Nobel nominee says Boomers to blame for recession.
Speaking at last week's CoreNet luncheon, Dent said the downturn has nothing to do with failed fiscal policy, but rather shifting demographics and an aging Baby Boomer population that will continue to adversely impact the commercial real estate industry for at least the next decade.
According to Dent, Baby Boomers a generation that went from hippie to yuppie culture typically married by 26. With marriage and children, comes a rise in consumer spending ranging from homes, cars, clothes, food, toys and other goods. That spending pattern rises from marriage until age 46-50 then declines (as children move out of the home and parents near retirement, around age 63). The problem, he said, is that the country's most populous generation, the Baby Boomers, have now surpassed that spending peak.
And younger, more transient generations--waiting much longer to marry, have children and purchase a home--simply aren't big enough spenders to drive our economy. It's not the 20-somethings or 30-somethings spending money on bars, restaurants and clothes that fueled the U.S. economy; it was the traditional spending habits of the middle-aged population.
"That's what drives our economy, people doing predictable things--borrowing, saving, investing and spending," said Dent, a Nobel Peace Prize nominee and founder/CEO of economic research firm HS Dent.
What's more, population projections indicate a declining U.S. birth rate through 2022, meaning consumer spending isn't expected to pick up for at least a decade. And that trend, coupled with a few other emerging demographic factors will bring some new challenges to the commercial real estate industry.
Dent said the demand for commercial real estate is at its highest when there's a strong influx of young people entering the work force for the first time. But declining birth rates over the next 12 years will cripple such demand for commercial space--even here in Manhattan.
In fact, Dent suggested that commercial real estate demand in New York might fall below other U.S. markets over that period because immigration into the U.S. is also projected to decline over the next several years. Additionally, both New York and New Jersey rank among the top five states losing population, underscoring a greater trend of population exodus from the Northeast.
Dent said the proposed federal stimulus is not the right remedy for the ailing economy and real estate industry. The reason, he said, is that young people have less of a need to buy new goods and the Baby Boomer population is now past the prime age for consumer spending.
"You give old people money and they go on vacation or save it," Dent said. "They don't go out buying cars and houses."
Dent likened another Federal stimulus to downing an entire bottle of Viagra and having nothing happen below the waste. A stimulus, he said, would take at least a year to have any impact on the economy and there's a strong chance that it won't meet consumer expectations, causing stocks to plummet--along with the value of the U.S. dollar. It's a risk, he says, that isn't worth taking.
That being said, Dent believes the real estate industry must brace itself for a longer-than-anticipated decline. Citing the 63% drop in home value during Japan's most recent recession, Dent said a similar scenario isn't out of the question here in the U.S. due to the deflationary nature of this downturn. Home prices, he said, have much more falling to do before the housing sector begins its recovery.
This downturn, he warned, will cut deeper than most experts are predicting and more so than anything the industry saw in the 1980s. Dent predicts the real estate industry won't bottom out until late 2012 or early 2013; most experts have suggested a turn-around in 2011.
Undoubtedly in for tough times, real estate professionals, advised Dent, should look to invest in healthcare properties; and landlords should seek pharmaceutical tenants, as demand will skyrocket for both thanks to the aging Baby Boomer population. The multifamily sector also looks like a less risky bet for investors, but homebuyers should continue to wait out the market, as Dent believes prices still have a long way to fall.
Dent strongly encouraged property owners to consider refinance mortgages, both short and long-term loans. He also suggested that New Yorkers lobby for stimulus funds for key infrastructure projects like Hudson Yards, which will stimulate the economy more so than stimulus funds for consumers, who are unlikely to spend in the current climate.
While news of a prolonged downturn and diminished commercial real estate demand unsettled the sea of CoreNet members in the audience, Dent did, however, promise an unprecedented level of transactional activity--unlike anything the industry has ever seen--for those who can wait it out and survive the shakeout. At this juncture, he said, firms shouldn't focus on expansion or market share, they should simply focus on survival and outlasting the competition.
"You ever hear that if there's a bear chasing you, you don't have to outrun the bear--you just have to outrun your friend," Dent said.
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|Comment:||Nobel nominee says Boomers to blame for recession.|
|Publication:||Real Estate Weekly|
|Date:||Jan 28, 2009|
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