April 1, 2015 - By by Jay Rollins, JCR Capital President and CEO
The Graying of America’s Real Estate
As appeared in the August 2015 issue of Colorado Real Estate Journal
There is an historic phenomenon occurring which is changing the face of commercial real estate, and few are doing anything about it. Right before our eyes, we are witnessing the greatest transfer of real estate assets in the history of our country.
This transfer of assets is tied to middle market commercial real estate and the ownership base of this real estate. The ownership base of middle market assets are typically individuals or a partnership of individuals. The majority of this ownership base is aging baby boomers, between the age of 51 and 70. Thus, the ownership of these assets is explicitly tied to the “Graying of America.”
Thus, middle market commercial real estate represents the majority of commercial real estate properties in the country, and accounts for more than half of commercial real estate in value. According to the Federal Reserve, the value of commercial real estate in the United States is $15 trillion. Of which, $7.6 trillion is middle market properties with values under $50 million.
The trends in the graying of commercial real estate reflects larger demographic trends in the U.S. relating to the aging Baby Boomer generation. According to the US Census:
- Baby Boomers make up 24 percent of the current population
- 5 million males and 1.5 million women, will pass away over the next five years
- The average baby boomer age is 58; it will be 64 in 2020
- Every day for the next 16 years 10,000 baby boomers will turn 65
- Sixty to 80 percent of boomers want to move once they retire, stimulating commercial real estate transitions
According to the New York Times, this graying of America is happening faster than anticipated:
“While demographers have long projected a significantly older country later this century, declines in fertility and mortality rates are hastening the shift, leading to what are expected to be profound changes for issues ranging from Social Security and health care to education. Signs of the change are underway: The Villages, a city in Central Florida with a large retirement community, was the nation’s fastest-growing metropolitan area from 2012 to 2013, according to the Census Bureau.”
Over the next 10 to 15 years, due to the aging ownership profile of middle market commercial real estate almost every asset will change ownership because of life events, such as death, retirement, health issues, etc. Even if these assets are transferred within the family, new ownership will be compelled to manage, sell, improve, etc. this real estate.
This transfer of ownership is an unprecedented opportunity for those who specialize in middle market commercial real estate. In addition to an aging real estate ownership base there continues to be a lack of liquidity for middle market real estate from both capital providers and sponsors. Less capital is available to the middle market as banks have tighter regulations.
Large real estate funds do not typically invest in the middle market range, thus the owners of this real estate have limited access to institutional capital. There are few, if any, institutional quality mangers that are exclusively focused on middle market real estate. This vacuum provides opportunities for middle market capital providers to earn above average risk adjusted returns. Historically, this space has provided better: deal flow, pricing and structures for capital providers.
Steve Sadler, CEO of Allegiancy says “the middle market is much more the purview regional players, with knowledge on the ground….and we have to be more well-versed in the middle markets.”
Yes, middle market players are regional…and aging. Tapping into the aging ownership of middle market properties gives rise to a whole new set of opportunities and issues, such as: death, succession, divorce, liquidity, and partnership issues. These life events are significant drivers of middle market real estate transactions.
Clearly, the “Graying of Commercial Real Estate” presents enormous opportunities for those with capital, knowledge and foresight to tap into these significant demographic and generational shifts in the U.S.
Important Information: This summary is not an offer to sell any security and intended for our institutional contacts. There is risk of loss with any investment and past performance is not a guarantee of future results. One cannot use graphs or charts alone in order to make an investment decision. Forward-looking statements or opinions stated in this letter are opinions and subject to change. As a private real estate fund, investments are illiquid and investors cannot readily withdraw their investment in the funds. Portfolio performance can also be affected by general market conditions, interest rates, availability of credit and other economic conditions that affect real estate markets.