There are eight factors driving the real estate high-rise boom. Of these, the primary driver is home equity. Significant high-rise development doesn’t make sense in markets where single-family homes cost less than $250 per square foot.
1. Demographics: There will be more than a 25 percent increase in the population of people over the age of 50 this decade, many of whom prefer not to own a high-maintenance home. This “over 50” group will also have far more money than any generation before, thanks to dual incomes, rising home prices, and record levels of inheritance. Many will choose luxury-high-rise, resort-like living, while others will prefer a more affordable “move down” alternative to an area where they don’t have to waste valuable time on the roads.
2. Government Policy: I never thought I’d say this, but governments are “getting it.” Many cities are “built out,” yet their populations continue to grow. Some city government officials want high-rise living to boost the wealth and income levels in their cities. Others have smart planners who see an opportunity to provide more affordable condominiums. Some provide both luxury and affordability.
3. Scarcity of Land Near Job Centers: Many areas, and most notably California, have made very little investment in freeway construction and mass transit in the last 30 years, resulting in unbearable commutes. Generations X and Y have absolutely no intention of wasting their lives in traffic, and difficult commutes will result in more baby boomers moving back into town. This phenomenon has been occurring in high-rise markets such as Chicago for many years.
4. Lifestyle Choices: Empty nesters, singles, young couples and retirees don’t have kids to consider. Throw in an increasing number of professional couples (same sex and opposite sex) who make great incomes and enjoy urban culture, and you have a recipe for high-rise development success.
5. Globalization: In many markets around the world, executives live in high-rises. Many affluent U.S. immigrants have been surprised that their first choice in housing has not been available to them. The buyers in many towers are international.
6. Home Equity: The high-rise market is highly cyclical and its success depends on local home prices. Entry-level buyers won’t pay $350,000 for a studio unless townhomes in the area are far more expensive than $350,000. Luxury high-rise buyers won’t materialize unless they can access a huge down payment from their existing home. As long as housing market equities hold, demand will be strong.
7. Depth of Demand: High-rise developers are tapping into pent-up demand that exists in their market area, as well as a small amount of induced demand from economic growth and second-home buyers. Once this demand is saturated, which has already occurred in San Diego, economic growth should support no more than two to three high-rises per year in each major coastal market.
8. Speculators: Investors buy homes that can be rented out as cash-flow-positive investments. Speculators buy cash-flow-negative assets that they believe will appreciate significantly. They believe they are smart enough to sell their investments before a downturn. There are speculators in new-home communities because they believe developers sell pre-construction units below market value. The units are false demand that result in resale competition for the developers of future towers.
In summary, more U.S. residents than ever before will live in high-rises over the next 20 years, but speculative bubbles in certain markets will occur along the way. The key for builders is to have floor plans and amenity packages that are exactly what the buyers want, and to avoid building high-rises in markets where speculators are active. Las Vegas, San Diego and South Florida are reportedly where the speculative activity has been greatest.
John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.
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