What may shape real estate - Part III
The article represents subjective opinions of Hines Interests Limited Partnership (“Hines”)1, the sponsor of investment vehicles offered by Hines Private Wealth Solutions LLC (“Hines Private Wealth Solutions”). Other market participants may reasonably have differing opinions.
As global economies continue to digest the abrupt shift from “no rates” to high rates, Hines believes several forces will likely be reshaping the real estate investment landscape in the coming decades. Two of these (deleveraging and deglobalization) have been covered in previous articles. The third force that may have a profound impact is demography.
Deconstructing how business thinks about the populations it hires and serves
While arguably not as abrupt as deleveraging or deglobalization, the impact on markets from changing demographics may also provide investor opportunities.
For anyone who has been investing over the past 20 or 30 years, it might still be a stretch to imagine how innovations in health care and artificial intelligence (AI) could alter the mix of the working-age population. At Hines, there is some skepticism directed at predictions of massively shrinking populations. Many could, but likely not to the degree of some estimates. For example, health care has advanced exponentially. In our lifetime, diseases never thought curable could be cured. That said, regardless of size, the changing composition of working-age populations will likely have a direct impact on real estate.
Fewer workers may equal slower GDP growth2
The working-age population is set to decline between 2031 and 2050 in eight of the 19 G20 countries (including China), which is likely to cause a significant realignment in GDP (see the below EIU projection chart). However, United Nations projections show significant growth occurring in the 15–24 and 65+ cohorts2 (with obvious implications for student and senior housing). Most global population growth through 2050 appears to come from Africa, and South and Southeast Asia. That growth should result in six African countries being among the 20 fastest growing economies in the world through 2050. India has already overtaken China in total population and will likely continue to grow faster both in GDP and population, although fertility rates are declining quite fast in India.
Aging populations also slows growth
Aging populations, particularly in Europe, should slow economic growth through two channels:
- Slowing population growth (and in many countries, negative growth)
- Higher tax burdens amid rising healthcare and pension obligations, as well as higher debt service burdens brought on by higher interest rates
Hines believes a younger worker demographic will likely cause behavioral shifts in how and where labor wants to work. In-office attendance has ebbed since the pandemic, but worker power is likely to wane in 2024 as slower growth pushes up unemployment. With higher unemployment, workers generally have less bargaining power over wages and (remote and flexible) working arrangements. Higher unemployment would allow employers to set firmer ground rules for in-office work. Reduced job security is also likely, especially in those industries being disrupted by energy transition, automation, lower investment, and the adoption of new technologies. Exceptions to this prediction could be fast-growing emerging markets (e.g., India) and in-demand skills, including those leading the artificial intelligence revolution.
Executing the Hines vision of office
Hines understands the dynamics in office and plans to attack the sector from the credit side as well as through traditional equity. But more fundamentally, Hines believes it has a clear vision for what the future of the office will look like and will aim to execute that vision in the years to come. The recent reduced appeal of the office sector has been closely connected to the factors (deleveraging, deglobalization, and demography) discussed in this series. In the decade since 2013, Hines reduced its office exposure by half while increasing multifamily and industrial by three times, representing a strategic diversification across product types. However, Hines has significant and historic experience in the office sector, strong views of what tenants want, and believe there is a lesson to be learned on office values from the performance of retail over the past decade. Capital markets painted that asset class with a broad brush due to secular changes stemming from e‑commence. But in examining the data, the best assets did quite well, stealing market share from those that failed, and investors who wrote off the asset class entirely missed a compelling window of opportunity.
Disruption may bring opportunity
Hines holds a similar view on the future of the office and believes it is too early to dismiss the potential of a whole asset class undergoing a massive transition in use. Disruption may introduce the opportunity for property re-inventions to help deliver the desirable destinations of tomorrow. Those winning destinations will likely be a set of magnetic, well-located office buildings with flexible offerings and purpose-driven experiences and amenities that attract actual occupancy. Deleveraging, deglobalization, and demography provide a backdrop for Hines to formulate investing theses across property types. There will likely be much to consider in the quarters and years ahead and there will surely be additional implications that arise from these broad forces. Hines looks forward to navigating this journey with its current and future partners.