How major economic and demographic trends are creating new opportunities and challenges for property managers.
Motivation
Property
Whether we embrace it with open arms or resist it every step of the way, we live in an era of rapid technological advancement and lifestyle transformation. Whereas previous generations could rely on similar patterns of work and personal life for decades at a time, we are faced with the need to adapt to significant changes occurring every few years. This rapid pace of change places unprecedented importance on forecasting and preparation. For those of us interested in growing our careers or businesses it is now a requirement to stay ahead of the curve. This paper aims to describe patterns that are deemed significant to real estate property management in the next two decades.
Property Management: A Robust and Growing Industry
According to the latest U.S. Census data the real estate property management industry experienced an average growth rate of 7-8% at the beginning of this decade. The data portrays a substantial and robust industry with over 140,000 active firms generating nearly billion in revenues. By virtually all expert accounts the industry is expected to continue to grow at an accelerated pace in the next two decades as the urban landscape of America undergoes a major transformation. The following four factors are considered amongst the most important demographic and economic forces behind this transformation:
1. The Baby Boomer Effect
2. The Generation Y Factor
3. Municipalities and the Planned Community Concept
4. The Local Living Movement
In this paper we discuss each of these factors and try to understand their main implications for property managers. At the end, we provide a series of conclusions and recommendations for further action.
1. The Baby-boomer Effect
Perhaps the most significant and most frequently discussed demographic topic of the past two decades has been that of the baby boomer generation nearing and entering the retirement age at an accelerating pace. This generation which has arguably had the loudest say in forming many contemporary trends, stands to have an even bigger influence given the degree of wealth amassed.
Who Are They? Numbering around seventy-six million, the American baby boomer was born between 1946 and 1964. A demographic that would be significant on account of its size alone, this group's characteristics include a higher level of education than previous generations and assumptions of lifelong prosperity and entitlement developed during their childhood in the 1950s. Aided by modern medicine and a better diet and exercise regime, the baby boomer generation refuses to get 'old' and continues to push the traditional age envelop by partaking in an active home, travel and work lifestyle.
Money Flows. After decades of gainful employment, running businesses and investing the proceeds, the typical baby boomer is looking forward to a prosperous and indulgent retirement. Multiple factors are at play that could make this dream a reality for many. For starters, baby boomers happen to be closing in on their peak earning years and by virtue of their higher levels of education enjoy healthy annual incomes. As another factor, consider that most baby boomers purchased their homes when home prices were substantially lower (as compared to household income) allowing most to pay off their principal residence mortgages early on. Most boomers offspring are also finishing college and forming their own families, further reducing expenses. Add to this mix the fact that this generation is increasingly in line to receive inheritance windfalls from aging parents and you have the recipe for a significant and unprecedented degree of liquidity in the next 20 years. In fact it is estimated that 10 to 30 trillion dollars will be spent by baby boomers on a variety of small and large ticket discretionary items in the next two decades.
New Digs. As baby boomers retire and are faced with an empty nest, they generally tend to downsize and move from larger single family homes to town homes or condominiums. In addition, given the ample funds at their disposal and the added free time to travel, they are increasingly purchasing second homes and vacation properties. It is quite imaginable to predict that the real estate picture in the next decade will be very different from what we have grown accustomed to in the past 30 years i.e., one that has been focused on owning a large plot of land in suburbia with a single family home built upon it.
What it means to property managers. Both types of transitions i.e., the move to smaller homes (typically condominiums or townhome complexes) and the trend towards vacation home ownership (especially resort properties) are foreseen as major drivers of demand for property management services as both of these trends happen to be away from unmanaged to managed or planned communities.
Not A Landlord, Will Invest. Real estate is a cyclical market with corrections taking place on average every ten to fifteen years. However history shows that well selected and professionally managed, real estate is a secure and stable investment vehicle with solid income generation and capital preservation characteristics. Whether you chalk it up to human nature, common sense or both, as we retire, we tend to want more stability and security in our lives and this is especially true when it comes to our nest egg. We tend to move our investments away from growth oriented, higher volatility assets such as stocks to more stable ones such as bonds. Today, despite the availability of many innovative financial products, real estate investment for the most part requires individuals to become landlords or take part in limited partnerships. While this is certainly possible and practiced gainfully by many, it is not for everyone. This requirement inherently limits real estate's exposure as a mainstream investment class. It is foreseen that in the next 25 years, real estate will become increasingly productized (from current 2-3% to above 50% securitization) and made available as an array of mainstream investment funds by major brand name investment firms.
What it means to property managers.This phenomenon will see the flow of trillions of dollars of new capital into real estate properties that will by definition require professional property management services to maximize yield.
2. The Generation Y Factor
Large suburban lots, quiet cul-de-sacs and spacious 5-bedroom homes may have sounded like the epitome of high living to the baby boomer generation but to the typical gen Y'er the same phrases spell isolation and a maintenance nightmare. While not talked about nearly as much as baby boomers, generation Y whose leading edge turns the home buying age in 2008, constitutes a powerful market force to study, comprehend and plan for.
Who they are. Gen y'ers, sometimes referred to as echo boomers were born between 1980 and 1999 and number upwards of 80 million as a large subset of the American population. This generation which is an even larger demographic than baby boomers is already entering the home rental and purchase market, a trend that will be accelerating in the next few years.
Technology & Media. Whereas computers and the Internet represented new tools to be learned and gradually incorporated into everyday work and home life for baby boomers, they are the natural bedrock of daily communication and social interaction for generation Y folks. Gen Y'ers are highly proficient and perhaps more importantly very comfortable with technology. More than 80 percent use the internet for school related work as well as for social networking. It is not a leap of faith to imagine that they will be making major purchase decisions such as those related to renting or buying homes based on information and research found on the Internet. Keep in mind that generation Y grew up being bombarded by mainstream marketing and branding messages and therefore developed a healthy dose of disdain for mainstream media. The advent of the Internet and explosion of niche media has afforded this demographic the luxury of being highly individualistic. In essence they take it for granted that they can tune into the information they like (be it music, news or home listings) when they like and in as much, or as little detail as they like. This is in sharp contrast to the TV generation who was essentially at the mercy of the broadcaster for type and timing of content being delivered.
Real Estate Preferences. Survey after survey shows that core city living and walking urbanism are hallmarks of generation Y preferences for real estate. As it turns out this demographic has a strong attraction to living and working in close proximity to downtown or at least re-styled suburban city centers where shopping, entertainment and work can all be readily accessed without having to drive. In his article titled Gen-Y Reshaping American Cities Rob Goodspeed quotes an important statistic: 77% of generation Y plans to live in core urban areas. This is a noteworthy figure to property managers considering the size of this demographic group (more than 80million) and their impending entry into the home buying and rental age. According to Goodspeed the bulk of this generation will be entering the housing market around 2012.
What it means to property managers. It is reasonable to predict that we will be seeing a massive surge in demand for managed real estate as Gen Y enters the home rental and purchase age. The current downturn in the housing market positions them well as first time home buyers and it is reasonable to expect they will be the primary force carrying the market in the next 5 years. The significance: property managers need to carefully consider how to appeal to this generation and its unique communication style.
3. Municipalities and the Planned Community Concept
Recent surveys show municipalities across the country and especially in the Sun Belt have been increasingly embracing Home Owner's Associations (HOAs) and other forms of managed communities with open arms. The so called planned community model is quickly surpassing the traditional single family lot subdivision as the preferred form of new community development. Upon closer examination the phenomenon is easily explained as a matter of economics: managed / planned communities allow municipalities to download costs while still maintaining similar property tax revenues-what is affectionately termed light governance by experts in the field. To this point, HOA's and other community associations are often responsible for trash pickup, code enforcement and landscaping of common areas, all responsibilities previously held and paid for by the cities. According to a recent paper by Jones L. Warren, the number of homeowners associations grew from 8,500 in 1970 to over 300,000 in 2005. By conservative estimates there are currently close to 400,000 Home Owners Associates (HOA's) and other types of managed communities in the United States with an estimated 80 million residents. In the next decade, HOA's and other managed communities are expected to grow at approximately 8-10% per year as the most preferable form of new community development for municipalities.
What it means to property managers. This is another driver increasing the number of properties requiring professional management and therefore another long term contributor to the rise in demand for professional property management services.
4. The Local Living Movement
Increasing energy costs, the shift towards greener living, mounting pressures on family schedule and last but not least a renewed longing for a sense of community can be cited among reasons contributing to the appeal of core urban living. In her article titled Urban living offers 'vibrancy' not found in suburbia Maureen B. Aikins a free-lance writer living in Greensboro, N.C. argues that when urban living is done right it offers a kind of vibrancy which contrasts sharply with the isolation of suburbia. Aikins cites greener living, ease of getting around and a desire for a more intimate community setting as the three main reasons people are attracted to the walking urbanism concept. As further evidence from the academic arena, a recent noteworthy CNN article titled Is America's suburban dream collapsing into a nightmare? quotes Christopher Leinberger an urban planning professor at the University of Michigan and visiting fellow at the Brookings Institution as saying "this trend [toward core urban living] stems not only from changing demographics but also from a major shift in the way an increasing number of Americans -- especially younger generations -- want to live and work. The American dream is absolutely changing". He further cites a recent market survey indicating that up to 40 percent of households surveyed in selected metropolitan areas want to live in walkable urban areas. All in all the above factors translate to further upward pressure on demand for core urban living which in turn contributes to further demand for property management services.
Summary & Conclusions
- The demographic and economic factors discussed in this paper translate to a significantly growing demand for property management services. However this does not mean that property managers can simply continue business as usual and expect their share of this pie to grow. As droves of sophisticated, well-off and technology savvy consumers migrate to life in managed communities and as real estate becomes increasingly securitized, the standard of property management service will rise sharply. This will likely accelerate the current consolidation trend in the property management industry as quality leaders take market share. In a nutshell, property managers need to change their game to meet and exceed the established norms of service or risk seeing the erosion of their market share in the years ahead.
- Property managers are seeing and should expect a significant influx of aging yet uncharacteristically active residents into managed communities in core urban areas. These new residents demand upscale finishings, high end appliances and availability of amenities such as hi-speed internet access as well as well-equipped social, recreational and fitness facilities. Be prepared to change your preconceived notions of a seniors apartment complex.
- A large swath of generation Y will be entering the housing market in the next few years. This generation communicates using the language of technology and implicitly expects personalized and prompt access to information. Property managers need to meet this generation on its own terms by providing powerful web presence and rich, up-to-date and interactive content about and access to their properties.
- The above two trends will see communities of two distinct age groups: baby boomers and generation Y living side-by-side. Interestingly many of the property features and amenities that appeal to the boomer generation are also attractive to generation Y (e.g., hi-speed internet access, social space & fitness). The challenge here is in the details of how these services are configured, presented and delivered. Each generation has its distinct tastes, life schedule and communication preferences. Property managers need to examine these differences in detail and then tailor the services to accommodate these preferences in a cost-effective manner.
- There is massive upside potential for property managers who are willing to be flexible, open minded and progressive. These property managers will prepare their business with a combination of technology and respond to the needs of this new breed of residents, owners (and increasingly shareholders). There seems to be little doubt that these property managers will see tremendous increases in their occupancy and resident satisfaction rates and ultimately their market share.
- On the horizon are exciting opportunities for fresh revenue streams from new categories of goods and services tailored to the distinct tastes and needs of both the baby boomer and generation Y residents.
About Trusterra
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About the Author
Robert Sardary is a veteran of both the software and the real estate investment / property management industries. He is passionate about researching these markets and the impact of intelligent software on productivity. Robert regularly publishes his findings as white papers, online articles and on his personal weblog called "The Cool Property Manager".