CRE Finance World Autumn 2015
21
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The Graying of America’s Real EstateJay Rollins
President and CEO
JCR Capital
here is an historic phenomenon occurring that is changing
the face of commercial real estate, and few are doing
anything about it. Right before our eyes, we are witnessing
the greatest transfer of real estate assets in the history
of our country.
This transfer of assets is tied to middle market commercial real
estate and the ownership base of this real estate. The ownership
base of middle market assets is typically individuals or a partnership
of individuals. The majority of this ownership base is aging baby
boomers, between the ages of 51 and 70. Thus, the ownership
of these assets is explicitly tied to the “Graying of America.”
Thus, middle market commercial real estate represents the
majority of commercial real estate properties in the country, and
accounts for more than half of commercial real estate in value.
According to the Federal Reserve, the value of commercial real
estate in the United States is $15 trillion; of which $7.6 trillion is
middle market properties with values under $50 million.
The trends in the graying of commercial real estate reflect larger
demographic trends in the U.S. relating to the aging Baby Boomer
generation. According to the US Census:
• Baby Boomers make up 24 percent of the current population
• 2.5 million males and 1.5 million women will pass away over the
next five years
• The average Baby Boomer age is 58; it will be 64 in 2020
• Every day for the next 16 years 10,000 baby boomers will turn 65
• Sixty to 80 percent of Boomers want to move once they retire,
stimulating commercial real estate transitions
According to the
New York Times
, this graying of America is
happening faster than anticipated:
“While demographers have long projected a significantly older
country later this century, declines in fertility and mortality rates
are hastening the shift, leading to what are expected to be
profound changes for issues ranging from Social Security and
health care to education. Signs of the change are underway:
The Villages, a city in Central Florida with a large retirement
community, was the nation’s fastest-growing metropolitan area
from 2012 to 2013, according to the Census Bureau.”
For the next 10 to 15 years, due to the aging ownership profile
of middle market commercial real estate, almost every asset
will change ownership because of life events such as death,
retirement, health issues, etc. Even if these assets are transferred
within the family, new ownership will be compelled to manage, sell,
improve, etc. this real estate.
This transfer of ownership is an unprecedented opportunity for
those who specialize in middle market commercial real estate. In
addition to an aging real estate ownership base there continues to
be a lack of liquidity for middle market real estate from both capital
providers and sponsors. Less capital is available to the middle
market as banks have tighter regulations.
Large real estate funds do not typically invest in the middle market
range, thus the owners of this real estate have limited access
to institutional capital. There are few, if any, institutional quality
mangers that are exclusively focused on middle market real estate.
This vacuum provides opportunities for middle market capital
providers to earn above average risk adjusted returns. Historically,
this space has provided better deal flow, pricing and structures for
capital providers.
Steve Sadler, CEO of Allegiancy says “the middle market is much
more the purview of regional players, with knowledge on the ground....
and we have to be more well-versed in the middle markets.”
Yes, middle market players are regional...and aging. Tapping into
the aging ownership of middle market properties gives rise to a
whole new set of opportunities and issues such as: death, succession,
divorce, liquidity, and partnership issues. These life events are
significant drivers of middle market real estate transactions.
Clearly, the “Graying of Commercial Real Estate” presents enormous
opportunities for those with capital, knowledge and foresight to
tap into these significant demographic and generational shifts in
the U.S.
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