The Future of Real Estate Investing: Opportunities and Threats (Part 1)

Mobility, the internet and demographics: Their net effects on the real estate market.

Mobility, the Internet and Demographics

Even respondents who agree on the significance of certain secular trends can find themselves disputing their impact. Any given development can have both positive and negative influences on real estate portfolios. Sources of disruption can intersect, overlap, and amplify each other depending on context. In order to make some sense of the myriad forces at work on their investments, we asked survey participants to comment on how they view the net effect (i.e., “pros” less the “cons”) of the trends on their activities.

Mobility

Changing modes of mobility are collectively expected to present an opportunity for real estate investors. Electric cars are increasingly practical, popular and cost effective. Autonomous vehicles are on the cusp of becoming widespread. Broadband internet and a multitude of delivery options mean people are less tied to specific locations in order to work, shop, eat, or be entertained. When they leave the house, they are increasingly likely to use a ride-sharing service. Deliveries via automated drones are seen by many as not far off.

These changes will affect demand for a variety of commercial properties, including dining and retail. Similar to the way we have seen the market for shopping center properties sour while warehouses soar, demand may shift away from restaurant spaces built for on-site consumption to staging areas optimized for food preparation. Real estate investors may want to look to Uber founder Travis Kalanick’s newest venture as a bellwether: Having exited the shared-ride space, Kalanick is now investing in “dark kitchens,” which function as staging areas for restaurants’ delivery businesses. Like ride-sharing, it is a model in which underutilized assets can be split or shared among multiple renters based on ebbs and flows in demand.

Figure 2: Impact of changing modes of mobilityChanges to mobility may profoundly reshape the outlook for real estate investments that are premised on the status quo, but they have not yet overcome the vital importance of location. The owners of a parking garage in the middle of Manhattan can repurpose that space into condominiums, fulfillment centers, or shared office spaces. But the owner of a parking garage located next to a suburban strip mall currently has far fewer options.

This dynamic may change over time, as new forms of transportation raise as many questions as they answer. Shaunak Tanna, Head of Structured Investments at Basis Investment Group, views mobility solutions as a major wildcard: “Uber and Lyft have made arrangements with some suburban office park campuses to provide discounted rides to nearest transit centers, which reduces the need to be located next to transit hubs. Once you get to fully autonomous cars, maybe we’ll see more suburban sprawl as people are able to use their commute times effectively and be productive at that time, as opposed to now when they’re driving.”

Internet

Society's shift toward internet-based interactions is another trend that is widely viewed as a net opportunity. Commerce and social interactions increasingly take place online, leading to declining interest in traditional commercial developments and the replacement of these facilities in growing numbers by logistics infrastructure. The future, however, is not all warehouses and dark kitchens.

Figure 3: Impact of shift to internet-based interactionsAs fewer businesses are patronized out of necessity, there is a growing emphasis on providing pleasurable and memorable experiences. As counterintuitive as it may seem, people spending more of their time online means urban cores are being repurposed with residential mixeduse developments centered on open-air markets, specialty stores, cafes and restaurants. Rather than fixating on transactions, commercial developments are increasingly focused on being integrated into the daily lives of residents, satisfying their craving for experiences and community.

It is unclear how this trend will ultimately play out. It is possible that the trend toward greater urban density will continue as people seek proximity to a cultural core and are able to push less exciting necessities to the periphery, but it is also possible that the newfound freedom from fixed workplaces will render distance irrelevant, spawning even more sprawl.

Demographics

Aging populations are also widely perceived to be a positive development, particularly in Asia, where 8 out of 10 fund managers view this demographic trend as an opportunity. A growing elderly population will fundamentally alter how residential and commercial properties are designed and developed. For example, newly designed urban spaces are more likely to incorporate green spaces with additional seating and activities for elderly residents.

These types of developments may become more commonplace as more seniors balk at leaving their homes. Gerstenlauer points out that “a lot of (assisted living) investments are in trouble because seniors don’t want to leave their home and live in isolation with people their age, and because this generation can’t afford it. The majority of baby boomers don’t have the $4,000-$10,000 per month to spend on rent in one of those facilities.”

Figure 4: Impact of aging populationEven with this reluctance, the sheer size of the baby boomer generation means that a flood of single-family homes owned by boomers will be hitting the market over the next few years. Strong demand from younger buyers may not materialize, distorting the market and making this an important consideration for any investor in residential real estate.

Millennials, on the other hand, are more likely to prize mobility and want the option of picking up and moving to wherever their work happens to take them. Joe Lubeck, CEO of American Landmark, notes that his firm has responded to this trend by devising rental programs that allow tenants to move geographies without penalty as long as they stay in one of their properties.

Oscar Vasquez, COO of Encore Capital Management, cautions against generalizing too much when it comes to generational preferences, pointing out that 83 million millennials are not likely to be in lockstep when it comes to their preferences for urban or exurban life. He goes on to note, however, that it is broadly true that “major life milestones like marriage, family formation, and the purchase of their first home are delayed by five to eight years. They’re carrying a tremendous amount of student debt, and wages have not been trending upward. It’s not that millennials won’t do these things, they’ve just postponed them.”

Pat Jackson, President and CEO of Sabal Capital Partners, agrees while pointing out that delays reflect shifting priorities among millennials: “Thirty years ago there was a flight to the suburbs, but now people are moving back to cities. Younger people want to rent—they don’t care as much about some of the things earlier generations cared about. Younger people view flexibility as valuable. They saw their parents lose their nest eggs in the previous cycle, so many of them view the cost to own as being higher than the cost to rent.”

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Legal Note

This information is provided for education purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.