How Baby Boomers Will Affect the Commercial RE Market

Question

My mom recently was discussing her retirement with me and it dawned on me how much the baby boom generation will impact the commercial real estate investment market.  I was a partner for 8 years at a national firm brokering commercial real estate investments so my mom was asking me about potentially investing in an asset.  What she needs is yield.  The stock market hasn't given her the returns she desires and almost no annual yield.  Given that the baby boomers just started reaching age 65 in 2011 and will likely move their stocks into higher yielding assets, I am prompted to believe that a significant amount of equity will be pumped into commercial real estate.  This is already evident by the massive amounts of money being raised by the likes of Blackstone, American Realty Capital, Cole, etc.

Paul Falbo · Answer

I'm with Bill; although, conventional thinking may be wishful thinking.

Baby Boomers have been a topic of discussion and study for many, many years..  As we reach retirement age, we supposedly impact healthcare, housing, budget deficits, the stock market, consumerism, political decisions, etc.  As a major demographic, the impact may be become negative.

The growing popularity of reverse mortgages is a sign that a lot of boomers weren't saving or planning for their "golden years."

I'm not one for generalities.  I made my living out of servicing investors in real estate. I've watched millionaires created and watched some of them become broke.

I went to a symposium some 6 or 7 years ago and the keynote speaker was projecting that the baby boomers would drive the stock market over 20,000 by now as every boomer would be investing their money for retirement into the stock market.

The Fed isn't helping.  Taxes are going up, along with capital gains; and returns in money markets, stocks, bonds aren't stellar.

My recommendation is to study the down and up cycles in real estate.  If you know a good geographer, you might be able to get ahead of the curve.

Roman Rosario · Answer

What's your cost basis in the Fullerton deal, if you don't mind saying?

The Davis market is great!  University towns are always a good bet.  Very low retail vacancy and most of the good office buildings are well leased, albiet a slightly higher vacancy when including the Class B and C buildings.

I like industrial, retail, multifam then office, in that order.

Karen Margrave · Answer

Yes, that's definitely too big a house for an empty nester! We leased out huge house out when our adult kids all moved to so Cal, and followed them! We had a 4600 s.f. house, 2100 s.f. guest house on 20 acres! Though I miss it terribly, there's a much better market here, and friends of ours leased it, so that's a bonus.

We like commercial because buyers do things more on the numbers, less emotional drama. Though, we do build residential sometimes.

We are in the process of putting together a deal in Fullerton, CA, it's a 10,500 sq. ft. +/- medical office building. The only vacant lot that was for sale in the area. It's designed to be sold as an entire building, or condos (allowing smaller investors). The entire building will sell for around $5 million.

How's the market in Davis? What type of properties do you like?

Roman Rosario · Answer

Medical definitely seems like a safe bet.

Interesting you mention baby boomers and their homes...staying on the topic of my mom, she has way too much house for what she needs at this point...she's an empty nester in a 4K SF home...her plan is to sell the house and roll the equity into an income producing asset...another reason I think commercial real estate could see a boom.  Yield will drive the decisions of many boomers.

Roman Rosario · Answer

Interesting comment regarding the keynote speaker Paul...I actually believe that the stock market should stall for the next 20 years given baby boomers reluctance to leave money in there as they start drawing from their nest egg....only time will tell!

Karen Margrave · Answer

As a Boomer myself, a developer, and a real estate agent, I know that what was once thought would happen with the Boomers has changed dramatically, and there's no way to know the extent of the damage.

Many boomers (and others) had depended on their homes appreciating in value, and thought they would be able to sell their homes; and relocate to a new area where living was less expensive for retirement, paying off their new homes with cash. We lived in one of those areas that drew the boomers from southern California that wanted to escape the rat race, and in fact were in the middle of building out a residential subdivision. When the market crashed, the entire area we lived in died. Unemployment skyrocketed, as the area was heavily dependent upon construction, and perfect for retirement (lakes, rivers, caverns, volcanoes, it's beautiful) The buyers of new homes were gone within weeks. All the equity they were depending on to relocate disappeared, as did their retirement plans.

Another scenario is those that refinanced their homes, once again depending on appreciation, and now have over financed homes that are under water.

I think in the areas where the economy is still good, many that planned to retire will retire later. Many of those that planned to move will instead move into smaller homes or condos, or possibly rent apartments.

In the areas where values fell, and the economy hasn't come back, there are many boomers that have lost their homes, renting apartments, and working in service industry jobs if they're lucky.

So in answer to the question, it's anyone's guess. We've never seen this situation before, and we'll learn as it unfolds. One thing is certain, the Boomers will get sick, have hip and knee replacements, need rehab, or work on staying healthy, causing all the businesses in those areas to prosper, and that's one reason why we are focusing on medical office space. It's a growing niche.

Bill Gulley · Answer

Welcome to BP, Roman.

Pretty short bolg, but I suppose as I'm a Boomer! It follows conventional thinking, older investors conserve and youger ones take more risk as they have time to make up for any ooops! :)

How Baby Boomers Will Affect the Commercial RE Market

Most Popular Reply