MIAMI — The two biggest generations in history — millennials and baby boomers — will likely have the biggest impact on real estate this year and for the foreseeable future, according to The Counselors of Real Estate (CRE).
Noah Shlaes, chairman of the invitation-only professional association of real estate advisers, spoke to attendees at the National Association of Real Estate Editors (NAREE) conference today. He covered the association’s annual list of “Top 10 Issues Affecting Real Estate.”
Demographic shifts, excess capital supply and rising interest rates were at the top of the list.
“This list reflects a higher degree of economic uncertainty than in years past,” Shlaes said in a statement.
“Anticipation of rising interest rates, continued currency devaluation and excess capital flowing into the United States are all on the minds of our membership. Combine this with a growing wage gap and major changes in demographics, and we’ve got a lot to think about this year.”
1. Demographic shifts: Millennials will account for 3 in 4 workers by 2025 and their buying power will shape the economy, according to Shlaes. This generation is not as confident in the home as an investment; enjoys living in concentrated, walkable locations; and is “perfectly happy” renting, he said.
At the same time, baby boomers must decide whether to age in place in their suburban homes, downsize or retire in a senior community.
“Urban markets are going to be very hot,” Shlaes said.
He sees the homeownership rate declining as the sharing economy expands and investment expectations decline.
2. Excess supply of capital: Investment in U.S. real estate is approaching record highs as foreign investors seek to park their money in a relatively safe asset. Multifamily is the “darling” of investors, but single-family investment is also on the rise, Shlaes said.
3. Rising interest rates: Although interest rates aren’t necessarily going up or perhaps slightly, savvy investors and consumers are preparing for them. An increase in interest rates could slow home sales.
But if millennials who are forming households and having children jump in and buy to try to beat rising rates, the residential market could see a short-term sales boost, according to Shlaes.
Credit could also become more available, though higher mortgage payments will likely decrease consumer choice, he added.
4. Global instability/currency devaluation: The U.S. dollar gained 22 percent in the past year as other currencies — the euro, the yen — fell. As the U.S. becomes a “safe haven” for investment, this means the nation’s real estate is becoming attractive again internationally. But the global economy is “psychologically linked,” Shlaes said, so there’s no telling what effect trouble elsewhere will have here.
“It doesn’t look like the hot spots of conflict are going away,” he said.
5. Urbanization: All over the world, more and more people are moving to cities. And it’s not just millennials who want to live in “live-work-play” and “walkable” communities — so are older generations and that affects their housing choices, according to CRE. Baby boomers may want to be “rid of all the trappings of the home that was built for raising children and perhaps grandchildren,” Shlaes said.
6. Energy: U.S. oil prices have dropped as other countries have ramped up their production. This means boom towns have now become bust towns, leading to unemployment, rent declines and a drop in residents’ buying power, CRE said. How long this will last is unclear, though residents are generally used to boom-and-bust cycles, Shlaes said.
7. The gap between rich and poor: The gradual disappearance of the middle class combined with demographic shifts toward renting present a challenge for real estate, according to Shlaes. Forty percent of the nation’s wealth is in the hands of the top 1 percent.
This divide in purchasing power affects where people live, diminishes housing choices and homeownership, and contributes to delays in household formation for millennials and certain immigrant groups, CRE said.
8. Infrastructure: There is a seeming unwillingness in the political sphere to make infrastructure a major issue, even after events such as the bridge collapse in Minneapolis, Shlaes said.
For homebuyers, crumbling infrastructure is a healthy and safety issue, but also one of convenience: People are more and more unwilling to travel great distances to travel to work. And since information on infrastructure is more readily available, it will have an impact on buyer decisions, Shlaes said.
9. Real estate technology/crowdfunding: As Inman readers know, real estate is hot among techies these days. How hot? In 2014, venture funding of real estate startups jumped by $241 million from the year before, according to CRE.
“Online has dominated home search for quite some time, but it now has several names associated with it rather than just one,” Shlaes said.
“The industry is primed for disruption,” he added.
And in this swirl of innovation, the role of the real estate broker is changing. Previously, brokerages were expected to help buyers find a home. Now, real estate pros are expected to help consumers filter information, he said.
10. The changing retail model: The rise of services like Amazon have completely changed consumer expectations. This means anyone hoping to serve consumers needs to be ready to transact when they are, Shlaes said.
And when it comes to searching for a home, consumers don’t lose the ratings mentality they have on sites like Amazon and Yelp.
“There’s so much data available to people in selecting houses and so much of it is reduced to competing scores” for things like walkability, Shlaes said.
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