Economy Watch: Why Boomers and Millennials Will Have the Greatest Impact on Real Estate

By Dees Stribling, Contributing Editor

Every year around the end of the second quarter, the Chicago-based Counselors of Real Estate produces a list it calls “Top Ten Issues Affecting Real Estate,” and it’s worth reading. If nothing else, it highlights the macro and not-quite-so-macro trends that affect real estate, so that little over the next 12 months will really come as a surprise to those paying attention. This year at the top of the list is demographics, which seems reasonable. It’s like the continental drift of human society: it works slowly but surely to change things completely; it sometimes causes earthquakes (youthquakes would be the human analogy); and there’s not a thing you can do about it, except try to understand it, and thereby profit from it.

Two key groups—large numbers of retiring Baby Boomers (born between 1946-1964), and the next mass population wave, the Millennials (born between 1980-2000)—will have the greatest impact on real estate through the lifestyles they choose in coming years, the Counselors assert. That basic demographic truth affects housing in all its forms: for seniors, the homes in which they choose to age-in-place, downsized homes, senior housing or assisted living; for Millennials, the decision to buy or postpone buying, and location most often being driven by amenities, such as walkable urban places. The real estate and service sectors targeting each group are adapting, too—medical facilities, retail, office and entertainment venues, to name a few; as well as infrastructure and distribution. Overall, demographic shifts will drive decisions across virtually all real estate sectors this year and for the foreseeable future.

No. 2 on the organization’s 2015-16 issue list is excess capital: namely, the funds that continue to flow from outside the United States to purchase U.S. real estate. The supply is driven by economies that have high savings rates, a shortage of mature financial markets and few safe assets. The investment rate is approaching record highs, which has the potential to put the squeeze on investments in the future. While investment in major cities continues, some non-gateway and edge cities are also experiencing higher levels of investment. Multifamily continues to be a darling, but investment isn’t limited to that. Investors want all kinds of secure assets that make U.S. real estate attractive to investors around the world.

Third is rising interest rates. They’ve been at near-historic lows, and the conventional wisdom is that they will stay that way for a while longer. But investors and homebuyers alike are preparing for rising rates. When it happens, it will devalue future cash flows, thereby devaluing assets. An interest rate rise could thus spur short-term commercial development and slow home sales. Rising rates will cause higher mortgage payments. But if Millennials jump in and buy before interest rates rise too far, it could create a second wind for the residential market.

Altogether, the list had 10 issues. The others included currency instability, urbanization (it isn’t just for Millennials), energy—good mostly, except for energy-heavy places—income inequality (bad for everyone), the neglect of U.S. infrastructure, crowdfunding and changing retail models.