Tuesday, January 18, 2011

Is apartment investing changing? Will it affect the economy?

Lately, I've been hearing that more people (within the real estate investment world) are interested in transitioning from investing in single family homes to investing in apartments.

There are, at least, a few reasons for this.
  • Apartments generate passive income.
  • You only need to worry about the maintenance of one building while still collecting many rent payments.
  • It's getting more difficult to find great investment deals with single family homes--since so many investors are looking for them now. Fewer people are looking for apartments; so theoretically more deals can be found with less searching effort.
However, I just read an article about apartments that might shape--not only apartment investing but also--companies in certain neighborhoods.

Here is the link to the article "No McMansions for Millennials"

It does not address investing; however, I think there are investing-oriented takeaways from this article.

It points out the fact that, while Gen X is a lot smaller than the Baby Boomers, Gen Y is about the same size as the Baby Boomers.

The articles reminds us that it was the Baby Boomers who spawned suburban sprawl, for better or worse. (There ARE good things. I'm not looking to attack the Baby Boomers here.) It was the Baby Boomers who lived most of their lives during a prolonged economic boom, save for a few short time periods in the 70's (oil crisis), another one during the mid-to-late 80's (Savings and Loan crisis), and another one during the early 90's (oil layoffs). Since they "knew" they'd always make more money, many of them wanted bigger and bigger houses.

The cities could not hold this. So to build these larger homes with larger yards, they had to go where land was available and houses were not already built. At that time, it was the suburbs.

People started moving that way, especially more affluent people. Most of these people were the ultra consumers.

The construction boom was born, and it grew to be a HUGE player to influence our economy.

So guess who else moved that way?

If you answered "businesses," you're absolutely correct. Amongst many other businesses, shopping malls sprouted all over the suburbs--all over the country.

What does all of this have to do with investing?

Perhaps, nothing.

However, this article points out the fact that many of today's up and coming people have different spending patterns AND different living patterns.

Remember: Where there are people with money, there are businesses to try getting that money.

To me, this means that Gen X behaving differently than the Baby Boomers would barely have any effect on the economy since Gen X is so much smaller. They really couldn't influence spending patterns too much. Plus, Baby Boomers were making most of the money during the years that Gen X came into the workplace.

Gen Y, however, is just as large as the Baby Boomers, and THEY have spending power.

Think that might influence businesses now?

The real question is how will Gen Y's influence change businesses?

Truthfully, nobody ever really knows the answer to this question. You can only make intelligent guesses based on history and logic.

To me, I see many of the top anchor stores in shopping malls struggling. Some will become stronger as competition falls from their map, but I foresee several disbanding. (The Internet does not help any of these stores, either.)

Fewer people want to take care of lawns? How might that affect companies who make lawn care equipment? How about lawn care services?

What about restaurants that are mostly based in suburbia? If the "spenders" flee, can they adjust in time? Will it be too costly to adjust? Who will want their current buildings if everyone else is fleeing?

I also see an opportunity for "fun" places within crowded cities that cater to many young people with no other place to spend their money.

Transportation companies have a nice opportunity in these cities, as many of the people living there will not have cars.

I predict that the cities with the best public transportation systems will lead the way to many of these types of changes. Places that have underdeveloped public transportation might not see these changes for a while.

Neighborhoods that have cheap land might tear down building to rebuild apartments with more units, smaller rooms, and more amenities. Shops will begin sprouting in these neighborhoods, especially ones that cater to impulsive shopping habits.

Depending how quickly this trend develops (which, I admit, is barely beginning), I see oil companies struggling. Fewer people really will be using cars. Of course, this means many people will need less gas.

It also could affect apartment investing. It could affect the type of apartment buildings that will be valuable investments for you. It could also affect the neighborhood from which you select your investment apartment.

To summarize, keep an eye on whether this trend actually develops. If it does, see which companies are willing to adjust and are able. Also see which investments make sense for you, beginning with the apartment buildings and people's living patterns.

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