Mariwyn Evans writes about commercial real estate for REALTOR® Magazine. You can reach her at firstname.lastname@example.org.
Who's Your Customer?
Aging boomers, young Millennials, and an increasingly ethnic population will fuel the real estate business in the coming years.
October 1, 2011
Real estate is a people business, right? But who are those people—the ones who rent apartments and buy buildings, run companies and work there, operate retail stores and shop at them? Using the 2010 census data, let’s look at a snapshot of real estate users today and in the near future.
Staying in the Game
The U.S. population is graying—rapidly. The first baby boomers are turning 65 this year. In seven states, the median age of residents rose to 40 or older, according to U.S. census data. While Rust Belt states in the Midwest continue to have the oldest populations, the percentage of 55-to-64-year-olds is also rising in places like Raleigh, N.C., and Austin, Texas, which attracted migrants a decade ago, says William Frey, senior fellow in the Metropolitan Policy Program at the Brookings Institution in Washington, D.C. Boomers are aging in place in part because they’re staying in the job market longer. The Bureau of Labor Statistics says that boomers over 55 will account for 25 percent of the work force in 2018.
One place boomers won’t be going, at least not yet, is into apartments. Almost 80 percent of those over 65 own their own homes and “the propensity to rent drops for older groups until they reach 75,” says Ron Witten, president of Witten Advisors LLC in Dallas. The exception: middle-aged professionals “displaced from home ownership,” says Dirk Needham, COO of Macbeth Apartment Services in Carlsbad, Calif. Unlike renters of a decade ago, these new apartment dwellers are more interested in price savings than amenities, he says.
Demographics Are Destiny
The strength of the economy will influence how fast the young start new households, when boomers will retire, and how fast the spending power of ethnic groups grows. Through good times and bad, demographics dictate who the future tenants, buyers, and owners of commercial real estate will be. Smart real estate practitioners are already taking notice.
Ready to Join the World
The Millennials (or echo boomers), born between 1981 and 2000, are on their way to becoming a powerful force in real estate demand. “The population in the 20–34 age range, which is considered the prime years for apartment rentals, will grow every year for the next two decades,” says Witten. With apartment construction coming off of 2009 lows of 90,000 units, it’s no wonder national apartment occupancy rates were near 95 percent this summer and effective rents have risen 3 percent since mid-2010.
Tighter lending standards are likely to make apartments the home choices of more people—young and old—during the next decade, says Arthur C. Nelson, director of the Metropolitan Research Center at the University of Utah in Salt Lake City. The 2010 census found that 34.9 percent of Americans were renters—compared with 32.5 percent in 2000. Nelson says that percentage could reach 38 percent in the years ahead.
How fast young people establish new households hinges on jobs, says Witten. The good news: The U.S. Bureau of Labor Statistics reports that civilian unemployment in the crucial 25–34 years demographic dropped from 10.1 percent at the end of 2010 to 9.7 percent in July 2011.
While most Millennial workers lack the seniority to influence office design decisions, the preferences of social media and software firms, which often attract many younger workers, may be an indicator of things to come. These companies tend to want more open offices in more city-like environments, says Andrew Cheney, CCIM, principal of Lee & Associates in Phoenix.
But if Millennials don’t rule the office yet, their influence is already evident in the retail sector, says John Bemis, executive vice president of Jones Lang LaSalle Retail in Atlanta. “It’s all about mobile apps,” he says. Smartphones let young shoppers compare prices at the mall and enable retailers to push out special offers to shoppers.
Multiethnic—and Moving Up
Minorities now make up roughly one-third of the U.S. population—a figure that will rise to 54 percent in 2050, according to census predictions. They’re also young. While the median age for all U.S. citizens was 37.9 years in 2010, the median age for Hispanics was estimated by the Census Bureau in 2009 as 27.3 years old. Blacks at 31.9 years and Asians at 35.7 years were also younger than the national median age, while whites had a median age of 39.2 years.
The Census also found that Hispanics and Asians are increasingly moving beyond coastal and border areas. Cities that showed a high percentage gain in Hispanic population include Nashville, Tenn.; Greenville, S.C.; and Charlotte, N.C. Asians are moving too, to Orlando, Phoenix, and Riverside, Calif.
Increases in minority populations are a plus for multifamily since more minorities are renters—52 percent of Hispanics, 40.5 percent of Asians, and 55.5 percent of African Americans, according to the 2009 American Community Survey. This compares to only 29.1 percent of whites who rent.
Jobs That Need Offices
The U.S. Bureau of Labor Statistics estimates that the economy will grow by 10.1 percent between 2008 and 2018, but “a 10 percent increase frankly isn’t too much, especially when you consider that employment dropped by almost 5 percent in 2009,” says John McDonald, the Gerald W. Fogelson Distinguished Chair in Real Estate at Roosevelt University in Chicago. Better news for office owners and leasing reps, McDonald says, is that businesses that are heavy users of office space will outperform the general economy, growing by 11.5 percent in 10 years. The biggest increases will come in the area of professional services, which will add about 2.5 million office workers and 4.2 million jobs, says McDonald. The top three gainers are consulting services, computer system design, and employment services.
Whites will remain the largest group in the labor force through 2018, but job growth for whites will slow compared with that for other races, according to the Bureau of Labor Statistics. Asians, who accounted for only 4.5 percent of the noncivilian workforce in 1998, will be 5.6 percent of the total by 2018. Blacks will go from 11.6 percent in 1998 to 12.1 percent in 2018. But, it’s ethnicity, not race, where the big changes happen. Americans of Hispanic origin made up only 10.4 percent of the workforce in 1998; by 2018, however, they’ll comprise 17.5 percent, the bureau estimates.
They Want More Value
The 2009 American Community Survey found that Americans’ income fell by 2.9 percent between 2008 and 2009, so it’s no wonder that more middle-class consumers are being “squeezed down to the value price point,” says Bemis. He sees this shift as more a cyclical response to the economy than a fundamental change. Still, the appeal of “value shopping” has made discount retailers an increasingly common tenant in mainstream malls, says Will Ander, senior partner at McMillanDoolittle LLP, a Chicago-based retail consulting firm. Groceries, big-box stores, and even services like health care have also embraced malls. “The lines indicating which retailers belong in a regional mall versus a grocery store–anchored community center are becoming blurry,” says Jon Southard, director of forecasting for CBRE Econometric Advisors in Boston.
Value retailers are also getting a boost from the growing buying power of Hispanic consumers—which was estimated to reach $1.2 trillion per year in 2010, according to the Census Bureau. It stood at $860 billion in 2007, according to a University of Georgia study. First- and second-generation Hispanic families are larger than non-Hispanic ones (3.2 people per household compared with 2.4 for non-Hispanic, according to the Selig Center for Economics) and have more younger members. With more people to support per family, Hispanics often choose value retailers, says James Rodriguez, who heads the Hispanic Real Estate Team at CB Richard Ellis in Los Angeles. And they often buy from local and regional companies, which do a better job of serving them than national chains, says Rodriguez. Until recently, higher rents have kept many of these retailers out of the mall. Now, however, vacancies are making owners more willing to negotiate.