The pandemic is remaking the business case for a number of real estate sectors, including suburban multifamily. Simply put, during a time when a contagious, sometimes-deadly virus is circulating, people want as much space as possible and the suburbs provide that. 

But it is just as likely that demographics are playing a role as well in this trend.

For a decade now, developers have been building urban apartments to meet demand from boomers and millennials, who wanted to live closer to the action. Those companies achieved strong rent growth.

As some urban areas became overbuilt, apartments in the suburbs began enjoying higher rental growth around 2014, according to a new report from PGIM Real Estate. 

"While suburban development activity is also rising, it remains well below the pace of inventory growth seen in the most urban submarkets," PGIM Real Estate wrote in its report. "Stronger fundamentals have also supported stronger total returns during the past five years."

Now that millennials have started growing up, those suburban apartments could enjoy even more robust demand. The population of people in their 30s will increase by 7.1% by 2025, while the rest of the population will only grow by 3.8%, according to The US Census Bureau.

"The aging of the millennial population into their mid-30s will provide a tailwind to suburban demand, as more and more young couples move out of urban areas in search of more space and better school districts as they start to grow their families," PGIM Real Estate said in the report. 

Unfortunately, the market has been moving toward smaller apartments. PGIM Real Estate says the percentage of studios and one-bedroom units in newly completed buildings has risen significantly. By 2018, those floorplans were more than 50% of all units completed. Even with higher concessions, the firm says rental growth for studios and one-bedroom units have outpaced two-or-more-bedroom apartments in most markets.

PGIM Real Estate compares the shift of renters to the suburbs with what happened in the 1970s and 1980s when the migration of Baby Boomers ignited a suburban building boom. During that time, most new apartments had had two or more bedrooms.

"We expect a return closer to that unit mix, as today's younger renters couple up and have children—albeit later in life than in previous generations," the report said.

Add an aging millennial cohort to acceptance of telework rising out of COVID-19, and larger unit sizes may become much more popular in the next generation of new developments.

"We already expected the shift in unit sizes simply based on growing household sizes," says Lee Menifee, PGIM Real Estate's Head of Americas Investment Research. "With COVID and the response to that, work at home, at least part of the time, may become more common. To do that comfortably definitely requires more space."

But Menifee cautions that it may be too early to make conclusions teleworking. "We're still very early on to see how productive work from home is going to be and what the preference is for both employees working from home and employers looking at some of the issues related to working from home," he says.

And, for some millennials, even bigger apartments won't provide enough room.  "These trends are also very supportive of the single-family rental sector," Menifee says.