The Great Demographic Shift
Among megatrends, aging demographics—or population aging—has long been a looming, yet slow-rolling emergent reality, like a mountain that somehow seems to move closer with every passing year—and that mountain, which is starting to cast its shadow over the contemporary scene, will result in massive economic challenges for health and social services, pension systems, basic infrastructure, and, of course, real estate. It’s safe to say that nobody today is quite prepared for the scale of a silvering planet, in which the number of people aged 60 and older is projected to grow, globally, from 607 million in 2000 to 1.4 billion in 2030 and to more than two billion in 2050, according to the United Nations.24 Added to this, low fertility rates, especially in developed regions of Asia, North America, and Europe, will result in shrinking populations of working-age people who will, nevertheless, need to support a growing share of what demographers call the “dependent population”—the sum of people aged 66 and over and those younger than 20 years as a percentage of working-age people.
And those numbers are truly startling: according to a recent study, the average dependency ratio of 30 major global cities in 2013 was 48 percent, or 100 workers supporting 48 people older than 67 as well as youth dependents younger than 20. (In Los Angeles, the number was 54 percent; Chicago, 53 percent; San Francisco, 39 percent). By 2025, however, Tokyo will reach 59 percent, Stockholm 63 percent, and Milan, where low fertility rates are especially acute, the dependent population figure will reach 74 percent.25 Aging populations, moreover, will account for increases in healthcare costs. Medicaid spending in the United States is projected to increase to $903 billion by 2020.26 And as the segment of people aged 60 or older in North America is projected to jump more than 40 percent, to 104.8 million people by 2030 and 122.7 million by 2050, total healthcare spending in the United States, which was 17.7 percent of GDP in 2011, is also projected to grow to 25 percent of GDP by 2030—much of that due to a population shift in which more than one in four people in North America (26.4 percent) will be age 60 or older in 2030 and nearly one in three (28.3 percent) will be older than 60 by 2050.27
And the good news? First, according to demographers, the Great Aging Shift is a slow-moving phenomenon, which means that governments and industries have time to prepare for its onset. Second, people are living longer and more economically productive lives—deeper into their senior years (today’s 50-year-old is in better shape than yesterday’s 40-year-old)—and this translates into what some have estimated to be a $7.1 trillion dollar longevity dividend for the U.S. economy in over the next 50 years.28 Third, population aging will happen soonest in developed global cities, where a good deal of the infrastructure, services, and built environment for seniors is already located—and where 58 percent of the world’s population aged 60 or older already lives.29 Fourth, as indicated by its top spot in this year’s Akerman Survey of megatrends most likely to significantly affect the U.S. real estate sector during the next three years, the aging-population trend will likely result in an ongoing, massive upgrade and build-out in urban centers, metropolitan areas, and in emergent suburban areas—urbanesque suburban hubs near transit lines and/or planned senior communities. “Everybody gets old,” one property manager and Akerman Survey respondent stated succinctly, “and they will need a place to live.”
Market fundamentals for the senior living space continue to suggest that overbuilding is less of a concern than it has been in the recent past, with an overall occupancy for the sector at 89.6 percent, an overall construction-toinventory rate for the fourth quarter of 2016 at 5.7 percent, and an annual rent growth, overall, at 3.7 percent—(for independent living facilities rent growth was higher, at 4.0 percent),30 all of which represents a respectable performance for the year, considering that rent growth for the rest of the multifamily sector, of which senior living is a part, was downright anemic, with overall multifamily rent growth increasing just 0.3 percent through the fourth quarter of 2016.31
“Gone are the days of separation and isolation. It’s now about integration and aging in place.”
At this year’s National Investment Center for the Seniors Housing and Care Industry (NIC) conference, one observer and panelist noted that operators were “guardedly optimistic” because of high asset prices and positive operating metrics, although for most big operators, a more strategic shift in business models, from the traditional fee-for-service to value-based care, can’t come soon enough.32 Most operators now say that value-based care, taking care of the whole individual, “no matter where they are in their life process,” according to one sector analyst, has become the preferred model under the Affordable Care Act. It’s a trend that Akerman’s Cecelia Bonifay sees growing nationally, especially in Florida, where more than 19 percent of the state’s population is over 65, the highest percentage in the nation.33 “I do think that we are geared up, in Florida and nationally, to deal with our aging population, especially in terms of addressing the complete lifestyle.” Gone are the days of separation and isolation, says Bonifay. It’s now about integration and “aging in place,” where seniors feel comfortable and familiar with their surroundings. “Now it’s about integrating all of the services that seniors might need,” says Bonifay.
A repeal of Obamacare, however, may prove to be a setback for the sector, but, as one observer noted, quoting Bill Gates, “Don’t overestimate what will happen in the next two years or underestimate what will happen in the next 10.” Setbacks will happen, in other words, but, at least when it comes to the greater certainties of the Great Aging Shift—and the likely surge in demand that such a shift will produce—senior housing and real estate targeting people aged 60 and older will be able to withstand these temporary exigencies. Indeed, when one looks down the road a bit, senior housing demand is expected to more than double by 2040, rising to 3.2 million units by 2040—1.8 million units higher than 2015 levels.34
Twenty-six percent of Akerman Survey respondents say that the preference for city living and more-compact development will have the most significant impact on U.S. real estate development in the next three years. The trend ranks second to aging demographics as the top megatrend to watch, and it’s easy to see why this might be so: the urban lifestyle population with young adults aged 20 to 29, on one hand, and baby boomers aged 55 to 64 on the other grew by 15 million people in the past decade.35 Not surprisingly, the notion of the growth of urban centers has dominated real estate news, with millennials said to be flocking to a new live/work/play ethos, and baby boomers, looking to shed their suburban homes and simplify their living arrangements, are migrating into U.S. cities to enjoy museums and music festivals and parks and the host of urban entertainments and activities—all of it accessible by public transportation and complete with social and health services that seniors need to use.
Millennials, for instance, are, in fact, a market-shaping demographic. They’re huge in numbers, representing 77 million people spending $600 billion annually (and are projected to spend $1.4 trillion annually by 2020).36 How and where they decide to live has long been a subject of speculation and anticipation in real estate circles, but some of this speculation may be worth reconsidering. While millennials have expressed a preference for city living, for example, it turns out that 75 percent of them aged 25 and 35 actually live in the suburbs, as do 80 percent of Americans in the 50 largest metro areas.37 And while much has been made of the millennial preference for aspects of the shared economy (that millennials prefer using city buses or Lyft or Uber, for instance), another recent survey indicates that 80 percent of millennial households actually own a car, 36 percent of millennials want to purchase their next home (rather than share it), and 48 percent of those car-owning millennials would rather be making mortgage payments than writing rent checks and want to do it all in the suburbs.38
Even the notion that millennials prefer compact development, that is, living at close quarters in walking distance to everything, may not be what it seems. More millennials, in fact, want to buy a single-family home (36 percent) than purchase a multifamily dwelling (2 percent), and they want to do this because, for 61 percent of those surveyed, owning your own home offers more family space. A majority of millennials surveyed, moreover, don’t mind the idea of living a short drive (rather than a walk) from grocery stores, restaurants, or retail shopping.39 Indeed, the much-discussed preference of millennials for city living in compact spaces, in other words, may turn out to be more unicorn than reality. Millennial urban outmigration, in fact, increased from 2013 and 2014, and the flow of millennials and empty nesters is projected to slow significantly during the next decade, whereas 79 percent of household growth in America during the next decade will happen in the suburbs.40
The oft-cited presence of millennials residing in urban centers may simply be a historical glitch. Millennials came to cities before the Great Recession, and then they got stuck there, afterward, saddled with student debts, ho-hum job prospects, and a tight home-lending market, so they stayed. Trend watchers, in other words, may have mistaken millennial presence with millennial preference.41 A similar mistake seems to have occurred regarding the fact that millennials have become renters rather than owners, creating a boom in the entire multifamily rental sector. This is a widely confirmed fact— but it doesn’t mean, by any stretch, that millennials prefer renting to owning. With an estimated 42 percent of millennials changing jobs every two to three years, it seems more likely that renting has become—for the moment—more convenient, but (again) not because millennials necessarily prefer renting and job-hopping, but because, to a large degree, the new realities of millennial work-life have obliged them to continually move around.42 Indeed, 74 percent of millennials surveyed plan to move in the next five years—but here’s the underreported number: 48 percent of those moving plan to purchase, not rent, their own home.43
Are seniors, then, shedding the big suburban house and moving into smaller apartments in urban centers? Not really. U.N. statistics that show aging populations migrating to urban centers also show that, at least in North America, that movement isn’t happening nearly as much compared with other regions in the world.44 In fact, U.S. Census data suggests that, from 2000 to 2010, the U.S. population of seniors dropped in urban cores but grew substantially elsewhere—in newer suburbs and exurbs. Since 2010, the population of seniors in city cores has risen by 621,000, but this seems tiny compared with the number of seniors moving to the suburbs. That figure grew by 2.6 million in the same period.45 A 2011 survey of seniors nationwide, moreover, estimated a senior back-to-the-city condominium demand of about 250,000 households—compared with the estimated 4.5 million empty-nester households in the country’s 52 largest metro areas.46
“At some point in the near future, changes will be made to the tax code that could be profoundly beneficial to the real estate sector.”
So what gives? Probably, Akerman Survey respondents are indicating their understanding of market preference for something urban-like—one study has dubbed these places “surban” centers—places like Reston Town Center, outside of Washington, D.C., or Legacy Town Center, in Plano, Texas, near Dallas, or Old Town Pasadena, a surban center outside of Los Angeles.47 These surban areas will likely be the next megatrend for new development in city-living-style hubs near transit facilities, for instance, with identifiable town-like centers—“compact development,” with retail shops and dining and multifamily apartments all within walking distance—all embodying a new, live/work/play ethos, but extended a bit further outside of cities themselves.
Few things are as important to the real estate sector as fiscal policy, especially as it impacts changes to the tax code. The sector’s laser-like focus in this regard springs from the way real estate businesses are commonly structured to take advantage of that code. More often than not, real estate companies are formed as pass-through entities, for instance—limited liability companies (LLCs) and many limited partnerships—because these entities enjoy the tax advantages of carried-interest rules. Such rules,— Donald Trump called them loopholes and acknowledged that he took full legal advantage of them, and then, during his candidacy for president, promised to close them—allow real estate entities (and private equity companies and hedge fund managers, for instance) to convert ordinary income into capital gains. And income derived from capital gains is, of course, taxed at 20 percent—about half as much as the top tax rate on ordinary income (nearly 40 percent). Nobody can say when, but at some point in the near future, changes will be made to the tax code that could be profoundly beneficial to the real estate sector—and that prospect has everyone sitting up in their seats.
That’s because, even if he fulfills his campaign promise to close the carried-interest loophole, President Trump’s tax proposal actually slashes corporate taxes from their present level, 35 percent, to 15 percent. In effect, if President Trump and a Republican Congress have their way, the closing of one loophole (carried interest) may simply mean the opening of other tax advantages that would favorably benefit the real estate sector. President Trump’s proposal, for instance, to repatriate some of the $2.6 trillion in corporate cash held overseas by offering corporations a temporary 10 percent tax holiday on such funds could, in 2017 alone, bring in $200 billion in cash held overseas by S&P 500 companies. Most of that—$150 billion— would probably be allocated to stock buybacks, according to Goldman Sachs. Indeed, a new term has emerged to describe the likely surge to corporate balance sheets brought about by the 15 percent tax and other measures—the so-called cash tsunami, which, if it does wash up on American shores, may challenge companies in the near term with the problem of riches on a number of fronts: increased M&A activity as some cash-rich big fish start lurking to gobble up the competition or an increase in shareholder disputes, as more shareholders demand stock buybacks, as opposed to investing cash in capital growth.48 But as some observers point out, a tax break of 15 percent, which would likely affect 60 percent of all business income in the U.S., could result in $1 trillion in reduced federal tax revenues over 10 years.
“The Tax Foundation supports the proposal because a onetime, immediate writeoff may help boost capital spending.”
A second feature of President Trump’s tax plan, for example, would allow companies to immediately write off capital investment expenses—as opposed to writing off those expenses over time. It’s not a loophole, and, indeed, the Tax Foundation supports the proposal because the onetime, immediate write-off may help boost capital spending, just one of many elements that would need to happen to move the economy from its sluggish growth to the more expansionist growth envisioned by President Trump.49 But critics note that the proposed immediate write-off for investments would combine powerfully with another provision of the existing tax code using debt—and the allowed interest deductions for interest on it—to offset other earned income. It’s a strategy that President Trump—who by one estimate has $650 million in debt—has used, in all likelihood, to pay little, if any, federal taxes. The net effect of President Trump’s proposed immediate write-offs for investments, when combined with the deductions already allowed in the current tax code for the interest on investment debt, is that companies would indeed engage in more investment behavior—but not because those investments are part of a long-term corporate growth strategy but because that kind of debt would make tax subsidy-seeking sense.