Demographics Impact on Commercial Real Estate Investment

Americans are very mobile. They are willing to move to new areas that offer well-paid jobs and low cost of living. The US population has a net gain of roughly about 1% annually in the last 30 years to about 301 million people in 2007. However, the increase is uneven, i.e. in some areas the population increases rapidly while some areas the population decreases. As a commercial real estate investor, you want to invest in a growing and/or stable area to capture high rents and potential appreciation. Investing in declining areas may offer strong income now but potential for appreciation is slim and it may be difficult to sell the property later on.

As Americans move around, there are 3 major patterns of migration: from Snowbelt to Sunbelt states, from the coasts to inland, and from big cities to the suburbs. On top of those 3 patterns, there is a demographic impact of the Baby Boomers.

Migration from Snowbelt to Sunbelt States

Snowbelt states, e.g. Michigan, Ohio, and Philadelphia tend to have high concentration of heavy industry: steel, auto, etc. These states have lost jobs due to foreign competition from Asia where the labor costs are much lower. As a result, the population in many Sunbelt states has continued to decline.

Migration from the Coasts to Inland

About 153 million Americans are living within 50 miles from the coastline. They are moving from big cities along the coasts, e.g. San Francisco, San Jose, and Los Angeles. Inland areas in Sacramento, Riverside/San Bernardino counties, Las Vegas, Phoenix, Dallas, Houston, and Charlotte experience very rapid growth. There are 3 main reasons for the migration:

• Many companies and people are moving into these inland cities to take advantage of the lower housing costs and higher quality of living. A software engineer working in the suburb of Dallas will get paid a little bit less compared to working in Silicon Valley. However, his home in Coppell, TX is about 60% less expensive and 2 times the size.
• The San Francisco/San Jose lost about 10% of the high-tech jobs after the dot com bubble.
• The city of New Orleans lost about 50% of its residents after the hurricane Katrina as people moved to higher grounds.

Migration of middleclass from big cities to the suburbs

Within various metros, the high income families tend to move from the cities to the master-planned suburbs looking for newer, bigger homes and better local amenities. This is evidenced in

• Dallas metro: the population is either declining or growing slowly in Dallas within loop 635 while in Plano, Coppell, Keller and Grapevine it is growing rapidly. The people in these suburban towns are also more affluent.
• Houston metro: the population is also declining or growing slowly within Houston. However; in Sugar Land, Pearland, Katy, The Woodlands, and Spring the population is growing rapidly.
• Atlanta metro: the Northern part of Atlanta, e.g. Duluth, Alpharetta, Lawrenceville is experiencing phenomenal growth. The median house hold income in these areas is between $65-110K compared with $25-45K within the city of Atlanta where the population is declining.

The Impact of Baby Boomers

The Baby Boomers consist of about 77.5 million people who were born between 1946 and 1964. During this time, the US population increased by over 50 million people and grew an average of 1.7% annually instead of the typically less than 1%. Starting from the next few years, these baby boomers will be heading toward retirement. One or all of the following will happen:

• Many will move to retirement communities in the Sunbelt states.
• They will realize that (for those who wait till the last minutes) they need another source of income to supplement their limited social security income. They also discover that commercial properties offer strong cash flow which meets their investment objectives. It’s likely that the demand for commercial real properties, especially ones with NNN leases will be even higher in the near future as a result.
• They will need even more medicine. This means Walgreens, Rite Aid, and CVS should do well. They should continue to be good tenants as they always have. The properties they lease should hold value and continue to be in high demand especially in stable and growing areas.