I typically contemplate commercial real estate in this space, but what currently fascinates me is the residential real estate market.
You, no doubt, have read or heard about rapidly increasing rents, sales above the asking price, lack of inventory, single-family rentals, and the affordability crisis. What is causing this and why?
Demographic Impact on the Market
It starts with demographics, particularly two large cohorts—Baby Boomers and Millennials.
Add in high land costs, development regulations, soaring material costs, and investor purchases of single-family homes, and you’ve got a challenging market. While I expect cost issues to subside in the short term, the demographic impact on the market will last.
Is the residential real estate market a place to invest? Maybe so. Let’s look specifically at Baby Boomers’ impact on the market.
The Supply Issue
Baby Boomers, now ages 60 to 75, seek an active lifestyle with fewer ownership responsibilities. Many have led a healthy lifestyle and are opting to stay in their homes longer. Yet by doing so, they reduce the housing supply that would otherwise be available to Millennials, now ages 25 to 40, who would typically be buying homes.
Also adding to this supply crisis is the significant percentage of houses recently been bought by investors to offer as rentals, thereby reducing the number of homes for sale.
Modify or Move Out?
Some Baby Boomers want to downsize, but they like their current home and community and would rather not spend up to size down. Instead, they are modifying their existing home, with changes like a first-floor master, zero-entry showers or entrances, or smart home devices. They are likely to remain in place for 10 to 15 additional years, restricting the supply for potential, younger homeowners.
Create New Community
A drive in the suburbs shows the popularity of “active adult communities,” also labeled as “age-restricted” or the gentler “age-qualified.” The appeal of developments like Del Webb or Epcon Communities include living among other retirees, low- or no-maintenance exteriors, sports and cultural activities, and nearby amenities.
Another similar choice is Independent Living Communities, essentially apartments or condominiums offering dining, transportation, programming and concierge services. These properties often have an assisted living component for those who want to stay in place even when they need a greater degree of care.
Co-Habitation: It’s a Thing
Although not widespread (yet), the co-habitation or cohousing option is out there. Take St. Martin’s in the Pines Cottages in Birmingham. It has three buildings, each having three stacked homes. Each home has 10 bedrooms and a kitchen, created with community in mind.
Quimper Village, a 55+ Cohousing Community in Port Townsend, WA, is yet another example. Twenty-eight single floor condominiums make up this self-governing community, in which owners work as a team in community maintenance chores.
Why Not Lease?
Some Baby Boomers opt for leasing in their later years. And why not? They can live carefree by leasing a nice condominium with concierge service (for groceries, laundry, transportation or all the above) and be all set. There’s lots of reasons Boomers opt to rent, including downsizing, convenience, flexibility, cost savings, amenities and walkability.
What do these options mean for private real estate investing? Are there opportunities here? I say yes.
A large, wealthy cohort, Baby Boomers demand housing options which are currently in short supply. Since the oldest Baby Boomers are in their mid- to late-70s, there will be many opportunities to satisfy this growing demand.
With prices for most commercial properties at all-time highs, this space provides a smart value-add option for investors—if you invest with well-capitalized developers or funds who have a proven record in senior housing properties.