Big Trends Affecting Real Estate Values

Episode Sumary

Welcome to today’s episode: Big trends affecting real estate values. We have four areas we want to cover today. The first is technology followed by demographics, urban density and then demand for housing. Those are our four big trends. Yes, there’s 40 but hey we can’t do them all in 20 minutes. Today we’re talking about:

  • Technology (Utility Costs, Construction Design/Architecture, Mobility)
  • Demographics (Smaller families, SRO, Seniors housing, Relocation)
  • Urban Density (Population explosion in downtowns, Suburbs as City-Centers)
  • Housing Demand (Life-time Renters, Economic Knowledge)

Episode Transcript

[00:00:21] Starting with technology, there are big trends that are affecting values in these areas that I'm about to share with you. The first of course is utility cost. We are using more wind and solar than ever before it's becoming a larger part of the energy grid with respect to the footprint of delivering electric to our urban areas. Can you imagine the day that we have solar paint where every building this collecting solar energy for its own use? We're not quite there yet but in some states wind and solar are producing as much as 15 percent of the power grid. And that number is only expected to rise.

We see fuel prices decreasing concurrent with the increase in the use of wind and solar. We also see a decline in coal- for the use of coal- for producing electric. Those utility costs have a positive impact on values because every time you can reduce cost in the operation of a building there is the possibility of increasing value based on that efficiency. Technology is impacting utility cost which means it's affecting real estate values construction design is also affecting values.

There's so many examples we have of positive impacts on construction design that save costs and increase efficiency. The simple one is that at one point we use galvanized pipe and then we went to copper and then PVC and now PEX. And every time along that path there is a reduction in cost and there's an increase in efficiency. Multiply that times 50 positive changes and construction design is having a real positive impact on value. One of the impacts is longevity because we're better at it now, meaning design, our buildings are lasting longer. They have a greater potential value based on having a longer life than once was thought reasonable. It continues to increase.

[00:02:30] Another area in impacted by technology is the impact of architecture. Today we have green buildings in LEED buildings are LEED buildings, buildings that are tech savvy. Buildings that offer both of those components (Green and Tech) have significantly more value than those that don't. Conservation efficiencies and the potential for efficiencies in technology- when both are provided in the same building.

[00:03:00] The third area in technology is mobility. I'm not going to just say driver-less cars. I'm suggesting that mobility or autonomous travel will have a serious impact on real estate values and we don't quite know how that's going to go yet. There's so many examples of positives and negatives. I'll use Los Angeles, my hometown, as an example. We can see already in the last ten years a direct impact on the expansion of the subway system to the increase in values of properties that are close to subway stations. That's not uncommon but it is uncommon for the metropolis known as Los Angeles because it's been missing for so very long.

[00:03:49] Mobility will have a direct and great impact on property values. I think as the technology changes with respect to how we move people and boxes (resources or content) in those boxes, things that we consume things and that we use, as we find better ways to move that around it will have a further great impact on values.

[00:04:18] What if we can put our product distribution centers in non-urban areas because there's no significant increase in costs to transporting that content or moving that distribution center there because it has direct access to the major cities anyway. We don't know the answer to that yet but we do know mobility technology is moving rapidly to the point where even General Motors in 2019 will have its own mobile taxi service or, autonomous taxi service.

[00:04:53] It's not just the Uber's and Lyft's of the world that are thinking about this. It's not just Google. There are large companies putting tremendous amounts of dollars into determining how we will be mobile and that will directly affect real estate values. What happens when we're able to move distribution centers and warehouses out of the major metropolitan's? That's going to free up a lot of dirt. It's going to free up a lot of space that we can utilize for some other purpose. That's the big question I have.

[00:05:32] If we don't need distribution centers warehouses and industrial close in to our cities, or in the middle of our cities, if we can move it even 10 or 20 miles away because we have easy access because of mobility or autonomous travel- to and from those areas- what's going to happen with all that newfound dirt (land area) inside these major cities? I don't know the answer to that but I'm certainly interested in seeing what occurs over time.

The recap on technology; utility costs, construction design, the impact of architecture and mobility.

[00:06:10] The next topic is demographics. There have been significant changes in demographics. The recession of the early 2000s has had a real large impact on demographic changes. We have today smaller family sizes as part of the impact of the Great Recession.

[00:06:28] We also have an aging population. Twenty years ago, there were not very many companies focused on housing just for seniors. Now we have real estate investment trusts that invest exclusively in senior’s houses. So how long has that trend? Probably a good long time. Demographics is having an impact directly on how people invest in real estate.

[00:06:53] We also are creating living in smaller spaces. This is referred to in the multifamily market as SRO, or single resident occupancy. That leads itself to tie in with the smaller family size. We have smaller family size. We also have more singles which means we have the need for spaces that houses just a single person in major markets. But it's also a functional space. So just because it's smaller doesn't mean it's any less efficient in terms of its use.

[00:07:24] We also have a large swath of our population that are permanently located where they reside presently- in that city (in their home city).  Those unwilling to relocate.  What I mean by that is we have less mobility. In the 2000's and before you could pretty much count on X-million of people moving from one metro to another and you could track them by U-Haul trips, you could track them by housing sales, you could track them by job growth in certain cities and job losses and others. Some of those metrics are still true but the bottom line is people are less willing to relocate now than they were in the past which means that they're staying put.

[00:08:05] That doesn't mean people won't move potentially from one house to another. But they're not like as likely to move from one metropolitan to another. That's why we're seeing shortages in workers in certain parts of the country; because people are no longer willing to move to another place for an opportunity when they have opportunity in a place where they already live. When a person has a good job and potential for moving within that company or moving to another company within their same market they are less willing to move from one metro to another to seek an opportunity.

[00:08:42] That demographic of people unwilling to move is a trend that's affecting property values because people are staying put and that is different than what it was a decade ago or certainly two decades ago.

[00:09:00] The third area is urban density. The best example I have is what's occurred in the last few years with respect to San Francisco and Chicago, as an example. In both of those cities more than 20,000 people have moved into the cities within two miles of city hall. And you couldn't say that 10 years ago- you can say that people were moving in that number back into the metropolitan areas as they have been in the last four or five years.

[00:09:31] Does that mean that there's an abandonment of the suburbs? The answer is no. Suburbs have not been abandoned but they are becoming is their very own Central City.

[00:09:42] The best example I can give you is Denver. Whereas Denver is a major metropolitan Fort Collins and Boulder, although they're within an hour of Denver, there's not a lot of people commuting into Denver from those enclaves because those places have their own office buildings, they have their own job centers, they have their own shopping and neighborhoods, medical services, schools. They are self-sufficient. Although they are attached to Denver (Fort Collins and Boulder) not as many people commute to Denver for jobs because there are jobs in Fort Collins and Boulder.

[00:10:23] The same is true for other major metropolitan's. Urban density, although it's increasing in the major metropolitan, has not caused the suburbs to suffering as they would have in the past because of people moving exclusively into the major metro for jobs and away from the suburbs. They now have their own central-city in their suburb. And that's made a difference in terms of values for those cities.

[00:10:48] There is certainly a higher concentration of jobs in major markets but that hasn't excluded many suburbs from creating their own sense of place and having their own job center without the need for a significant commute away from the suburb into the nearby major metro. When I say significant commute, I mean something more than 30 minute.

[00:11:07] Our last area is demand for housing and how the demand for housing is affecting real estate values. Today you can still buy a house in rural Ohio for $35,000 or $45,000. Although that's unusual you can't say the same for the Metropolitan of Phoenix Arizona, right? Demand has a direct impact on value. That's no new news but demand for the type of housing is also changing.

[00:11:40] When I say the type of housing I'm referring to the own-versus-rent decision that people make. We have fewer owners of homes today than in the last decade. Although that number may inch up a little bit as family formation increases, as younger people, those in their mid 20s, now move out of the home and start forming their own families perhaps the ownership rates will go up a little bit. People are far more tepid to buy a home today than they were because everyone now knows that home prices do go up but they also do come down.

[00:12:25] And that fact now, that it's known to the current generation, makes some of them less interested in home ownership and perfectly fine with becoming lifetime renters. That lifetime renter that's not buying a home is out of the home buying market. That is a change in the demand for owner-occupied housing that we haven't seen before at this sustained level. The home-ownership rate has been steady at 66-68%. Yes, maybe we're there now- but will it remain even that high? Whether it ever ratchets back up to the old days of 70 percent homeowners- I don't see that happening anytime soon.

[00:13:05] The demand for housing has changed. And just like all politics is local, so to housing demand and pricing is local. The demand for housing has changed in terms of the home-ownership dynamic.

[00:13:23] Those are the big trends I wanted you to be aware of. Will they change over time? Always! That's what I think is occurring today and I think these areas will have a large impact on the value of real estate going forward. Technology, demographics, urban density and the demand for housing.

[00:13:44] Thanks for listening today. This has been John Wilhoit on Real Estate.

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