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Demographics Drive Real Estate Prospects Mature but Expanding Economy Supports Canadian Investment
July, 2009
By Leanne Lachman and Deborah Brett
Investing where demographic demand is strong and deep is far more rewarding over time than investing in markets with little or no growth. Looking forward, the greatest urban population increases will occur in the world three largest countries: China, India and the United States.
Mature but still growing economies will offer attractive real estate investment and development prospects once the current recession subsides. In this context, think Canada, United States, United Kingdom, Ireland, Australia and New Zealand.
The size and capabilities of national labour forces are important investment considerations. Growing numbers of moderate and middle-income households generate demand for retail, residential and hospitality projects. Service employment growth supports office developments, while industrial expansion requires manufacturing and distribution facilities.
Two labour gaps are evident, one visible and one emerging:
• The skilled construction trades – carpenters, sheet metal workers, electricians, mechanics, operating engineers, etc. – are not attracting enough young people. Young people born in the United States are not being encouraged to work with their hands so technical schools target new immigrants. This aspect of secondary and tertiary education deserves more focus.
• As baby boomers begin to retire, the industry will lose management talent. The succeeding demographic group – Generation X – tended to bypass real estate because there were no entry level jobs when they finished college during the collapse in the early 1990s. Thus, the real estate industry lost a generation.
MIDDLE CLASS MARKET FORCE
Even in nations with a large percentage of low-wage workers or high-income inequality, recent economic growth and changing demographics have resulted in the growth of middle class and affluent households. As incomes improve in the developing world, moderate-income households can upgrade their shelter, move to permanent structures (with a lease or a mortgage), add more space and enjoy electricity and safe drinking water.
Earth’s population of 6.7 billion will reach 8.3 billion by 2030 and 9.2 billion by 2050. Developed countries will contain a smaller and smaller share of the world’s residents, but this category contains both growing and shrinking countries.
Japan, the countries of the European Union and Russia face population declines. Six English-speaking countries that encourage immigration and assimilation of newcomers will continue to expand – Canada, United States, United Kingdom, Ireland, Australia and New Zealand.
Although mature economies, and particularly growing ones, offer attractive real estate investment and development prospects, emerging markets present nearly infinite opportunities to create residential, retail, office, logistics and hotel properties, as well as master-planned communities to serve growing populations. More basically, those nations also need infrastructure investment to literally pave the way for contemporary real estate development.
By 2050, seven of 10 global residents will live in urban areas as compared with five out of 10 today. Meanwhile, 600 million fewer people will live in rural areas by 2050.
High-income nations include Canada, United States, Japan, South Korea, Australia, New Zealand and most of western and northern Europe. The category also includes a number of small Caribbean islands with affluent expatriate populations, several Persian Gulf countries, Estonia and the Czech Republic. The upper-middle-income cluster features a handful of African nations that have stable governments and well-developed economies, along with other such emerging markets as Russia, Romania, Turkey, Mexico, Argentina and Brazil. These classifications are helpful in identifying nations that warrant consideration for real estate investment.
The northwestern hemispheric region encompassing Canada, United States, Bermuda and Greenland contains 5% of global population. Between now and 2030, 67 million people will be added, representing 4% of world growth.
Populations in this region are the most urbanized in the world with Bermuda at 100%, United States at 81.4% and Canada at 80.3%. Still, the movement of people from rural to urban areas is ongoing.
By 2050, more than 90% of the region’s population will live in cities and suburbs. As is true in all regions, migration to urban areas in North America generates real estate demand in receiving locations.
Conversely, though, as populations fall in some less attractive urban areas, fewer residential and commercial buildings are needed. Demolition may be required. Excess space becomes more visible in times of economic stress, and abandonment is now increasingly evident in the least appealing neighbourhoods of low-growth or no-growth urban areas.
AGE-BASED CONSUMER TRENDS
The oldest baby boomers are now 63 years old. Retirements have begun among this generation, but the recent economic downturn will likely delay full retirement for many workers in Canada and the United States.
For half a century, commentators have fixated on the predilections of baby boomers, often convincing themselves that this demographic cohort was monolithic despite the fact its births extended over 18 years. If truth be told, the youngest boomers turned only 45 in 2009 and they have ample time to recoup any lost investments before retirement. The McKinsey Global Institute points out that the earnings peak for the oldest half of the baby boomers will occur in 2015; for the youngest half, the peak will not be until 2025. Boomers have lots of working time ahead.
According to a survey the American Association of Retired Persons (AARP) conducted a year ago, 14% of retirees were considering returning to work because of stock market losses and that proportion is likely higher now. For boomers approaching retirement age, this is a time of reconsideration. Although surveys have consistently shown that average baby boomers intend to work longer and more intensely past age 65 than their predecessors did, researchers have never been sure what would happen when the respondents actually reached retirement age.
Boomers are not the only large demographic cohort. Generation Y, or the Net Generation, which contains 15 to 32-year-olds, totals approximately 74 million in the United States (and a similar proportion of the Canadian population). As young adult immigrants arrive, they add to the ranks of this demographic group so it will exceed the size of the boomer group and then keep growing.
Retailers certainly recognize the size and consumption preferences of techno-savvy Generation Y. Colleges enjoy strong enrollments and apartment owners profitably cater to these young adults and their mix-and-match roommates. However, their importance to North America’s labour market and their potential real estate and consumer demands are not fully acknowledged.
The older portion of this generation, who are currently primarily renters, will become the first-time homebuyers who take advantage of the bargain prices when the economy begins to recover. In massive numbers, they will furnish those houses, become hardware store devotees, buy small cars, shop on-line, take ‘green’ seriously, travel, go to concerts and set new social and consumer trends of their own.
Generation X is the smaller demographic group born from 1965 to 1976 that falls between the boomers and Generation Y. Although this cohort has not received the same attention, the transitional Generation X offers a hint as to the probable behavioural patterns of its successors.
One of the interesting characteristics is low fertility – 20% of women ages 40 to 44 are childless, twice the level of 30 years ago. Furthermore, the other 80% of women have an average of 1.9 children versus 3.1 for their counterparts in 1976.
In Generation X, women married later and bore their first children at a more advanced age. Early indicators suggest a possible reversal of that pattern among Generation Y, but definitive data are not yet available.
The preceding article is an excerpt from the Urban Land Institute’s overview of Global Demographics 2009. Leanne Lachman is a real estate consultant and executive-in-residence at the Columbia University Graduate Business School. Deborah Brett is real estate and planning consultant. For more information, see the Urban Land Institute web site at www.uli.org.
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