I turned 50 this year and my son Kevin signed me up for AARP. I thought it was a joke. It wasn't. I actually qualify for membership in the American Association of Retired Persons. Amazing.
Adding insult to injury, our payroll administrator informed me that the limit on my contribution to our 401(k) plan had been raised to let me catch up as my retirement draws nearer. And, a short time later, I was speaking on the phone with a nationally recognized broker who was handling a large transaction that was about to close. He told that he was going to weight hismore toward income since he was getting older, wished that he had done this sooner and was sure I had the same regret.
The United States is experiencing a large demographic shift. That is notnor is it a surprise. That I am a part of the shift is, somehow, a surprise to me. Further, that people, some of them my peers, are making financial decisions based on that shift should come as no surprise to any of us…but it does.
In my case, it is simple denial about my creeping age. But in the case of the real estate community, we tend to think of our business cycles as only relating to economic expansions and contractions and their corresponding interest rate movements. We have been slow to fully recognize that our business is also driven by broader variables, such as the trade deficit, the U.S. budget deficit, global business expansion, global demographics and the performance of other sectors in theworld.
A growing retirement population creates a pile of capital with unique investment goals. Their horizons are shorter so the emphasis is on preservation of capital, current income and stability of income. A well-located, high-occupancy shopping center fits these criteria pretty well. As to investment returns, I remember being discouraged in the decade of the 1990s because a potential 15 percent to 18 percent IRR from a property was not attractive since the broader stock market was producing returns from 20 percent to 30 percent. Why would someone want to invest in illiquid, low-yielding real estate when the alternative was fast and easy money in “the market?”
Now, the reasoning has shifted. Why wouldn't someone be pleased with a stable 8 percent to 10 percent total return from real estate as opposed to a riskier 6 percent to 8 percent projected return from the equity market (and the 6 percent is optimistic if one follows the Oracle of Omaha, Warren Buffett)? The alternatives to real estate are no longer as attractive as they were.
This demographic pressure and the change in investment goals it brings are not limited to the United States. Many people in many countries are getting older, have the same goals and the same limitations. Globalization doesn't just send back-office jobs to India or funnel Chinese goods through Wal-Mart to us; it also exposes our real estateto a global community of investors.
Australian, German and Dutch investors are driven by many of the same forces as American investors. They are seeking stable cash flow, reasonable appreciation and their options are uninspiring. Combined with a weak dollar that makes our assets a relative bargain and our low interest rates, U.S. shopping centers are quite attractive.
A Positive Outlook
Real estate has become a legitimate asset class. Investment advisers in the United States and around the world now routinely recommend that a diversified portfolio include some allocation to real estate.
This is true for public pension funds, corporate pension funds and endowments. The 401(k) at my company even has options for employees to invest in real estate.
Now that I am an old guy, I can increase my investment in this sector. This is true in countless companies and institutions literally around the world.
Real estate has joined the global institutional investment market and that is having an impact on the way our shopping centers are being valued today.
I do not know what is ahead for values in our part of the real estate world, but I do think that the good old days of high volatility and the opportunistic investment strategies that came with them are gone.
Too many changes in the world have transported real estate to a new era. And there is just too much capital in the market for me to expect any big swings in value in the near future.
I am not exactly sure how to attack the market with these new fundamentals, but I am going to start reading my AARP magazine, figure out the difference between the current account deficit and the budget deficit and start hanging out with some Australians.
They seem like pretty fun people anyway.
President and CEO of GMS Realty, LLC, which acquires, redevelops, develops and manages neighborhood shopping centers in the Western U.S.