Episode Details

With the generational shift in the US housing market underway, our analysts discuss the impact this trend will have on residential real estate investing.

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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 migrato