With the generational shift in the US housing market underway,
our analysts discuss the impact this trend will have on
residential real estate investing.
----- Transcript -----
Ron Kamdem: Welcome to Thoughts on the
Market. I'm Ron Kamdem, head of Commercial Real Estate Research
and the US Real Estate Investment Trust team within Morgan
Stanley Research.
Lauren Hochfelder: And I'm Lauren
Hochfelder, Co-Chief Executive Officer of Morgan Stanley Real
Estate Investing, the global private real estate investment arm
of the firm.
Ron Kamdem: And on this special episode of
Thoughts on the Market, we’ll discuss the tangible impact of
shifting demographics on the residential real estate investing
space.
It's Tuesday, September 10th at 10 am in New York.
So, Lauren, for several years now, we've been hearing about
millennials overtaking the baby boomers. As a reminder,
millennials are people between the age of 28 and 43. So someone
like me. And there’s about 72 million millennials right now. Baby
boomers are around 59 to 78; and there's about 69 million at the
moment. This demographic shift will have a profound impact on all
sectors of the economy, including residential housing. So, let's
lay the foundation first. What are the current needs of baby
boomers and millennials when it comes to their homes?
Lauren Hochfelder: Yeah, this is such an
interesting moment, Ron, because as you say, their needs are
shifting. Over the last 15 years, what have millennials wanted?
They have wanted multifamily. They have wanted rental apartment
units. And by the way, they've wanted, generally speaking, small
ones in cities.
Ron Kamdem: Yup.
Boomers? They have been disproportionately residing in single
family homes that they own, and that they've owned for a long
time. But here we are, as millennials reach peak household
formation years and boomers approach their 80-year-old mark.
There's a real shift.
We have millennials growing up and growing out, and boomers
growing older. And that means millennials need more space;
boomers need more services. Housing with increased care options.
And that really leads to three things.
One, pockets of oversupply of multifamily. Developers develop to
the rearview mirror; and we have way too much of what they wanted
yesterday and too little of what they wanted to what they want
tomorrow. The second is increased demand for single family rental
in more suburban locations to meet the needs of those
millennials. And the third is increased demand for senior housing
for the boomers.
Ron Kamdem: Excellent. So, when we look at
the next five to ten years, let's consider each of these
generations. Demand for senior housing is increasing
significantly. Where are we in this process, and what's your
expectation for the next decade?
Lauren Hochfelder: Look, we think this is
the golden age for senior housing. The demand wave is upon us,
supply is way down. And by the way, labor costs, which have been
a real headwind, are finally abating. New construction of senior
housing has basically fallen off a cliff. It is down 75 per cent
from its peak; if you look at the first quarter of this year,
it's basically at GFC levels. And third, the senior wealth
effect. Not only do seniors need this product, they can afford
it.
They have been in those homes, they've owned those homes for a
very long time, and over that period, home prices have
appreciated. So, seniors are in a position where they can really
afford to move into these senior living facilities.
Ron Kamdem: And what about millennials? As
they get older, how are their housing needs evolving?
Lauren Hochfelder: I'd say three things.
It's they need more space. So single family rental versus
multifamily. The second is migratory shifts, right? It's no
longer -- I have to live in San Francisco or New York. You're
seeing real growth in the southeast and Texas. And the third is
this preference to rent. Now, a lot of that's affordability
driven.
Ron Kamdem: Right.
Lauren Hochfelder: But I think there's also
mobility. There's just general preference. I mean, this is a
generation that doesn't own a landline, right? So, they want to
rent. They don't want to buy.
Ron Kamdem: So, given these trends as an
actual real estate investor, how do you view the supply and
demand dynamics within residential investing? And where do you
see the biggest opportunities?
Lauren Hochfelder: Look, I think housing in
general is attractive to invest in. There's simply too little of
it. But you really can't paint a broad brush. You need to invest
in the type of housing with the best outlook. And you and I can
sit here and debate what's going to happen with interest rates.
But what is not debatable is that these two large age groups are
going to drive demand disproportionately.
And so rather than speculating on interest rates, let's calculate
the number of people in these generations. And so that means that
we want to invest in single family. We want to invest in seniors
housing, and we want to invest in the markets where these groups
want to live.
So, let's turn it around. We've been talking about this growing
senior population and, you know, we and my side of the business.
We've been investing in a lot of senior housing communities. But
how does this affect your world? You cover the entire US public
real estate investment trust universe. How are you thinking about
these things?
Ron Kamdem: So, our investors are really
focused on secular trends that they can invest over a long period
of time. And there's really two that I would like to call out.
So, the first is the rise of senior housing communities.
As you mentioned earlier, if you think about the US population,
the population that's 65 and over is really the addressable
market. And we do expect that number to rise to about 21 per cent
of the population or 71 million people.
Lauren Hochfelder: So, think about one in
four people being eligible or appropriate for senior housing.
It's amazing.
Ron Kamdem: That’s an incredible demand
function.
Now, the second piece of it is historically
these seniors have actually shied away from senior housing. So,
the first sort of trend and inflection point that I want to call
out is we do think there's an opportunity for penetration race --
not only to flatten out, but to start increasing. And that's
driven exactly by your earlier comment, which is affordability.
Remember, about 75 per cent of seniors actually own their own
homes, and they've seen a significant amount of price
appreciation. Since 2010, their home prices have gone up 80 per
cent, which is about two times the rate of inflation.
Second investable trend is the move of outpatient services
outside of the hospital setting. So, if you go back to the
eighties, only about 16 per cent of services were being done
outside of the hospital. In 2020, that number was close to 68 per
cent and we think that's going to keep rising. The reason being
because of surgical advances, there's a lot of projects that can
be done outside of the hospital. Whether it's, you know, knee
replacements, trigger finger surgery, cataract surgeries, and so
forth. In addition to that, the expansion of Medicare coverage
has allowed for reimbursement of these services, again, outside
of the hospital.
So, we think these are trends that are in place that should
continue over the next sort of decade and drive more demand to
the healthcare real estate space.
Lauren Hochfelder: So, what should we be
nervous about? What concerns you?
Ron Kamdem: Look, I think on the senior
housing side, there's always two factors that we focus on. So,
the first is labor. This remains a very labor-intensive industry.
But in the US, historically, people coming out of college,
they're not necessarily going into the health care space. So,
there's been moments of labor shortages. This happened exactly
after the pandemic. Luckily, today, the labor situation has
abated and you're seeing sort of labor costs back to inflationary
type levels.
The second piece of it is just the age of the facilities. Now,
keep in mind, there's still a lot of facilities with the average
age of about 41, right. And everybody has in the back of their
mind, these older facilities with older carpets and so forth. So,
when we're thinking about investing in the space, we're always
focused on the newer assets, the better quality that are going to
provide a better experience for the tenant.
Lauren Hochfelder: So, given these shifts,
what segments of your world are poised to benefit the most?
Ron Kamdem: The real estate public market,
there's about 160 REITs across 16 different subsectors; and the
senior housing subsector is by far the most compelling in our
minds. If you think about the REIT market, the average sort of
earnings growth is 3 to 4 per cent. However, the senior housing
sector, we think you can get 10 per cent or more growth over the
next three to five years. The reason being when the pandemic hit,
this was an industry that saw occupancy go from 90 per cent to 75
per cent.
There was a moment in time where people thought you'd never put
any seniors in the facility again. Well, the exact opposite has
happened, and now we're seeing occupancy gains of about 300 basis
points of about 3 per cent every year. On top of some pricing
power, call it 5, 6 or 7 per cent. So, we're looking at a sector
where we think organically you can grow sort of high single
digits. With a little bit of operating leverage, you can get to a
total earning growth of double digits, which is very compelling
relative to the rest of the REIT market.
Lauren Hochfelder: Let's go back to your
generation, as you said. Let's go back to the millennials. How do
those shifting needs affect which part of the universe you would
invest in?
Ron Kamdem: One of the things that I think
every real estate owner’s thinking about is how to integrate
their platform so that they're more millennial friendly. They're
going online. They're using their phones, and I think we're
seeing a much bigger investment in marketing dollars on a web
presence, on a web platform, and on a mobile friendly app,
certainly to be able to interface with that millennial and help
with customer acquisitions.
So, I would say that's probably the biggest difference -- is how
you target that population in a different way than you did
historically.
Lauren Hochfelder: Yeah, I mean we all shop
online, shouldn't we get our homes online, right?
Ron Kamdem: That's right. All right,
Lauren. Well, thanks for taking the time to talk.
Lauren Hochfelder: Yeah, this been great,
Ron. I always enjoy us catching up.
Ron Kamdem: As a reminder, if you enjoy
Thoughts on the Market, please take a moment to rate and review
us wherever you listen. It helps more people to find the show.
*****
Lauren Hochfelder is not a member of Morgan Stanley’s Research
department. Unless otherwise indicated, her views are her own and
may differ from the views of the Morgan Stanley Research
department and from the views of others within Morgan Stanley.
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