Global Megatrends and Your Real Estate Investments

By Melanie Reuter

Considering that much of the media coverage on macro fundamentals affecting the real estate market has been on demographic shifts in North America, it is no surprise that Price Water House Cooper s (PwC) thought leaders recently weighed in on what this means to global business. I examined their coverage on Businesses should plan to take advantage of megatrends to see how their insights on emerging demographic shifts were relevant to real estate investors who can, and should, use them to get ahead of the wave and inform their investing decisions.

Tim Ryan, Vice Chairman and Markets, Strategy and Stakeholders Leader for Price Waterhouse Coopers (PwC), was recently the keynote speaker at MICHauto, a public-private partnership serving Michigan s automobile sector. He implored the group that if they did not get ahead of these trends their businesses may suffer as many of these trends would occur swiftly.

Mr. Ryan outlined the following five changes that will affect our business and our lives across the globe:

1. Accelerating rates of urbanization

2. Climate change/resource scarcity

3. Demographic shifts across the world

4. Shift in global economic power

5. Technological breakthroughs

Accelerating Rates of Urbanization

Today, 50% of the world s population lives in a city; 60 years ago that percentage was a mere 30% of the population. It is anticipated that within 25 years, urbanization will increase exponentially worldwide to 75%, creating 22 megacities (those cities with over 15 million inhabitants). Not only will cities densify, but they will sprawl, encompassing the suburbs as witnessed in Toronto.

The ramifications of this migration and increase in density mean stress on infrastructure. Roads, water and sewer, and power grids, many of which are already pushed to the extreme, will require major infusions of capital to manage the growth. Schools, hospitals, and emergency services will also need to expand quickly to support the infusion of residents.

This acceleration will be felt most in emerging cities, especially those with comparatively low levels of urbanization.

Climate Change/Resource Scarcity

Remove the debate about the validity of climate change and you are still left with the very real outcome that policy makers are legislating business practices and products to control their environmental impact. Consider the emergence of LEED certified buildings, green products in new buildings and retrofits, and the elimination of incandescent light bulbs. Many younger consumers are making environmentally conscious choices even when those decisions mean a higher price point. This impact goes beyond housing choices and consumables of course, as supply chains will have to rethink the way in which goods are moved.

Demographic Shifts Across the World

One third of the population in North America is comprised of the Y-Generation, those born between 1977 and 1994. This is combined with an ever increasingly aging population, as the baby boomer cohort now hits retirement and of course, we are all living longer. This might also explain the boom in the senior living market, with companies like this one offering senior housing in Omaha becoming more and more popular among those looking to live as independently as possible, while being supported where they feel they need a little help. The real estate industry might see a business opportunity in senior living facilities, which can also serve as a community-building tool in countries with a majority of senior citizens. However, building a senior living community might not be an easy task, which is why some investors might prefer to work with senior living consultants who can offer their expertise and knowledge in the field. Demographers believe that it is the countries whose economies are emerging, whose life expectancy has traditionally not been as high that will experience the most growth, while 60 countries representing 40% of the world s population will inevitably experience a decline. The changes in these two societies will be rapid. One will be comprised of a young, growing labour force and conjoined consumer market and the other comprised of an aging, antiquated labour force (proportionate to its total population) without the bodies and skills to adapt to the global wants, needs, and changes. The emerging cities will have what the world needs a working age population.

Further, the societal implications for a disproportionate aging population are immense. Norbert Winkeljohann, Senior Partner with PwC Germany believes:

With 360 million older workers set to leave the global workforce by 2050, the burden of supporting the ever-expanding ranks of retirees will put the working population under increasing strain in some countries. In others, growing populations will need to be fed, housed, educated and employed to sustain growth and cohesion. In either case, demographic shifts will be a if not the major force for social and economic change.

From: PwC. Demographic Shifts. http://www.pwc.com/gx/en/annual-review/megatrends/demographic-shifts-norbert-winkeljohann.jhtml

Shift in Global Economic Power

Because of the demographic shift to the East, and in some cases the South, PwC believes that the economic power will shift from the west to the east. North America will still remain relevant because of its advantages in its manufacturing base, technology, schools and innovation.

The Gross Domestic Product (GDP) of the world s seven leading emerging nations was two thirds that of the G7 in 2009 and it is posited that by 2050 this will be reversed and This reshaping of the world economic order is unprecedented in its speed and scale. The shift will mean a change from places of production and labour to places of consumers.

Technological Breakthroughs

Because of the demographic and environmental changes occurring globally, technology will be sought to ameliorate the pressure points, create solutions, and improve conditions. This will encompass advances in logistics, robotics, Artificial Intelligence, and nanotechnology. Business growth will cross borders, and platforms, and evolve in ways we cannot imagine. As an example, consider how technology like the digital ecosystem (individuals can read more about this by visiting the likes of laisschulz.com) aids business growth in the present day. Several entrepreneurs are known to be using this solution (it can integrate all platforms and online channels to keep customers close to the business, wherever they are) to improve their marketing, thereby making their business more relevant, visible, and accessible to the world. So, if technology is so advanced now, imagine the power it will have in the near future.

The Impact on Real Estate Investing

These megatrends will impact everything we do in the next 35 years. Businesses are urged to skate to where the puck is going in order to thrive, and like any other business, the housing market will feel the impact of these changes.

I anticipate that real estate investors will be impacted on many levels:

• The aging population will need more and varied housing products: assisted living; convalescent; and active-lifestyle, low maintenance homes.

• A larger proportion of homes will be sought that accommodate an aging population such as: one-level units, in-suite elevators or chair assisted stairs, easy to operate fixtures and handles, accessible bathtubs, showers, and toilets.

• Younger populations will demand greener choices for their homes: LEED certified, closer to public transit, located in areas where they work and socialize.

• A large shift to self-employed and work at home will be expedited and reduce the pressure and demand on Central Business Districts, commuting to work, businesses employing people who live in the immediate vicinity.

• Cities will sprawl and/or absorb smaller suburbs in order to streamline tax-bases, increase infrastructure efficiency and merely accommodate growth effectively. The largest city in Canada became larger when the City of Toronto became a Regional Municipality by amalgamating with York County.

• Incivilities (such as trespass, vandalism, loitering) and crime will increase because of densification, mixed-use, and the mash-up of different types of users of a space (young, old, different income levels, increased immigration).

• A larger proportion of development responsibility and infrastructure costs will shift from public funding to private funding/developers costs. Density increases will no longer be a bonus to the applicant; minimum standards will be set by the city. Consider the proposed rezoning changes in the City of North Vancouver. No residential areas in the city are zoned for less than three private dwellings.

• North American Governments will have to rethink cross-border employment as increasingly employees work virtually for countries other than those in which they reside.

• Consumers will seek to reduce their carbon footprint because of personal choice, increased costs, and governmental mandate seeking to minimize commutes and driving, consuming locally, shopping on-line (reducing their own commute in exchange for the distance their goods travel).

• The international housing market and investment will flourish in ways yet to be seen as investors put money into emerging markets.

These changes will be deemed by some to be positive, negative by others. Whatever your opinion, in most cases the change is inevitable. Stay on top of the impacts these trends will have on your long-term buy and hold investment strategy; know your future clients, and provide them what they want to maximize your long-term gains.

Melanie Reuter is the Director of Research with REIN and a Real Estate Investor owning both single and multi-family units. She has a Master of Arts Degree from California State University, San Bernardino and a BA from Simon Fraser University in Burnaby, BC.