Originally published August 2021.
With the population moving to the US’s South and West, investment opportunities have followed.
Nearing my retirement, I am considering some of the investment lessons I have learned along the way. One of the most significant is the importance of demographic trends to the long-term performance of real estate markets, sub-markets and ultimately the assets themselves. In the 1980s, when institutional real estate investment was less broadly accepted, institutions focused on getting exposure to real estate through Class A office buildings in ‘gateway’ US cities and major shopping malls throughout the country. Investment in industrial and residential apartments was much less common, and deviating from the top five or six well-established markets was also met with some scepticism and questions about liquidity.
Today, real estate research teams at all of the major brokerage and advisory shops are actively working to uncover demographic trends that will influence movement of Americans across cities and within metropolitan areas. These changes in human behaviour generate and moderate demand drivers all across the real estate menu – office, retail, industrial and residential apartment communities – and create niche investment opportunities in student housing, medical offices and so on. Remember when Seattle was just another rainy city? Or Austin was simply the capital of Texas? Today, these cities and other ‘ascending’ markets are hotbeds of institutional investment across many property types, delivering tremendous appreciation potential.
Recently, AFIRE published its International Investor Survey, which is rich with data on the plans of global institutional real estate investors. According to the results, investors rank demographic and population trends as having the most significant impact on their investment decisions for the next 10 years. Given this priority, it’s not surprising that Austin, Dallas, Atlanta, Denver, Phoenix, Charlotte and Nashville are the only US markets that made significant upward moves in the market rankings and all are included in the top 10 targeted for increased exposure by the institutional community.
Have recent demographic trends led to this interest or is this something that has been going on for a while? The recently released 2020 US Census data indicates that the US population has been shifting to the South and West over the past 50 years. Per the 1970 US Census, less than half (48%) of the population resided in the South and West, while the Midwest and Northeast accounted for 52%. Today, the shift is very apparent, with 62% now living in the South and West. The Midwest and Northeast have each seen a drop-off, resulting in only 38% of the US population now living in those regions. Note that all of the markets listed above with significant upward moves in the AFIRE rankings are located in the South and West.
At Barings, we have studied the outperformance of markets and learned that cities with strong educational attainment and an outsized base of STEM (science, tech, engineering and maths) employment have the potential to deliver above benchmark returns. In recent years, employers have been following the educated worker, which has increased the vitality of many ascending markets. Investors have been watching and are starting to place their bets. Demographics is their ace in the hole.
