Real estate
How population changes impact US real estate
The US population is projected to shift in the future to more older Americans and fewer under age 15. Here’s what that may mean for real estate investing.
Roughly 80% of US private market real estate value consists of sectors other than traditional office.
Vacancy rates for most sectors remain near or below pre-COVID-19 levels.
Most real estate sectors, other than office, should begin their demand resurgence from a favorable position.
Investment real estate consists of more than office buildings. We know this, so why say it? Because headlines about office market risk are crowding out discussion about the other types of investment real estate and their opportunity set. Consider this: A recent Google search on “US office real estate market” generated more than one billion results — four times more than for industrial and retail, five times more than for apartments, 10 times more than for self-storage, and hundreds more than for other property sectors, such as medical office, data centers, life science, student housing, senior housing, and single-family rental.1 They’re all investment real estate! While the media focus on office is understandable given its risks, it’s disproportional to its role in the broader real estate market.
Only focusing on office may mean missing investing opportunities. The real estate opportunity set spans far beyond office buildings. About 80% of US private institutional real estate market value and 90% of private institutional real estate property counts are sectors other than traditional office.2 Also, about 96% of US public real estate investment trust (REIT) value is in sectors other than traditional office.3
The office sector has played a larger role in investment real estate than it does today. Traditional office comprised more than 40% of US institutional (private) real estate market value at the end of 2000. That dropped to just below 34% by the end of 2010 and fell further to 20.2% in Q1 2023, only half of the share from the turn of the century. Office share composition among US REITs (public real estate) fell from roughly 22% in 2000 to just over 12% in 2010 and eventually to a mere 4.5% in April 2023.3
While office demand continues to adjust to remote and hybrid work trends, stronger demand in non-office sectors has spurred tighter vacancy conditions. (See chart below.) National office vacancy in Q1 2023 averaged 17.8%, which is considerably higher than the past 10-year average of 14.1% and the pre-COVID-19 rate of 12.3% in Q1 2020. It’s also two to seven times higher than the vacancy rates for other sectors. By contrast, most commercial sector vacancy in Q1 2023 was below 10%, and the average residential vacancy was below 5%.
Office vacancy rates have increased by five percentage points since the start of COVID-19 in late Q1 2020. For most sectors, however, rates in Q1 2023 were similar to — or lower than pre-COVID-19. (See chart below.) For example:
Apartments (up 2.5 percentage points through Q1 2023), self storage (up 1.7 percentage points), and office (up 1.0 percentage point) experienced the sharpest annual rise in vacancy rates since the Federal Reserve started raising the fed funds rate in March 2023 (see chart above). Some important takeaways:
Certain sectors experienced either nominal increases in vacancy rates or tightening for the year ending Q1 2023. Medical office buildings and single-family rental vacancies mildly increased. Strip retail vacancy rates fell to record lows. Each benefited from limited levels of new supply and steady demand growth, which reduced the impact of higher interest rates on sector vacancies. Industrial experienced a moderate vacancy rate rise in the year ending Q1 2023 with record levels of new construction delivered against moderating demand.
The next time you read something about the commercial real estate market, see if it addresses the broad, multi-sector real estate market — or just the office market. Remember, the non-office segment is much larger than the traditional office sector. Several of the non-office property sectors are posting tight vacancy rates, even in a rising interest rate environment. Assuming interest rates and inflation eventually moderate, a recovery in tenant demand is expected to follow. Most sectors, other than office, should begin their resurgence in demand from a favorable position of low- to moderate- vacancy rates.
Google search query results as of July 7, 2023.
National Council of Real Estate Investment Fiduciaries as of March 2023, based on the NPI-Plus Index. Traditional office accounted for 20.2% of overall index market value and 9.5% of the index total property count. For purposes of this article, traditional office is defined as office buildings designed and built for general business use, which excludes buildings predominantly purposed for life science use or medical services use.
National Association of Real Estate Investment Trusts as of April 2023, based on market value within the FTSE-NAREIT Equity REIT Index.
How population changes impact US real estate
The US population is projected to shift in the future to more older Americans and fewer under age 15. Here’s what that may mean for real estate investing.
Why invest in US private real estate?
Private real estate has a place in today’s portfolios, in our view, thanks to its history of attractive long-term total and risk-adjusted return potential and inflation-beating income potential.
How global demographics drive global real estate opportunities
Global demographic shifts, like a declining, growing, or an aging population, in tandem with macroeconomic factors tend to generate real estate investment opportunities.
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Header image: Getty Images 1283514230
The NPI-Plus Index: As of Q2 2023, the NPI consists of 10,892 investment-grade, income-producing properties with a market value of $895 billion. The market value breakdown by property type is about 24% office, 28% apartment, 14% retail, 34% industrial, and less than 1% hotel. The NPI includes property data covering over 100 CBSAs. In addition, within each property type, data are further stratified by sub-type. These data enhance the ability of institutional investors to evaluate the risk and return of commercial real estate across the US.
The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property.
About risk
Investments in real-estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies, and their shares may be more volatile and less liquid.
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