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August 25, 2018

We are living in a transformative period in which the baby boomer generation’s aging population is affecting the real estate market as a whole. Some of the boomers have passed the age of 65 while many more are still waiting to join them. In 2000, 2.5 million Americans became senior citizens; today that number has reached 3.5 million, with the numbers continuing to exponentially rise.  The average increase of life expectancy, which is attributed to such factors as improved health, nutrition and medicine, is proving to be a game-changer. In 2030, there will be approximately 72 million Americans over the age of 65, according to the US Bureau of Statistics.

Implications of the Growing Baby Boomer Demographic

The implications of this growing demographic have pension funds and insurance agencies reworking their overall strategies to cater to all of these future retirees. An aging population does not necessarily account for a less productive or less well-off population. Despite the 2007/8 crisis and the years of economic downturn that followed, the majority of these baby boomers had a good economic run and are far better off financially than the generations that followed them. This population segment’s wealth is one of the largest drivers of the US economy, and the real estate industry is one of the primary benefactors.

For many seniors, once the retirement years arrive and the children have long left the nest, the question of downsizing will be on the table. For most of them, their homes are their biggest asset and serve as a nest egg. If needed, they can be sold to finance or subsidize their post-work years. Alternatively, they can trigger a release of equity to help their younger generation to climb up a rung in the housing market.

The majority of Americans are financially capable of retiring quite comfortably. This is because they made their initial housing purchases in the late 70’s and through until the early 90’s. This has resulted in trillions of dollars in housing wealth tied into family homes with no mortgage debt.

The Question of Downsizing

Many will decide not to downsize; they might enjoy the expanses of a family-sized home to host their loved ones on weekends. Additionally, they might just wish to stay in their same communities and could be less prone to making changes. Others might choose to relocate in search of a different lifestyle in a warmer climate or to a locality where the cost of living is lower and their pensions go a longer way.

In the case of downsizing, the need for more 2-3-bedroom multi-family residences that provide amenities and accessibility for the elderly is on the rise. As such, the market is adapting to these demand requirements. According to Senior Housing Analytics, demand for senior housing alone in the US will grow by 850,000 units by 2030. Housing for an aging population presents a large challenge and, at the same time, a great opportunity for developers and investors. This is because beyond the need for new multi-family complexes, there is also a demand for more old-aged homes and assisted living facilities for people who can afford to live in them.

This growing demographic has transformed a once niche market into a large-scale specialized market. A surging population is the driving force for the senior housing market instead of other external factors, such as the employment rate or economic growth. Consequently, there is a lower market risk, which is favorable for investment diversification.

Older residents also tend to be longer-term tenants than younger renters. For real estate rental projects for the elderly, this comparatively low turnover also reduces risk and annual turnover cost. An additional aspect of downsizing is the freeing up of family-sized homes that are being left for smaller homes, providing added supply to a market in shortage for first-time buyers. In fact, the market for starter homes has dropped by 43.6% since 2012, according to a 2016 Trulia report.

Opportunities for Specialized Real Estate Projects

On an institutional level, with more Americans set to retire than at any point in history, institutional players, including pension funds and insurance companies, are investing far more in real estate than in the past to meet all of their future obligations. JLL Research is predicting that real estate transactions on a global scale will have doubled from 2015 to 2020 beyond $1 trillion. This can be explained by the fact that far more institutions, constituting 20% of the market, will have dedicated resources to the real estate sector.

The emergence of this sector and the sheer weight of the aging demographic bring tremendous economic and social change to the real estate environment. From an investor’s perspective, inclusion of this growing specialized retiree real estate segment as a part of portfolio diversification is highly recommended. For entrepreneurs, there is a historical opportunity to create new types of specialized real estate projects.