is 540 square feet, and that is not even considered micro-living. You would be talking about very minimalistic where the bed would fold down from the wall. You may have a very small, compact kitchen and small format bathroom. A consumer who tries to live micro is not accumulating a lot of possessions. It is an interesting trend and probably more common than the millennial generation. You see these documentaries where that age group is simply more inclined to travel and less inclined to stay at a place very long. It is an interesting trend and definitely something that will not go away soon.

Aaron said one of his favorite projects he has seen on this is the oldest existing mall is in Rhode Island. The project is called Arcade Providence. The bottom floor is retail, and the top two floors are micro apartments. The vast majority of them are around 250 square feet. It only includes a small bathroom and living area and a bed and desk in the back. It is super minimal and reminded Aaron of when he lived in New York. It is almost like they are taking inspiration from New York and making it fashionable.

John Burns and a couple others at the firm coined an amazing term they called surban. This is that suburban/urban living and is typically retail on the first floor. It is a little bit closer to the suburbs, but you still get that urban feel and lifestyle with some suburban amenities. This includes being close to good restaurants and grocery stores. Some of the surban lifestyles are gearing more towards a micro product type.

The target market for this seemed to be professional. It included nurses, and doctors, and entrepreneurs who had businesses in the building at the bottom. These were co-work spaces, and it had so many trends. The beauty of it was that it was in the oldest existing mall in America.

Aaron asked how micro-living compares to tiny houses. Aaron said there were a lot of people in his life in the mobile home space, and he thought they were really fancy mobile homes. This is a simple way to say it, but there are certainly similarities and differences. Similarities would be that they tend to be homeowners and residents who value fewer possessions and want more flexibility to travel if they want. There is not a huge emphasis on a lot of material out of square footage. A clear difference is that they are detached homes, so often they will be in a more rural area and less urban. However, they tend to be similar demographics. Millennials are more inclined to live in a tiny house versus a family of five.

Aaron asked if micro-living and tiny homes trends are here to stay, or will they go the way of condo hotels. This was where they converted hotel rooms into rentable condos, similar to Airbnb before they became popular. Steve wondered if this was driven by them needing to convert the places to something during the downturn. He did not know too much about this, although Aaron said it was a money-making thing. Aaron wondered if these will stick around, although Steve did not know whether they were here to stay. It’s a little early to tell, but from a demographics standpoint it appears that as millennials form households, they are certainly going to be a segment of that demographic who wants to live in a minimalistic format home. They are not going to be as inclined to move up into a 4,000 square foot home as previous generations had. There will be clear demographic differences.

At the firm, this is something they really cover. There is a team that covers demographics, so this is a really interesting concept and one they should be further into now. It will be interesting to see if seniors downsize. The seniors in Aaron’s life have gone from 3,6000 square feet to over 4,000. It is hard to know, but Aaron has lived in big cities a decade of his life and has a very different perspective. Aaron said he is great at small spaces and would rather do things. This is why he thinks the demographics piece is really important. As a real estate investor, he looks at things like the economy. He loves John Burns’ book Big Shifts Ahead where it talks about demographics, their behavior, where they are going, and some of the trends the company is seeing.

They next went on to talk about co-living since it blends a little bit of the micro-living. Steven described it as your Airbnb type of situation. These are people who needed a temporary solution for housing. Steven lives in the mid-west, and it is a temporary spot for him. He has a studio apartment in the downtown area, but he is looking to break the lease. He knows he is going to be moving eventually, and temporarily he needs a housing solution. He is currently looking at Airbnb, which there are a lot of in the area and hosts who will do a 1-2 week stint. It could be only $10-$20 a night, and he is already in a lower rent area unlike California. $10 a night for a month is only $300, which is less than a third of what he pays in rent. This is why it is an attractive solution for him if he does not need a lot of possessions. This is a compelling thing since it offers him flexibility, considering he also travels a lot for his work and would really only be there two weeks a month.

You look at the young professional or somebody who is a little bit of a nomad, and temporary housing is an attractive solution. Rents vary widely by market, but in some cases it is $10 a night. You can save $600-$700 a month to go towards other things. It varies so much. When Aaron first moved to New York, he lived in a residential hotel in midtown Manhattan. At the very top was a youth hostel, which he had never been exposed to at the time. It is big in Europe, but you pay a very minimal amount to be in a huge room with several other people. It might be co-ed, or it might not.

Something new has popped up in L.A. called In Hollywood, you pay $50 a night or $15 for a day, and it is literally an open room with over-sized bunk beds. This is probably actually a little cleaner than some of the hostels you will find in other areas. This is definitely an upgrade, it is just really interesting to see their target that is clearly millennials. It is almost offensive if you are in real estate investing or are a realtor. You read the language of the process, and they are basically saying, “Screw ownership, who needs that. You need flexibility.”

As far as co-living, Aaron has seen some interesting design trends in urban markets where builders are specifically building spaces to where you have a 3-bedroom apartment that is fully furnished. They do a beautiful job on the main living quarters with a high-end kitchen and highly designed family room. The consumer coming in pays one fee that is going to include rent, utilities, and maid service. They are surrounding it with services and just pay one fee. The target market here, specifically for one Aaron had in mind, is technical people in the Bay Area. There is a lower end where you have pod share in Los Angeles that is clearly for the millennials, and then you have co-loving where builders are building to suit for professionals who plan on sticking around but do not know for how long.

Some real estate investors are doing similar things in the single-family rental space. They rent out each room separately, and they surround it with services. It is a play on a fully-furnished rental, they’re just doing it by room. The person in charge here said they get the professional market: teachers, nurses, as well as young couples. Steve said if you look at how we break up demographics in John Burns’ book, the 1980s and ‘90s are the shares of the connectors. These are generations used to sharing and probably grew up sharing a room with their siblings. Therefore, they are more comfortable living in shared environments.

Now, more than ever before, you have these platforms like Airbnb that are verified hosts. There is generally a safety factor. You may be comfortable sharing an environment with someone because it is generally known that they have been vetted if they have good reviews. There is more inclination to do this to save the money. There is value placed on this and travel more.

Aaron asked Steve if the boomers are moving to more urban markets or interested in co-living as they look for connections as they age and lose friends. Steve said it is not too different from what we have seen in the last thirty years. Certainly grandma and grandpa are moving in with their kids as they get older. Aging in place is a huge thing. From a building product standpoint, there is a lot of investment going on in designing and developing products that keep mom and dad in the home longer. This includes a bathtub and they can easily step into or out of it. It could also mean wider entry ways and doorways that can accommodate walkers or mobilized wheelchairs. There is certainly a lot of investment and awareness about what this generation needs to stay in the home longer.

The last thing they discussed was multi-generational living. Aaron brought this up since he saw a local building area that built out 1500 homes. What is interesting compared to last time is they are not building the entire neighborhood then selling it. They are only building upon an order. In this particular buildout, there are two different phases that are targeting different demographics. So far, there are four phases. The two early ones sold out; and specifically the #2 higher end on the first buildout was specifically marketed multi-generational. This second phase with the two different neighborhoods with 3-4 models each is known as flexible housing. It is basically the same thing with a junior suite on the bottom.

Aaron asked if people are trying to depart from the term “multi-generational.” Steve reiterated saying it was not a new concept. Mom and dad have been moving in with their kids for a long time. However, it is interesting to see the product shift. If they are moving into an existing home, they may be moving into a new home now. There is certainly more products out there on the construction side that cater to the multi-generational buyer. However, he does not think people are departing from the term “multi-generational.”

If you think about demographics, they show that 1950s innovators and 1940s achievers need to have housing solutions as they get older to stay out of assisted living. You also have the boomerang generation coming home from college to park it for a few years. That extra space allows them more privacy and isolation. When Aaron thinks of multi-generation, he thinks of family with an older generation, but maybe they are rebranding to encompass the younger generation coming back. There is some rebranding happening to give it a different connotation and lifestyle to keep grandma and grandpa out of the nursing home.

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