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

Source: Econ­o­mist Intel­li­gence Unit (EIU) as of YE 2021.

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 1524 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.

Pro­ject­ed Changes in Age Groups
Source: The Over­shoot, Infla­tion In The *Very* Long Run,” Matthew Klein, May 132023.

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. 

Source: Econ­o­mist Intel­li­gence Cor­po­rate Net­work (EINC) as of June 62023.

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.