Trading Spaces: Millennials and Boomers

Summary

In this episode of 'Thoughts on the Market,' Ron Camam and Lauren Haw discuss the significant impact of demographic shifts on residential real estate. With Millennials now in their peak household formation years and Baby Boomers aging, there's a growing demand for single-family rentals and senior housing. The conversation highlights the need for investors to adapt to these changes, focusing on types of housing that align with the evolving needs of these generations, such as senior living facilities and suburban rentals, to capitalize on the current trends.

Takeaways

• 👥 Millennials, aged 28 to 43, are overtaking Baby Boomers, aged 59 to 78, as the largest demographic group, with 72 million vs. 69 million individuals.
• 🏠 Millennials traditionally favored multifamily and rental units in cities, while Baby Boomers have been predominantly homeowners in single-family homes.
• 🔄 As Millennials age, they require more space and services, leading to a shift in housing preferences towards single-family rentals and suburban locations.
• 👵 The demand for senior housing is on the rise, with a significant decrease in supply and a 'golden age' for this sector as the Baby Boomer population ages.
• 📉 New construction of senior housing has plummeted by 75% from its peak, indicating a potential oversupply of multifamily units and undersupplied single-family and senior housing.
• 💰 Seniors have the financial capability to afford senior living facilities due to long-term homeownership and appreciation in home values.
• 🔝 There's a growing preference among Millennials to rent rather than buy, influenced by affordability and a desire for mobility.
• 📈 Investment in single-family and senior housing is seen as attractive due to demographic trends, with potential for higher earnings growth in these sectors.
• 🌐 Regional shifts in housing demand are occurring, with significant growth in the Southeast and Texas, moving away from traditional hubs like San Francisco and New York.
• 🏥 The healthcare real estate space is expected to grow, with outpatient services increasing and Medicare expanding coverage for procedures outside hospitals.

Q & A

What is the current age range for Millennials and how many are there in the United States?

Millennials are individuals between the ages of 28 and 43, and there are approximately 72 million of them in the United States.

How does the demographic shift between Millennials and Baby Boomers impact the residential housing market?

The demographic shift impacts the residential housing market by creating a need for different types of housing. Millennials, reaching peak household formation years, require more space, while Baby Boomers, approaching their 80s, demand more services and housing with increased care options.

What are the current housing preferences of Baby Boomers?

Baby Boomers have been disproportionately residing in single-family homes that they own and have owned for a long time.

What changes in housing needs are Millennials experiencing as they age?

As Millennials age, they need more space, which shifts their preference from multifamily to single-family rentals. Additionally, there's a migratory shift towards regions like the Southeast and Texas, and a general preference to rent rather than buy.

What is the current state of the senior housing market in terms of demand and supply?

The senior housing market is considered to be in a 'golden age' with a significant increase in demand as the Baby Boomer population ages. However, supply has decreased, with new construction falling by 75% from its peak.

How has the perception of senior housing changed among the older population?

Historically, seniors have shied away from senior housing, but there's an opportunity for increased penetration as affordability and the appreciation of home prices have put seniors in a position to afford senior living facilities.

What are the two main secular trends in the US public Real Estate Investment Trust (REIT) universe?

The two main secular trends are the rise of senior housing communities and the move of outpatient services outside of the hospital setting.

What concerns are there regarding the senior housing industry?

The concerns include labor shortages in the healthcare space and the age of facilities, with many being over 40 years old and potentially not providing the best experience for tenants.

Which segment of the REIT market is most compelling for investment in the context of the senior housing trend?

The senior housing sector within the REIT market is most compelling, with expected earnings growth of 10% or more over the next three to five years, compared to the average market growth of 3 to 4%.

How are real estate owners adapting to cater to the Millennial generation?

Real estate owners are integrating their platforms to be more Millennial-friendly by investing in online marketing, web presence, and mobile-friendly apps to facilitate customer acquisition and interface with the Millennial demographic.

Outlines

00:00

🏡 Shifting Demographics in Residential Real Estate

Ron Camam and Lauren Haw Felder discuss the impact of changing demographics on the residential real estate market. They highlight the transition of Millennials, aged 28 to 43, and Baby Boomers, aged 59 to 78, on housing needs. Millennials, who previously favored multifamily and rental apartments, are now seeking more space as they grow older, while Baby Boomers require more services and senior housing options. The conversation emphasizes the need for an increased supply of single-family rentals and senior housing to meet the evolving demands of these generations.

05:00

🌟 Golden Age for Senior Housing

The discussion shifts to the 'golden age' of senior housing, with a significant increase in demand as the senior population grows. The supply of senior housing has decreased, with new constructions falling by 75% from its peak. The senior wealth effect is highlighted, as many seniors can afford to move into senior living facilities due to the appreciation of their long-owned homes. The conversation also touches on the evolving housing needs of Millennials, including the need for more space, a preference for renting over buying, and a shift in preferred locations, with growth seen in the Southeast and Texas.

10:01

📈 Investment Opportunities in Real Estate

The conversation concludes with an exploration of investment opportunities within the residential real estate sector. The focus is on investing in housing types that align with the needs of Millennials and Baby Boomers, such as single-family rentals and senior housing. The discussion suggests that rather than speculating on interest rates, investors should consider the demographic trends driving demand. The conversation also covers the importance of integrating technology and online platforms to cater to the Millennial generation's preferences, emphasizing the need for a modern approach to real estate marketing and customer acquisition.

Keywords

💡Millennials

Millennials, also known as Generation Y, are individuals born between approximately 1981 and 1996. In the context of the video, Millennials are highlighted as a demographic group that is overtaking Baby Boomers in number and significantly influencing the residential real estate market. They are described as traditionally preferring multifamily housing and rental apartments, particularly in urban settings. The script mentions that as Millennials age, their housing needs are evolving to require more space, which is driving changes in the types of housing being developed and where.

💡Baby Boomers

Baby Boomers refer to the demographic cohort following the Silent Generation and preceding Generation X, born between 1946 and 1964. The video discusses how the needs of Baby Boomers are shifting as they age, moving from owning single-family homes to requiring housing with increased care options and services. This demographic shift is creating a demand for senior housing, which is expected to grow significantly in the coming years.

💡Residential Real Estate Investing

Residential real estate investing involves purchasing, managing, renting, or selling residential properties as an investment. The video focuses on how demographic changes, particularly among Millennials and Baby Boomers, are impacting this sector. The discussion highlights the need for investors to adapt to the evolving preferences of these generations, such as the increased demand for single-family rentals and senior housing.

💡Multifamily

Multifamily refers to a type of residential property that includes multiple housing units under one roof, such as apartment buildings. The script notes that Millennials have traditionally favored multifamily housing, but as they mature and have families, their preference is shifting towards single-family homes, leading to a potential oversupply of multifamily units.

💡Single-Family Homes

Single-family homes are residential properties that consist of a free-standing house meant for one family. The video discusses how the demand for single-family homes is increasing, particularly among Millennials who are growing up and needing more space, and among Baby Boomers who may be downsizing but still require single-family structures for their lifestyle and care needs.

💡Senior Housing

Senior housing refers to residential communities or facilities specifically designed to meet the needs of older adults, often including services and amenities tailored to their age group. The video identifies senior housing as a sector poised for significant growth due to the aging of the Baby Boomer population and the increasing demand for age-appropriate housing options.

💡Supply and Demand Dynamics

Supply and demand dynamics are economic principles that describe how the availability of a product (supply) interacts with the desire for that product (demand) to determine its price and the quantity sold. In the video, the discussion revolves around how the changing demographics are creating new supply and demand dynamics in the residential real estate market, with implications for investment strategies.

💡Public Real Estate Investment Trust (REIT)

A REIT is a company that owns, operates, or finances income-producing real estate. The video touches on how REITs, particularly those focused on senior housing, are positioned to benefit from the demographic shifts as investors look for opportunities aligned with long-term trends like the aging population.

💡Labor Costs

Labor costs refer to the expenses associated with the workforce required to operate a business, which can include wages, benefits, and training. The video mentions labor costs as a significant factor in the senior housing industry, noting that historically, there have been challenges in attracting and retaining workers, which can impact the sector's profitability and growth.

💡Outpatient Services

Outpatient services are medical treatments or procedures provided to patients who do not require hospitalization. The video discusses a trend of increasing outpatient services, which is driving demand for healthcare real estate as more procedures are performed outside of traditional hospital settings, often in specialized facilities.

💡Mobility

Mobility in the context of the video refers to the preference of Millennials for housing that allows for flexibility and ease of relocation, often due to job changes or lifestyle preferences. This trend is influencing the types of housing products that are being developed and marketed, with a focus on rental options that provide convenience and the ability to move with minimal commitments.

Highlights

Millennials are overtaking Baby Boomers as the dominant demographic, impacting the residential real estate market.

Millennials, aged 28 to 43, currently number around 72 million, while Baby Boomers, aged 59 to 78, number around 69 million.

Millennials have traditionally favored multifamily and rental units, typically smaller ones in cities.

Baby Boomers have been largely homeowners residing in single-family homes.

As Millennials mature and Baby Boomers age, there's a shift in housing needs towards more space and services.

There's an oversupply of multifamily housing as Millennials' preferences change.

Single-family rentals in suburban areas are increasingly in demand among Millennials.

Senior housing is experiencing a surge in demand with the aging of the Baby Boomer population.

The supply of senior housing has significantly decreased, with new construction down by 75%.

Seniors have the financial capacity to afford senior living facilities due to home price appreciation.

Millennials' housing needs are evolving to require more space and a preference for renting over buying.

There's a migratory shift among Millennials, with growth in the Southeast and Texas.

Investing in housing types that align with the needs of Millennials and Baby Boomers is key.

Senior housing communities are expected to grow, with the 65+ population projected to reach 71 million.

Outpatient services are increasingly moving outside of hospitals, driven by surgical advances and Medicare coverage.

Labor costs in senior housing have been a challenge, but recent labor shortages have eased.

Investing in newer, higher-quality senior housing facilities is recommended for a better tenant experience.

The senior housing sector in the REIT market is expected to see earnings growth of 10% or more in the next few years.

Millennials are driving changes in how real estate owners market and interface with potential tenants.

Transcripts

welcome to thoughts on the market I'm

Ron camam head of Commercial Real Estate

research and the US Real Estate

Investment Trust team within Morgan

Stanley research and I'm Lauren Haw

Felder co-chief executive officer of

Morgan Family real estate investing the

global private real estate investment

arm of the firm and on this special

episode of thoughts on the market we'll

discuss the tangible impact of Shifting

demographics on the residential real

estate investing space it's Tuesday

September 10th at 10:00 a.m. in New York

so Lauren for several years now we've

been hearing about Millennials

overtaking the Baby Boomers as a

reminder Millennials are people between

the age of 28 and 43 so someone like me

and there's about 72 million Millennials

right now baby boomers are around 59 to

78 and there's about 69 million at the

moment this demographic shift will have

a profound impact on all sectors of the

economy including residential housing so

let's lay the foundation first what are

the current needs of Baby Boomers and

Millennials when it comes to their homes

yeah this is such an interesting moment

Ron because as you say their needs are

shifting over the last 15 years what

have Millennials wanted they have wanted

multifam they have wanted rental

apartment units and by the way they've

wanted generally speaking small ones in

cities yep Boomers they've been

disproportionately residing in single

family homes that they own and that

they've owned for a long time but here

we are as Millennials reach Peak

household formation years and uh Boomers

approach their 80-year-old Mark there's

a real shift we have Millennials growing

up and growing out and Boomers growing

older and that means Millennials need

more space Boomers need more services

housing with increased care options and

that really leads to three things one

pockets of over supply of multif family

developers develop to the rearview

mirror and we have way too much of what

they wanted yesterday and too little of

what they want tomorrow the second is

increased demand for single family

rental in more Suburban locations to

meet the needs of those Millennials and

the third is increased demand for senior

housing for the boo exccellent so when

we look at the next 5 to 10 years let's

consider each of these Generations the

demand for senior housing is increasing

significantly where are we in this

process and what's your expectation for

the next decade look we think this is

the golden age for senior housing the

demand wave is upon us Supply is way

down and by the way labor costs which

have been a real headwind are finally

abating new construction of senior

housing has basically fallen off a cliff

it is down

75% from its peak if you look at the

first quarter of this year it's

basically at GFC levels and third the

senior wealth effect not only do seniors

need this product they can afford it

they have been in those homes they've

owned those homes for a very long time

and over that period home prices have

appreciated so seniors are in a position

where they can really afford to move

into these senior living facilities and

what about millennium as they get older

how are their housing needs evolving I'd

say three things it's they need more

space so single family rental versus

multif family the second is migratory

shifts it's no longer I have to live in

San Francisco or New York you're seeing

real growth in the Southeast in Texas

and the third is this preference to rent

now a lot of that's affordability driven

but I think there's also Mobility

there's just General preference I mean

this is a generation that doesn't own a

landline right so they want to rent they

don't want to buy so given these Trends

as an actual real estate investor how do

you view the supply and demand Dynamics

within residential investing and where

do you see the biggest opportunities

look I think housing in general is

attractive to invest in there's simply

too little of it but you really can't

paint a broad brush you need to invest

in the type of housing with the best

Outlook and you and I can sit here and

debate what's going to happen with

interest rates but what is not debatable

is that these two large age groups are

going to drive demand disproportionately

and so rather than speculating on

interest rates let's calculate the

number of people in these generations

and so that means that we want to invest

in single family we want to invest in

senior's housing and we want to invest

in the market

where these groups want to live so let's

turn it around we've been talking about

this growing senior population and you

know we and and my side of the business

we've been investing in a lot of senior

housing communities but how does this

affect your world you cover the entire

US public Real Estate Investment Trust

Universe how are you thinking about

these things so our investors are really

focused on secular trends that they can

invest over a long period of time and

there's really two that I would like to

call out so the first is the rise of

senior housing communities as you

mentioned earlier if you think about the

US population the population that's 65

and over is really the addressable

market and we do expect that number to

rise to about 21% of the population or

71 million people so think about one in

four people being eligible or

appropriate for senior housing it's

amazing that's an incredible demand

function

now the second piece of it is

historically these seniors have actually

shied away from senior housing so the

first sort of trend and inflection point

that I want to call out is we do think

there's an opportunity for penetration

race not only to flatten out but to

start increasing and that's driven

exactly by your earlier comment which is

affordability remember about 75% of

seniors actually own their own homes and

they've seen a significant amount of

price appreciation since 2010 their home

prices have gone up 80% which is about

two times the rate of inflation second

investable trend is the move of

outpatient services outside of the

hospital setting so if you go back to

the 80s only about 16% of services were

being done outside of the hospital in

2020 that number was close to 68% and we

think that's going to keep Rising the

reason being because of surgical

advances there's a lot of projects that

can be done outside of the hospital

whether it's you know knee Replacements

trigger finger surgery cataract

surgeries and so forth in addition to

that the expansion of Medicare coverage

has allowed for reimbursement of these

Services again outside of the hospital

so we think these are trends that are in

place that should continue over the next

sort of decade and drive more demand to

the healthcare real estate space so what

should we be nervous about what what

concerns you look I think on the senior

housing side there's always two factors

that we focus on so the first is labor

this remains a very labor intensive

industry but in the US historically

people coming out of college they're not

necessarily going into the health care

space so there's been moments of Labor

shortages this happened exactly after

the pandemic luckily today the labor

situation has abated and you're seeing

sort of labor cost back to inflationary

type levels the second piece of it is

just the age of the facilities now keep

in mind there's still a lot of

facilities with the average age is about

41 right and everybody has in the back

of their mind these older facilities

with older carpets and so forth so when

we're thinking about investing in the

space we're always focus on the newer

assets the better quality that are going

to provide a better experience for the

tenant so given these shifts what

segments of your world are poised to

benefit the most the real estate Public

Market there's about 60 reats across 16

different sub sectors and the senior

housing sub sector is by far the most

compelling in our minds if you think

about the re Market the average sort of

earnings growth is 3 to 4% however the

senior housing sector we think you can

get 10% or more growth over the next

three to five years the reason being

when the pandemic hit this was an

industry that saw occupancy go from 90%

to 75% there was a moment in time where

people thought you'd never put any

senior in the facility again well the

exact opposite has happened and now

we're seeing occupancy gains of about

300 basis points of about 3% every year

on top of some pricing power call it

five six or 7% so we're looking at a

sector where we think

organically you can grow sort of high

single digits with a little bit of

operating leverage you can get to a

total earning growth of double digits

which is very compelling relative to the

rest of the re Market let's go back to

your generation as you said let's go

back to the Millennials how do those

shifting needs uh affect which part of

the re Universe you would uh invest in

one of the things that I think every

real estate owner is thinking about is

how to integrate their platform so that

they're more Millennial friendly they're

going online they're using their phones

and I think we're seeing a much bigger

investment in marketing dollars on a web

presence on a web platform and on a

mobile friendly the app certainly to be

able to interface with that Millennial

and help with customer Acquisitions so I

would say that's probably the biggest

difference is how you target that

population in a different way than you

did historically yeah I mean we all shop

online shouldn't we get our homes online

right that's right all right Lauren well

thanks for taking the time to talk yeah

this has been great Ron I always enjoy

us catching up as a reminder if you

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