ARA CEO Stanley Iezman and Head of Research Sabrina Unger discuss how an aging U.S. population influences the way investors are looking at commercial real estate today and in the future. They consider the impact different generational cohorts will have on the various sectors of real estate and how policy may help offset some of the challenges of an advanced economy’s demographic state.

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Stanley Iezman: One of the most important things that you and I talk about when we're thinking about investing is demographics and how they impact the demand for real estate. How do you think about demographics today from an investment standpoint?  

Sabrina Unger: The single greatest demographic influence in the next decade, as it relates to our investment strategy, is the aging of the domestic population. We've known for years that every generation that comes after millennials is smaller than the last one. So we think about what that suggests about the composition, overall, of the domestic population. Years ago, we were effectively a pyramid: there were a lot more younger people at the bottom supporting relatively fewer elderly people at the top. We have now essentially shifted shape as a population where we've gone from pyramid to pillar, so now we have many more elderly people being supported by relatively fewer young people. When we think about those structures, pyramids are built to last, but pillars can often topple. 

SI: That is a very interesting problem. We have a demographic shift of the boomers—my generation – sort of aging out, and the utilization of real estate is very different than it was before. How do you think this older population shifts the demand for real estate today?  

SU: I think what's important to remember is that older households tend to spend less in aggregate. That suggests that consumer spending, or retail sales, inevitably slows as this pyramid-to-pillar shift perpetuates. As we move forward, there's less spending, so that suggests retailer profits could be challenged; it suggests future net demand for industrial could moderate in response to slower retail sales. That would be a net negative. Now, the one caveat to lower spending by older households is healthcare. Somebody aged 65-plus spends nearly four times as much on healthcare than what they spent on healthcare when they were in their 20s and 30s. That suggests, of course, that there will be continued demand for things like life science that caters to aging and all the processes to help facilitate that, as well as outpatient medical offices. 

SI: Do you think we're going to have enough workers to be able to provide the medical care and the home healthcare support that are going to be necessary for this aging population?  

SU: I think we will certainly see more and more companies try to solve that problem through technology. Maybe we get to a place in the future where human workers are also being supplemented with some sort of robotic companion to help with that labor. We've talked about this in other times, but the reality is that the labor force is perpetually tight in this country because, again, every subsequent generation is smaller than the last. And so as we have more baby boomers retire, we have fewer people that are ready to step into those roles. We're going to have to lean on technology to solve for some of that gap. 

SI: What other areas do you see an aging population impact the utilization of real estate? Do you see impacts to multifamily housing or single-family housing?  

SU: I think one of the questions that we get related to this is: should we be doing some more in senior housing? Should we be doing assisted living? Doesn't this signify there is going to be a lot of demand for that? The average age of a person that moves into assisted living for the first time is 83. Even the front end of the baby boomer wave, they're not going to hit that age until 2029. So we have a long runway to position ourselves, if we want to take advantage of that in our strategies. What I think it does impact is housing. If seniors can't live alone, and maybe they don't have the income to be able to afford independent living, they're going to look to their children to house them. I don't think that's going to happen in a one-bedroom apartment. So this actually bolsters the intermediate and longer-term case for purpose-built single family rentals, because they tend to have more space. We may see some changes in terms of the design of housing, where we see very specific living zones. If you are an older child and you have your parents move in, they have their dedicated space in your home, you have your own dedicated space. So we could certainly see that evolution come into play. 

We also have talked about things like accessory dwelling units – the granny pod in the yard. I think municipalities will really have to consider their willingness to allow those things on single-family plots so that again, the children can help take care of the elderly parents that may not be able to or want to go into a traditional facility. 

SI: Implicit in this conversation is the fact that we have this massive demographic shift to fewer people, and every day we look in the paper that the job openings that are unfilled are significantly higher today than they were 10 years ago. How do we think about that in terms of being able to fill that gap - absent a change in immigration, which is a political solution to a demographic problem? 

SU: I think you took my answer to your question, which is the whole reason that advanced economies, not just the United States, have been able of backfill the gap left behind by an aging population is through immigration. The United States is not alone in the fact that we're going from pyramid to pillar. The countries that have been able to address this have more lax immigration policies, and that has propped up the United States historically. Our birth rates have continued to be on the decline – again that's very typical of an advanced economy where education levels go up. I don't think that we can prompt a reversal in the domestic population's willingness to have more children. There's a whole host of reasons why people aren't doing that; so absent of reversal in immigration policy, I think that that gap persists. 

SI: You and I always talk about economics driving decision-making, because that really underscores everything. It would seem that our immigration policy surrounding this question, we should be allowing more people into the U.S., because that would drive the economy, and we would have greater growth than we are otherwise having right now. 

SU: Yes, that's absolutely correct. We look at the way immigration fills labor, it's productive labor. Immigrants often have more children, at least first generation. So again, that helps with consumption and consumer spending. There's very little economic downside to a more lax immigration policy, as you alluded to. It's almost wholly political. 

SI: Let’s talk about our favorite topic, Gen Z and the millennials: what they do, what they don't do, and what their needs are in terms of real estate. How do you think this new generation is going to utilize real estate, and what are the changes that we should expect?  

SU: We cannot overemphasize the importance of affordability for those cohorts. We think about millennials and Gen Z, what are the characteristics of these generations? They're consistently burdened with student loan debt, they are unable to get into the for-sale housing market, which has traditionally been a wealth-generation mechanism. And on top of it, their prospects in terms of earnings and jobs have been marred, not by one, but two really disruptive economic periods in their early earning years, both with the global financial crisis and then with COVID. So interestingly, inflation-adjusted earnings for millennials at the age of 40 is higher than previous generations at the age of 40. When you look at it through that lens, it doesn't seem like it should be that bad, they should be able to buy a home. But again, housing prices have accelerated so much more rapidly than their income that they just can't get into the market, so it's creating a generational wealth gap. Whereas previous generations bought a house, the home appreciated, they could pull equity out, they could contribute to the economy – these younger generations are just simply not able, en masse, to crack into that. 

What it suggests about real estate demand going forward is that there's going to be a perpetual, chronic, growing need for affordable, accessibly priced rental product, at least until there's a greater generational shift from sort of older generations holding the for-sale market and passing it onto these younger generations. 

SI: Well, this is a great topic and I want to thank you for your time, Sabrina, on this exciting conversation about demographics. And we're going to be looking at this over the next several months again, as we monitor the changes that are occurring. 

This transcript of the ARA In Conversation discussion has been edited for clarity.

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Watch more ARA In Conversation, as Stanley Iezman and Sabrina Unger discuss the Future of Office

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