The Future of Real Estate Investing: Macro Trends

From location selection to renting and sharing space, several factors are causing a shift in the marketplace

Macro Trends

Many changes are remolding the real estate world, but certain developments are particularly significant. Asset managers and investors participating in the survey agree that one of the biggest shifts in the industry is the growing emphasis on secondary and tertiary cities (Figure 1). Both groups also concur that a growing consumer preference for rental properties is a trend that is likely to inform their investment decisions. Beyond this, there was less agreement. Investors are more prone to cite a variety of developments influencing their thinking, including some that are viewed by fund managers as distinctly niche issues, such as co-working projects and facilities for digital nomads.

Location, location, locationFigure 1: Real Estate Decision Drivers

The attention being lavished on second- and third-tier cities is especially prevalent among investors based in North America. Memories of the last financial crisis and speculation about the likelihood of a coming retrenchment are causing worries around the durability of many of the high-end developments built to capitalize on the skyrocketing valuations in some major cities. Jenna Gerstenlauer, CEO of Sound Mark Partners, notes that her firm finances Class A projects in secondary markets, explaining that they have found “investors favor these sorts of projects over luxury condos priced at the top of the market that might not be able to command the same rents in a downturn.”

The growing concern is understandable. Real estate prices in the most expensive markets are enough to produce vertigo: A 60-square-meter apartment in London costs the equivalent of 14 years’ salary.1 The lack of affordability in some urban areas is changing behavior, sometimes radically. In San Francisco, where one square foot of living space now trades for approximately $1,000,2 one-bedroom apartments are being converted into barracks for six or more young tech workers whose only realistic option would be to join the legions of “super commuters” spending three or more hours getting to and from their jobs each day.

For many buyers and renters, quality of life is an important enough consideration that they are flocking, in growing numbers, to second- or third-tier cities. These are not all created equal from the standpoint of residents or investors. The most attractive growth prospects are often found in markets anchored by prominent universities, large medical facilities or major research and development centers.

Strong employment and low prices are an irresistible combination to young families and young companies, whose presence contributes to a solid and more resilient foundation for growth. A vice president at one of the world’s top 10 largest sovereign wealth funds said that their ideal residential property development strategy would “focus on university towns where there are space constraints, an educated workforce and potential for innovative micro-hubs.”

Rental Revival

Both GPs and LPs also point to a growing emphasis on rental properties. This cannot be entirely due to the well-publicized preference among millennials for flexibility and mobility, because their successors in Generation Z appear to be moving in the opposite direction, placing greater emphasis on stability.3 Nevertheless, rising home prices put ownership out of reach for a growing number of potential buyers. As Maurice Malfatti, Managing Partner at Blue Heron Asset Management points out, “The move away from home ownership to renters, and a focus on experience over ownership, is permeating all age groups, not just millennials.”4 Census data supports his assertion, revealing that the number of renters in the U.S. aged 60 or older grew by 32% over the past decade, compared to single-digit increases among younger cohorts.5

Sharing spaces

While European and North American respondents often bring a shared perspective, their Asian counterparts revealed a different set of priorities. Asian investors, for example, are much more likely to attach importance to the growth of co-work spaces as well as lodging and infrastructure for so-called digital nomads, who are not tied by their work to any specific physical location. This flexibility is made possible in part by the kind of technological infrastructure that one can find in many Asian cities, making it easy to survive for days at a time with only a smartphone to pay for goods or services.

Another contributing factor is the growing culture of entrepreneurship in markets that were previously dominated by state-owned enterprises and large conglomerates. More women are joining the white-collar workforce in Asian countries, a trend that is often accompanied by an emphasis on more flexible work arrangements. Commuting and pollution concerns are also more acute in many Asian cities, further reinforcing the trend toward remote work. The emergence of COVID-19 as a global pandemic has now suddenly accelerated this trend by triggering a work-from-home experiment of unprecedented proportions.6

Asian investors are also much more excited than their American and European counterparts by growth in nontraditional residential developments centered on the notion of shared spaces. In a new spin on the tried-and-true concept of flatmates, co-living properties are now marketed as intentional communities of like-minded residents in North American and European property markets. They are attracting significant attention and being associated with millennials’ penchant for sharing as well as an interesting and cost-effective choice for retiring baby boomers. Still, they remain niche developments in most developed economies.

There are some interesting indicators that the shared-housing business model is particularly well-suited to dense urban areas featuring very fluid workforces. This makes it a natural fit for Asia’s cities. The sheer volume of new construction, coupled with the number of workers who arrive in order to earn and send money to homes in smaller villages, has developers constructing more purpose-built buildings with private bedrooms and shared living areas.7 All of these preferences point back to Asia’s position on the leading edge of digitization, mobility and connectivity. Different dynamics in the North American market might prevent widespread adoption there, but it would not be surprising to see co-living developments take root in cities across other regions in the coming years.

"The move away from home ownership to renters, and a focus on experience over ownership, is permeating all age groups, not just millennials."

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1  Global Real Estate Bubble Index 2019, UBS Chief Investment Office, September 30, 2019.
2 Marco Santarelli, “San Francisco Real Estate Market: Is it a Good Place to Invest in 2020?,” Norada Real Estate Investments, February 2, 2020.
3 Manon Defelice, “What Gen Z wants at work will blow your mind,” Forbes, October 31, 2019.
4 2019 EisnerAmper Private Equity Real Estate Market Outlook.
5 Irina Lupa, “The Decade in Housing Trends: High-Earning Renters, High-End Apartments and Thriving Construction,” RentCafe, December 16, 2019.
6 Jessie Yeung, “The world’s biggest work-from-home experiment has been triggered by coronavirus,” CNN, February 15, 2020.
7 Michael Gerrity, “Alternative co-living arrangements gain popularity in urban Asia Pacific Cities,” World Property Journal, April 12, 2019.

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