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Demographics and Real Estate
The value of real estate relies to a high degree on supply and demand. The makeup of the demographics or population characteristics for the region where the real estate is located is the driver for the demand side of the equation. Demographics measure things like age, race, income and employment status of the nearby population and are used to project future demand.
An example of how demographics play into real estate investment opportunities is the large number of aging baby boomers. As the boomers grow older their needs change and astute investors who can read that trend can benefit. The current shortage of assisted living facilities is a good example of demographic change creating demand for an asset class that is in short supply.
An additional consideration to the demand engine of the aging boomers is the barrier to entry for new product. This is created by the current high cost of construction and available land that is properly entitled.
The strength and diversity of the local economy can also directly affect the supply and demand balance, impacting the value and stability of real estate.
In 2000 the health of the economy in the Silicon Valley in California was predominantly driven by the "dot-com boom". When the dot-com economy went bust, real estate followed. The need for office space evaporated and values and cash flows in the area suffered the consequences of being a “one horse” town.
Studying changes in demographic patterns can point the investor to the areas with the greatest likelihood of finding success. Indicators to consider are population and job growth for the last several years and projected growth over the next ten years. Areas that are currently considered highly promising using the population and job matrix are Myrtle Beach South Carolina, Phoenix Arizona, Las Vegas Nevada, Hesperia California, Orlando Florida and Austin Texas.
The wise investor looks at many factors when evaluating risk for a given investment. What is the economic engine that drives the local economy, are their barriers to entry for new product, is there population and job growth, how broad-based is the economic engine, are the services being provided via the real estate asset relevant to the demographics and local economy?
Demographics are a powerful tool in the search for good investments. They can be used to help locate which geographic areas and what real estate asset classes to pursue. If properly used they can also help the investor understand current and future risk for a given investment.
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