Real Estate: Is It Still Location, Location, Location?
One of the first activities attributed to humanoids, even before spoken languages, was to seek shelter. Our quest for cover is as old as fire. We simply don’t like being exposed to the elements. Evolving in fits and starts over the millennia, that need is reflected today in construction techniques and property rights and other efforts and issues, some only marginally more sophisticated than contesting for and settling into the most comfortable cave.
The basics of sheltering have changed little. If you don’t have more people, you don’t need more shelter. But with an influx of people, shelter can be at a premium and you might have to compete for it. These days we worry about homeless people because all sorts of bad things—disease, accidents, violence—can happen as a consequence of being exposed. And beyond mere comfort and safety, having a place to live, an address, is essential to securing employment as well as accumulating possessions and wealth.
Commercial real estate is much the same. Business-related shelter is as essential as having a roof over your family’s head. Keeping business activity out of the elements allows for much improved outcomes—aside from landscapers, construction sites, and football teams (and even they need indoor spaces for planning and operations). There are practical reasons for gathering in one place to conduct business, for workers to be collaborating within the confines of an office building or a manufacturing facility, even if COVID-19 called into question where some of us work most productively. Do professional services need to be performed behind a closed door on the 23rd floor of a New York skyscraper with a view of downtown Manhattan, or could some professionals work just as effectively at home in their basements? Some basic questions about the organizational workplace are being asked that have significant implications for residential as well as commercial real estate.
People Follow Jobs and Quality of Life
Owning a home was long thought fundamental to living the American Dream, though that concept took a beating during the Great Recession. Financial consultants changed their characterization of a house as most peoples’ “largest single asset and biggest source of wealth” to “biggest single item on their balance sheet.” Home ownership was restoring its reputation and appeal as we moved through the twenty-teens, and it is clear that owning a home is potentially a huge source of wealth, if not income. An enormous amount of peoples’ personal wealth is wrapped up homes.
Single-family residential real estate is driven by two factors: where people want to live and household formation in the economy. If you have a high birth rate, you eventually need places for all those people. Aggregate housing starts should more or less match-up with growth in the number of households, with the exception of some adjustments, such as migration, which requires more housing and therefore more construction in a particular area, even if the overall population is unchanged. As well, we see that growth in the number of households ebbs and flows with the maturation of generations of baby booms and baby busts.
It is easy to misinterpret the relationship between the stock of real estate and the GDP accounts. While real estate represents an enormous amount of wealth, that wealth by itself does not contribute to nor is it necessarily a sign of a healthy GDP. A great deal of activity around real estate generates income—lenders, lawyers, real estate managers—but not real estate itself. Construction, the addition to the stock of real estate, is the investment activity that adds to GDP.
Still, the existing stock of real estate helps us make predictions about GDP investment in the context of the larger economy. We pay very close attention to economic indicators like new housing starts, building permits, and groundbreaking announcements by construction firms. They tell us a great deal about the near-term construction impact on GDP, and also about what the business community thinks the future is going to look like and where people are going to live and work.
If you don’t like cold weather and you’re looking for a job, you’re likely to look in a warmer climate. So we’ve seen a great deal of construction in the Sun Belt, which combines warmer weather and a lower cost of living to attract more residents and workers. North Carolina and Michigan illustrate the point. They are comparable in terms of population, slightly more than 10 million each in 2019. But North Carolina employed 231,500 construction workers that year to Michigan’s 173,400, about a third more. North Carolina is typical of Sun Belt states, which are consistently recording above national average economic growth.
Where you decide to live is function of lifestyle and what you can afford given your employment. That has made the Sun Belt the fastest growing section of the United States. Employers have followed suit, moving their companies to where they can get the best workers for the wages they offer. Houston, Atlanta, Charlotte, Raleigh, Nashville, Dallas, Orlando, Tampa: These cities are attracting waves of workers, including new college and advanced-degree graduates with knowledge critical to twenty-first century employers. It is no wonder their companies and jobs are following the graduates.
From an equilibrium perspective, residential housing and commercial real estate need to be developed more or less simultaneously. People need places to both live and work. So while we tend to look at residential and commercial real estate separately in assessing our economy, what drives each market is not all that different. Some states, like Florida, have tried to focus on attracting retirees where the migrants weren’t looking for industrial or office space. But in general the demand for real estate is about both living and working—which takes us back to real estate and investing in real estate being all about figuring out where people want to spend their lives.
Takeaways
• One of the human race’s first needs was for shelter, and over the millennia that has translated into an enormous amount of wealth being wrapped up in homes and commercial buildings.
• People and businesses locate where they believe their lifestyle and business prospects will be best, which has made the Sun Belt, due to weather and affordability, the fastest growing section of the United States.
• Real estate and investing in real estate are about figuring out where people want to live and work, and the results show up in the construction portion of GDP.
Equilibrium
Real estate is one of the most essential markets in the economy; it is where we live and work. Consequently, watching trends unfold in real estate can tell us a lot about the economy. It’s “location, location, location.” If no one wants to live or work in a particular place, real estate in that place won’t be worth much. Conversely, a highly desirable location will be highly valued. What constitutes a desirable location changes over time with differing social preferences and changing technology. Air conditioning was essential for populating the U.S. Sun Belt, and the ease of long-distance travel has made more locations feasible for living and working globally. The wealth represented by the stock of real estate is a major part of many individuals’ investment portfolios, and the investment in new construction is a notable contributor to GDP.