Renter Cohorts in Gateway Markets

As we begin to wrap up our weekly renter cohort series – engaging a powerful set of data fueled by RealPage’s lease transaction data and overall analytical prowess – it’s a worthwhile exercise to view the data through the lens of gateway markets and Sun Belt markets.

The Gateway/Sun Belt dichotomy has arguably been the key storyline in terms of market performance over the past 12 to 24 months. And while current trends do indicate there is some rebalancing of fundamentals between gateway markets and their Sun Belt counterparts, it’s important to understand the renter composition of these two regional groups.

This week we will explore the renter composition of gateway metros, followed by an accompanying write-up focused on Sun Belt markets next week.

The gateway markets have historically been heavily targeted metros from an investor’s perspective. The long-standing thesis has been that these areas offer a high-barrier-to-entry, favorable demographics, expensive single-family homes, and larger “brand recognition” (increased liquidity), among other driving forces.

While the shifts from pre-pandemic to current performances have certainly changed the investment thesis of some industry groups (note the inflow of capital migrating to Sun Belt markets versus gateway metros), one could argue that many of those pre-existing trends still hold true.

Rather than delve into the merits of which trends hold true today and which sentiments are narrative-led vs. data-driven, today we’ll discuss demographics, which can be a useful proxy for these purposes.

Arguably the most noteworthy gateway renter cohort storyline isn’t a cluster of renters at all; in fact, it’s the opposite. The Starting Out Singles cohort which makes up the largest share of renters in the country (some 32.8%) is all but absent in gateway markets.

This points to a key divergence between the cohort and gateway market characteristics. The Starting Out Singles group tends to live in lower rent areas (Memphis, Greensboro, Columbus and Indianapolis see the highest concentration of this cohort).

Another supplementing factor here is that renters in the gateway markets tend to be older and further along in their careers. Only Seattle has a median renter age that is below the 2020 U.S. average (30.8). Among the gateway markets, Anaheim (34.6) has the highest median renter age.

That is yet another sign that probably points to the high-barrier-to-entry from a single-family perspective (in other words, younger adults in those markets take a longer time to build up the savings required to purchase a single-family residence).

Where the gateway markets lack a high concentration of Starting Out Single renters, they certainly make up for it with a vastly overrepresented Affluent Singles cohort. Across the nation, Affluent Singles make up 15.6% of the entire renter base.

Every gateway market has a far higher concentration of this renter base, however. San Francisco and San Jose are similarly large, followed by Los Angeles. In each of those markets, at least one-third of the renter bases belonging to the Affluent Singles cohort.

Affluent Singles fit the profile of “renters by choice.” This group of renters brings in a median income of more than $100,000. Further, this segment’s median age of 37.9 is the 2nd highest of all renter cohorts (only the Independent Seniors group has a higher median age).

The Affluent Singles subset of renters are by and large renters who like living in dense, urban areas. Despite having the highest median rent ($1,562), this segment’s rent-to-income ratio of 16.6% is lowest among all cohorts.

Such a small rent-to-income ratio would suggest this group of renters would be able to afford a single-family home, but their lifestyle choices tend to show the opposite signals. That is, they are less likely than their cohort counterparts to be married and to have children. Put another way, this is a career-focused group of renters who like being close to the office.

One final group of renters that tends to heavily cluster in gateway markets is the Roommates by Necessity cohort. As the name would suggest, this subset of renters tends to live in two- or three-bedroom households in an effort to offset the higher rental rates that accompany gateway markets.

Yet again, each of the gateway markets sees a higher share of this cohort than the nation overall. Unlike the Affluent Singles group of renters, however, this cohort is just starting out in their career with a median age of 28.1 (the 2nd youngest of all cohorts).

That deviation between these renters and their home metros – again, areas that tend to boast a much higher median age – suggests the Roommates by Necessity group of renters are indeed a distinct group within the local marketplace.

That’s further supported by the relatively high median income (just shy of $80,000). These are renters who are probably working in industries that cluster in the gateway markets (sectors like Finance, Technology or Professional/Business Services) and therefore earn relatively high wages. Further, this Roommates by Necessity cohort tends to be more transient as their typical lease term is second shortest among all cohort types.

The following tables highlight some of the previously covered trends in a slightly different format. That is, most overrepresented and most underrepresented groups of renters in gateway markets. The comparison point is the difference in cohort share vs. that of the U.S. overall.

Extending this analysis in a slightly modified format is yet another useful way to leverage the data. This comparison shows the ratio of renter cohort by locale vs. the U.S. overall. This is a standard way in which the Bureau of Labor Statistics compares industry or economic sector clusters in markets.

The simplified explanation of this comparison is: How much more or less likely are you to find ‘Cohort A’ in ‘Market XYZ’ vs. that of the U.S.? For example, Affluent Singles are 2.7 times more common in New York than in the U.S. overall. Comparatively, on the underrepresented side of the equation, the Starting Out Singles cohort is 0.1 times as common in San Jose than in the nation at large.

Altogether, the gateway markets can be classified as a distinct group of markets based on a number of characteristics. While it will take a few years before the dust settles from the markets’ 2020 shakeup, there does appear to be some substantive demographics data that supports many of the pre-pandemic investment theses that supported incredible investment volumes into those markets.