An American shift from suburbs to cities
America in the near future will more resemble Europe in its real estate markets, as high oil prices, long-term underemployment, underfunded baby boomer retirements and a young generation with poor credit drive a shift from suburban homes to luxury rental apartments in urban centers.
That was the vision, grounded in new economic realities, presented by Jeffrey G. Otteau in his keynote address at the recent Northern Metro Multifamily and Mixed-Use Commercial Real Estate Summit in downtown White Plains. The daylong series of panels drew more than 255 executives from 170 companies to the White Plains Performing Arts Center in the mixed-use City Center complex.
The faintly doomsday scenario of an America in forced retreat from its 20th century communal sprawl to “walkable development” centers also offers opportunities for developers and investors in luxury multifamily, mixed-use and retail properties, the keynote speaker said.
Otteau, president of Otteau Valuation Group Inc., a real estate consulting and property valuation firm in East Brunswick, N.J., said the shift from suburban and exurban communities to city centers near transportation hubs already has begun. “Generally what we”™re seeing is a shift to a more sustainable real estate demand model” that is common to Europe, he said.
That “astonishing reversal” arises from financial decline that constrains lifestyles as the American economy matures and income levels stagnate. Aging baby boomers, 60 percent of whom are said to lack sufficient funds to sustain them through retirement, will liquidate their suburban homes and “McMansions” and seek high-quality rental space in cities, driving up rental rates.
Urban rental demand will be further driven by a generation of “millennials” unable to afford and secure mortgages on the suburban homes vacated by their elders.
High oil prices and chronic underemployment will first deplete exurban communities, where families can no longer sustain mortgage payments and long commutes as their household budgets are eaten up by gasoline prices at the pump.
Otteau noted the U.S. gross domestic product is fully recovered from the start of the recession in December 2007. Yet of the 8.7 million American jobs lost in the recession, 5.5 million have not been restored. “This is a long-term chronic correction in the U.S. economy,” he said. “We will not get back to the full employment numbers that we”™ve seen before.”
Otteau said the growing demand for rental housing has brought vacancy rates to “an all-time low” in the tristate area. In Connecticut, New Haven has a 2 percent vacancy rate ”“ which indicates virtually full occupancy ”“ while Fairfield County at 5 percent has the highest vacancy rate in the region.
“We”™re seeing an astonishing rise in rental demand over the last few years,” said Otteau. Unlike past inner-city development projects, a higher-income tenant “is generating much of this demand and that tells us that a more luxury apartment is needed.”
The housing shift “is just getting started,” he predicted, “because increasingly we no longer are able to support luxury suburban communities.”