Demographic Trends That Will Affect Commercial Real Estate Development
Today's demographic changes present challenges for commercial real estate developers, but they also offer lucrative opportunities to firms creatively adapting to new demands. Commercial real estate development firms must cater to the end-users needs, from where they live and work to retail, to office space and multifamily housing.
Being successful in the development industry means being on the front end of trends, thinking about what those trends mean for the long-term. Developers that understand those major demographic changes will have a competitive edge. Many factors can influence demands in commercial real estate; for example, homeownership is challenged by rising mortgage rates and increased student loan debt among potential consumers. Changes in government policy have reduced subsidies to homeowners, which can decrease the value of homeownership among potential buyers. The pandemic has affected commercial developers' plans and builds for potential retail, restaurants, and entertainment spaces.
Also, advancements in technology have had a significant impact on the commercial real estate industry with things like rideshare apps and autonomous driving vehicles, fewer people own cars, so commercial real estate features like parking garages may need to be repurposed.
Amid many broad trends, here are five specific societal and demographic changes impacting commercial real estate development:
1. Household Formations
According to a 2020 Urban Land Institute report, 12.5 million of the expected household formations will be led by millennials. Renters are on track to comprise 58 percent of those new households, which will drive demand for multifamily housing. Increasingly, younger new households want communities that mix the best of city and suburban living with cohesive walkable retail and entertainment spaces.
Development opportunities within this trend include converting shopping malls into mixed-use facilities with both housing and retail, as consumers are evolving to prefer convenience over the traditional mall experience. And with less demand for owning cars, consumers are less likely to demand commercial garages and parking lots.
2. Aging Baby Boomers
Commercial developers should see ample opportunities in building projects geared for younger retirees as the Baby Boomer generation transitions to retirement age. An estimated 10,000 Baby Boomers will reach age 65 every day through 2030. Essentially, about 18% of the population will be looking for new activities to fill their days in the next 10 years.
Here, real estate opportunities include specialized retirement community apartment buildings with amenities like on-call doctors and bike racks, i.e. “Club Med” style communities with ample wellness programs and activities.
3. Growing Millennial demographic
Millennials are roughly defined as those born in the 1980s and early 1990s. Their generation will have many impacts on commercial developments, including different needs in office and retail space. These demands include things such as entertainment and dining options combined with retail locations or a higher demand for shared office space as more people work from home a greater percentage of the time.
According to reports, millennials are less interested in owning homes as they prefer the benefits of renting and are often too bogged down by student loan debt as discussed earlier. Homeownership plunged from 2005 to 2015 and is now at one of the lowest rates in decades, which increases the demand for rentals in multifamily housing.
4. Women in the Workforce
The rise of women in the workforce, including in executive positions, will drive demand for flexible office space and other amenities. Women hold roughly 47 percent of all jobs in the U.S., up from 38 percent in 1970, the resulting changes are part of today's growing need for flexibility in their schedules.
This means commercial developers need to rethink the office space and amenities which they offer, gravitating toward offices with fewer square feet per employee, so smaller offices and shared working spaces are in higher demand. Developers will have to start thinking about incorporating things like child care facilities, pediatricians, or even grocery stores for convenience into future builds.
5. Migration Toward the South
Over the next decade, the southern regions are expected to draw 62 percent of the household growth in the U.S.. Because the South offers more affordable housing and more land for your money, it attracts a younger demographic that will cause a higher demand for rental housing and townhomes. Essentially, developers can expect softening demand in the North and Midwest as retiring Baby Boomers flock to the South.
The Bottom Line
While many of today's demographic changes threaten commercial developers' traditional projects, they also create new ways for developers to profit. By adapting to these shifts, commercial real estate can evolve toward more lucrative opportunities.