Buying good investment real estate has always been a challenge. It’s become even more so with the changing migration patterns, evolving lifestyles, and consumer habits influenced by technology. These trends are evolving and changing in much shorter periods of time than just a decade ago. Real estate has typically been a longer-term investment with seven- to 10-year horizons, and often longer. When looking at potential real estate investments, you must take into consideration what trends could develop during the projected holding period that could potentially influence your investment returns both positively or negatively.
For example, just a decade ago, it seemed a safe bet to buy suburban office buildings, apartments, big box centers and shopping malls. One of the current demographic trends changing the landscape is the migration from the suburbs to the inner cities. This trend is underway in almost every metropolitan area of the country. The trend is driven by baby boomer empty nesters looking to downsize after raising families, and echo boomers age 25 to 34 looking for amenities, lifestyle and social interaction. The result has been a weakening demand for suburban housing, office and retail space. In the past decade, the growth of online shopping has taken a serious bite out of the sales of big-box retailers such as Best Buy and the now-bankrupt Circuit City. As a result of these two trends, many types of suburban real estate investments are experiencing increasing vacancy and declining values, while at the same time, inner city real estate investments are thriving.
Another example of how trends can impact real estate investments is in the area of food sales. Supermarket-anchored retail centers were once considered one of the safest bet in real estate investing. However, traditional supermarket chains are now finding themselves in very competitive environments. Large retailers, such as Wal-Mart and Target, to dollar stores, warehouse clubs like Costco, and drug stores are adding grocery products to their shelves. In addition, upscale organic supermarkets such as Whole Foods are expanding into traditional grocery markets. As a real estate investor looking at buying a grocery-anchored retail center, you need to do in-depth due diligence on any grocery anchor to determine if there is any risk that the anchor might close or go out of business. If a grocery anchor was to close or go out of business, the result could be devastating to the retail center.
When you look at resorts like Aspen, the question is what trends are impacting these markets? National demographic studies indicate that, besides the migration to the inner cities, the other important migration is from the larger metropolitan areas to smaller towns and communities, particularly those with good amenities such as college towns and resorts. Resorts such as Aspen-Snowmass and the Roaring Fork Valley seem to be in the path of this migration wave thereby offering what should be a solid environment to invest in real estate longer term. Another positive trend is the growing popularity of ski resorts in the summer months. But the question for astute investors is whether there are other trends that might develop that could change that outlook? The kind of trends worth examining might include the issue of global warming, future recreational habits and the impact that the growth and improving sophistication of online shopping might have on in-store retailing in a resort market.
Due to quickly evolving trends that are more common in today’s environment, real estate investing has become more complicated. Astute investors should always consider what trends could impact a real estate investment and how that property might perform under the worst-case scenarios. If the property can withstand a negative trend, it’s likely to be a solid investment. But if that’s not the case, an astute investor should consider passing on the opportunity.
This opinion article is provided by William Small, JD, CCIM, managing director of Frias Luxury Estates, a division of Frias Properties of Aspen. Email him at firstname.lastname@example.org.