The Velocity of High-Speed Demographic Shifts Leaves Question Marks for the Commercial & Residential Real Estate Industry
Many people moved during the pandemic by departing from cities and heading to the suburbs. This has been well-documented in an excellent article by Bloomberg CityLab that based their findings on data from the U.S. Postal Service and the U.S. Census Bureau. As a consequence, there is a booming real estate market, even in small, rural towns that were once long forgotten because industries such as steel mills and coal mines shut down their operations such as in Bethlehem, Pennsylvania where the Wall Street Journal found price-shocked home buyers. But the reasons for some of the housing shortages have been building since the 2007-2008 Great Recession, according to this analysis by Elyse Menger of Applied Geographic Solutions.
These findings provide the hard evidence. The anecdotal evidence has hit my own family with three of my adult children vying to buy homes during the last two years. One, bought at the early stages of the pandemic and found a home after only bidding on just a few homes in the Washington D.C. area. Another just recently purchased a home in the D.C. area but had to place multiple bids, all above the asking price. The last piece of evidence is from my third son who is desperately looking for a home in the San Francisco Bay Area but after submitting bids on multiple homes, is coming up short as other bidders are offering 20% over the asking price, with many submitting all cash offers. He has since decided to delay his house hunt.
Dynamic Demographic Disruption
The consequences of many people entering the housing market and urban flight that have led to housing shortage are staggeringly interesting to the location intelligence profession as we try to work with data that will provide some enlightenment as to how shifting demographics affect both residential and commercial real estate. Both the velocity of new data available to analysts and a once-in-a-lifetime phenomenon that led to changes over the course of just a few months, instead of years, provides an opportunity to validate the benefits of geospatial models.
What’s coming into focus is the need for location-based data that can capture the dynamism that is taking place. Fortunately, location technology has been harvesting the digital breadcrumbs left by a mobile society and sensor-enabled devices that provide information on consumer behavior that has offered extremely valuable information on brand interests and location. Vital new data from U-Haul has tracked one-way rentals to cities, thus validating this phenomenon. However, with Apple’s 14.5 iOS restricting the access to third-party data from cookies, those breadcrumbs will become scarce sustenance for the hungry marketer or the real estate investor.
The Real Estate Inventory Squeeze
Menger’s analysis explained that during the Great Recession many construction and materials mining workers were laid off, as jobs disappeared and many never returned to the workforce. This led to a shortage in the construction and manufacturing workforce as the economy recovered. As a result, the inventory of new homes that were required in still-growing metro areas did not keep pace. The pandemic had a similar impact that has driven up prices for materials and kept the labor force on the sidelines as they collected unemployment benefits. But also, Menger points out, Millennials comprise the largest demographic cohort today and have tended to delay both marriage and consequently buying a home, too. In addition, there is not only a shortage of suburban residential inventory but a shortage of lumber and commodities like copper that is slowing the construction of much needed homes. Hence, Millennials are caught in a squeeze. The market has too many buyers chasing too few homes.
Working from Home Works
Urban migration from city centers has created a glut of commercial real estate left fallow by workers who can now pursue a comfortable employment lifestyle at home. Bloomberg CityLab also cited that “More than a decade ago, back in 2010, the U.S. Census Bureau reported that some 7% of U.S. workers worked largely out of their homes, and that 10% or so worked from home one day a week. Today, roughly 40% of jobs can be done remotely” according to the National Bureau of Economic Research. The question that many are asking is whether workers will return to the urban canyons of high-rise offices. Employers such as Google and Microsoft, have already said that flexible work situations will be accommodated.
The Un-Malling Continues
Considering the confluence of urban flight, a suburban housing shortage, and the pandemic, retailers find themselves under water. Malls were drowning before COVID-19 hit and the over 20% increase in e-commerce purchases over the last year has left many “dead soldiers”, those vacant storefronts in both strip and regional malls in the wake of e-commerce giant, Amazon. It’s time for malls to adapt.
A recent article in Chain Store Age proclaimed, “If you own a mall, you also own a warehouse.” Author’s David Blumenfeld and Kyle Spencer discuss how, “Mall owners who are thinking about providing warehouse and logistics services will need to make fundamental shifts in how they interact with tenants. They’ll need to reevaluate and purchase the tools and technologies they implement on their properties…It’s a win for the retailers, a win for shoppers, and most certainly a win for landlords. Expanding the definition of a mall expands the revenue streams, the customer base, and the overall value of the property.”
This is an optimistic outlook, for sure. But what most mall developers and would-be warehouse managers might fail to realize is that the original mall location was planned with different demographic statistics at a different time. Today, new, more current location-based data is required such as footfall, dwell-time and real-time vehicle traffic data. Factors such as the ingress-egress to a mall location acting as a new, regional depot needs to be planned with respect to existing traffic from passenger cars.
Where Logistics and Geospatial Meet
To validate whether part of the mall could be converted to a warehouse while giving hope to existing retailers that the buying power of walk-in traffic will return, more recent consumer expenditures that track brick and mortar versus e-commerce purchases need to be obtained. Questions such as:
- Where have most of the purchases occurred recently (e-commerce vs. brick and mortar) and how much?
- Would a warehouse location that used to be a mall, serve the needs of local consumers?
- Is there a propensity and need for 1–2-hour delivery that could be accommodated by the new warehouse?
- What were the purchasing patterns over the last year that fundamentally changed?
- Are there more knowledge workers moving into the area vs. a more industrial, “blue collar” workforce?
- How could these changes be modeled, and can a new, “highest and best” use for the mall be determined? Should it stay just a mall? Or should space vacated by an anchor tenant be converted into a warehouse?
- Is it better as a mixed-use facility that includes recreation, office, retail, etc.?
Here, the application of geospatial data and location technology is most helpful. Spatial interaction models that accommodate variables specific to warehouse development can determine attractiveness, regional access to transportation, taxes, distance to other warehouses to determine delivery zones, and options for direct-to-consumer (D2C) opportunities. Catchment areas, described by distance, time, and road safety can provide logistics managers the ability to evaluate mall-to-warehouse conversions.
Commercial Real Estate Must Adapt to New Reality
Research by Prologis has indicated the future of logistics real estate has been forever changed with the long-term structural growth rate rising. “In order to compete, brick-and-mortar retail will need to meet the same demands for convenience and reliability as offered by online shopping. Options to buy online and pick-up in store could drive traffic and sales post-pandemic, but would put increased pressure on store inventories, necessitating a rapid replenishment operation close to stores to keep shelves stocked…Leveraging data and technology in retailing and supply chain management creates a competitive advantage that can help companies more efficiently scale and globalize operations.”
Adapting to the current environment will require commercial real estate companies to leverage technology in such a way that allows them to keep the same pace in the post-pandemic era. The habits of consumers have certainly changed, and they are not looking back. They’ve already adapted to a new reality and every industry, including real estate, is already feeling the pinch.