The last few years have brought dramatic change in the world of commercial real estate, leaving many developers struggling to find firm footing. The upheaval began with the onset of the COVID-19 pandemic, but even as pandemic constraints have eased, elevated inflation, high interest rates, and other economic factors have continued to apply pressure on the market.
These macroeconomic pressures are having a profound effect on some demographic sectors in the United States, which in turn are affecting trends in real estate. “Even as some areas within commercial real estate may be seeing some stabilization as patterns and routines start to more closely resemble those of the pre-pandemic era, there are demographic forces in play that are driving even further change,” said Mike Thomas, head of PNC Real Estate. “But with change comes opportunity, so it’s important for real estate businesses to stay informed about these demographic shifts in order to evolve and remain competitive.”
5 demographic trends impacting real estate development:
1. Aging Baby Boomers
Commercial developers have opportunities in building projects geared for retirees as baby boomers transition to retirement. An estimated 10,000 baby boomers will reach age 65 every day through 2030, at which point, all members of that generation will be of retirement age.
One perhaps surprising trend is the degree to which the baby-boom generation is contributing to demand in the U.S. rental market. Between 2009 and 2019, the total number of renter households was up 14%, but those headed by a person aged 65 and over went up by 43%. Most of this growth reflects the 37% increase in households in that age group, but the rentership rate went up slightly as well. Over the next two decades, as more baby boomers move into the 75-and-over age group (an age bracket when rentership typically increases), this rate is likely to continue to rise.
The desire to capitalize on high demand and tight inventory in the housing market may account for some of the impetus for baby boomers to sell their homes. But other late-middle-age dynamics may also be in play, as baby boomers, many of whom are empty nesters, may be looking for fewer responsibilities and more flexibility in their retirement years.
The trend toward an increase in senior renters could have significant impacts for real estate developers in terms of this generation’s preferences when constructing new rental properties. Older renters are likely to have different interests than younger renters in terms of features and amenities, and they also tend to occupy rental properties for longer.
2. Shift to Remote Work
The shift to working from home that began during the COVID-19 pandemic appears to be a permanent change, at least for some companies in the U.S. While many workers have returned to the workplace, more than one-third of employed Americans (34%) reported working from home full-time in 2022. These workers were likely to have higher levels of education, with 54% of employed individuals aged 25 and over working from home versus 18% of those with a high school diploma and no college. If this trend continues, commercial real estate may need to find ways to adapt and decentralize corporate office spaces.
3. Millennials Move to the Suburbs
Demographic trends in the millennial generation, roughly defined as those born between 1980 and 1999, will have a number of impacts on real estate demands. At more than 72 million strong, millennials are the most populous generation in the U.S.
They also comprise the largest share of homebuyers and are primarily interested in single-family suburban homes, according to the 2022 National Association of Realtors®. This reflects a reversal of a pre-pandemic trend toward moving to large city centers. According to a 2021 study from the Pew Research Center, only one-in-five U.S. adults express a preference for living in a city, down from closer to one-quarter of respondents in 2018. A recent survey revealed that 45% of millennials expect to buy a house in the suburbs – a shift that may stem in part from the expectation of the continued ability to work from home, as millennial homebuyers look to suburban and rural areas that offer better housing affordability.
4. Homeownership and Household Formation
The homeownership rate has increased since the COVID-19 pandemic, jumping from 64.6% of adults in 2019 to 68.6% in 2022. This is due in large part to a surge in first-time buyers under age 45. Millennials represent 43% of homebuyers, the highest share of any generation.
According to a market profile from the Environmental Research Systems Institute (ESRI), 3,181,557 households are likely to be formed over the next five years, accounting for a 2.4% increase overall (0.49% per year). In terms of renters versus owners, the rental rate is projected to decrease 0.5% during that same time frame from 31.7% to 31.2%, while the owner-occupied housing unit rate will likely increase from 58.5% to 59.1%.
Total household growth is likely to slow over the next few years, partially because many millennials were able to realize the goal of household formation due to favorable conditions for homebuyers that occurred during the pandemic, as well as deteriorating affordability and slowing population growth.
5. Housing Affordability
Despite the clear interest in homeownership, particularly among millennials, it’s a dream that may be unattainable for many due to high housing prices, shortages in housing supply, and the increased cost of mortgage lending due to elevated interest rates.
Home prices rose 37.5% between the beginning of 2020 and early 2023, pushing up the median sales price for existing homes to $375,400 in March 2023. With higher home prices, first-time homebuyers have to save more in order to afford initial costs needed to secure a mortgage – a challenge made even more difficult in the face of elevated inflation rates.
Estimated housing payments (including mortgage, insurance, and property tax) needed to purchase a median-price home in the U.S. escalated to $3,000 per month in March 2023, pricing more than 2.4 million renters out of the market. The estimated annual income required to afford median homeownership costs rose 20% in 2022, to levels well above the national median income for renters.
The supply of single-family homes for sale was 30% lower at the end of 2022 than at the end of 2019, and the rate of construction of single-family homes decreased in the second half of 2022, as rising mortgage interest rates left purchasing out of reach for many potential homebuyers and inflation led to increased building costs.
The Bottom Line
Significant macroeconomic challenges and changing population demographics continue to put pressure on the real estate market, particularly in terms of residential properties. “Even as pessimistic as the outlook may be for some potential homebuyers, there are areas of opportunity for developers,” said Thomas. “To realize the potential that is resulting from these new dynamics, commercial real estate businesses need to be willing to adapt and take non-traditional approaches to cater to the needs of evolving segments of the population, including millennials and the baby-boom generation.”
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