Access over excess: A new era of tenant demand

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Access over excess: A new era of tenant demandIn 2011, for the first time in nearly 100 years, the rate of urban population growth outpaced growth in the suburbs, according to CBRE Global Investors, and millennials are the driving force behind the phenomenon. Members of this group are willing to live in smaller apartments and travel to their nearby workplaces by foot or public transport, and prefer to be conveniently located near restaurants and leisure facilities.

This shift in the way the U.S. lives, works and enjoys leisure time is helping to redefine the economy and society, creating a new era of tenant demand in the real estate industry. Evolving demographic trends, growing urbanization and, of course, omnipresent technology are creating growth opportunities that cater to rapidly changing appetites.

On-demand culture and the growth in urbanization Almost two in three people in the U.S. use smartphones. That’s an estimated 207.2 million smartphones for a population of 332.7 million, according to U.S. Census Bureau statistics.*

This level of connectivity has irrevocably changed the way people live and work. Access to data and technology creates an on-demand culture for products and services that was not present a decade ago.  

“This type of consumer change drives people to more urban areas, with better-tailored services, mass transportation links, and more food and dining choices,” says Donald Wood, president and CEO of Federal Realty Investment Trust.

What is commonly missing from urban areas is the big-box store. But national retailers such as Walmart and Target have already started to capitalize on this void by opening scaled-down versions of their retail outlets in densely populated  areas. Others are expected to follow suit.

The boost to industrial real estate
U.S. e-commerce sales in the first quarter of 2016 accounted for 7.8% of total retail sales — a 15.2% increase on the first quarter of 2015 — while total retail sales increased by 2.2% in the same period.

The on-demand culture is also reflected in the growing number of e-commerce transactions that connected consumers are making. Millennials generally prefer to order online and receive their deliveries within 24 hours, says Lorraine White, a partner in Tax Services at Grant Thornton LLP.

This has been highly beneficial to the industrial sector, which includes the vast array of logistics warehouses across the U.S.

Flexible working leads to a new corporate environment “Companies are designing spaces to meet their workers’ evolving needs,” says Alvin Wade, national managing partner, Construction, Real Estate, Hospitality and Restaurants practice at Grant Thornton. “Employees ‘check in’ to the work space — it’s called hoteling,” he explains.
Successful businesses are increasingly technology-driven, which enables people to work from home and communicate with colleagues via digital channels. This leads to a different demand for real estate use. Smart companies are no longer utilizing traditional office floor plans, instead designing more efficient layouts that cater to flexible working patterns to encourage innovation and collaboration.

Demographic shifts Real estate owners and operators can use sophisticated data analytics to understand more about what the market wants, helping them react more swiftly to tenant demand than ever before.

This is particularly relevant to millennials. “I think smart developers are really ahead of the curve,” says Richard Smith, an industry adviser, at Grant Thornton. “They are accommodating what specific generational groups in the U.S. want in terms of mixed-used living spaces and work environments.”

Suburban communities can find growth opportunities here, if they are willing to reinvent themselves with urban influences — by blending residential, commercial and cultural properties into street-level walkable experiences.

The affordability challenge Affordability is a key factor for millennials. The cost of higher education is taking its toll — the average class-of-2016 graduate has $37,172 in student loan debt, up 6% from last year. Meanwhile, the average price of a house in the U.S. has doubled in value from 1999 to 2016 to $379,800.

These financial pressures have partly shaped rental-market demand. The 306,000 multifamily units that were completed and entered the market in 2015, according to Freddie Mac, represented the most additions in a single year since 1989. And the American dream is being redefined — home ownership is at a generational low of 63.5%, according to U.S. Census Bureau data.

There may be other factors that are driving demand for leased apartments. “The perceived stability of home ownership may not be what it was cracked up to be,” says Smith. “Rather than having their money tied up in a home, I think there are other things that millennials would rather do with it.”

Additionally, millennials are waiting longer to get married and having fewer children, so bigger yards and better school districts are essentially not on their radar.

Summing it all up The way people live and work is changing. As real estate developers decide where to invest next, they should remember that access to amenities has become more important than square footage in terms of living spaces, and the workplace is more about collaboration than hierarchy. All indicators suggest that the way forward is to build up instead of out in highly populated urban areas.

Millennials Infograph