The Future of Real Estate by Ken McElroy

The Future of Real Estate

Understanding Supply and Demand

I think everyone can agree that real estate is very much a local business. What’s happening in Phoenix, Arizona is quite different than what is happening in Miami, Florida, for example. If you dig deeper, you’re going to find that there are significant differences even within the submarkets too. Prices, rents, expenses and vacancy rates can vary from neighborhood to neighborhood depending on several factors.

There’s good news! There is an enormous amount of money to be made in the next several years so get your team in place and begin your research.

Just remember when doing your research, to pay attention. Because real estate is so versatile, it’s important to understand that other people’s predictions and opinions are either very broad statements about the industry, or very specific to a certain location. Do yourself a service and make sure you are aware of the context of the content you are reading.

Here are several things to consider as you look to invest:

Numbers, Numbers & Numbers

Let’s talk inflation. We know that inflation is the main driver of interest rates and that they move together. But the relationship between the two can get more complicated.

Increasing interest rates tend to reduce future cash flow, however, inflation has the ability to increase the value of real estate because it’s categorized as a “hard asset”. Hard assets include things like gold, oil, diamonds, farmland, and commercial real estate.

Real estate is a commodity, just like gold or oil. This means that there is a limited supply which makes it valuable. If you think about it, real estate consists of multiple commodities. The building materials (steel, wood, concrete, etc.) and the land. The building itself is a combination of raw materials. And if you think about it, when the price of those materials goes up, the cost to build increases. This makes existing properties more valuable. The other part is land. It’s hard to find. Although some land is scarcer than others depending on where you look (big city vs. roaming plains). This makes it a valuable resource.

If that doesn’t convince you that hard assets are worth the investment, think about this next point. For the most part, hard assets are a good way to hedge against inflation, meaning their value rises as the general price levels for goods and services increases. Other investments, especially bonds, typically lose value as goods and services increase.

I have spoken and written about how demand can and will affect real estate pricing. I bring this up again because it is a fact and not speculation. An increase in the demand of anything will increase the price of that item. Which brings me to my next point.

Increased Demand from Aging Demographics

Demand for medical services and facilities will continue to increase because of the changing health care needs of aging baby boomers and expanded health insurance coverage created by the federal Patient Protection and Affordable Care Act.

Hospitals, clinics and other medical facilities (including pharmacies, physical therapy and diagnostic facilities) will follow, as will housing for countless professionals drawn to jobs in medical careers.

The National Investment Center for the Seniors Housing & Care Industry estimates that the number of people 75 and older (those most likely to need seniors housing) will grow at a rate of approximately 2.1 percent annually during the next decade and intensify significantly between 2021 and 2039. Between 2021 and 2025, for example, the population of those aged 75 and older will increase cumulatively by 22.8 percent. It looks like we’re going to see more outpatient, urgent care and wellness centers, along with free-standing Emergency Departments (EDs).

But preventative care has become a focal point for driving down healthcare costs. Wellness centers, patient education and resource centers, and free-standing EDs are examples of facilities that will become anchors in critical healthcare markets.

Younger Americans are starting to realize the increased burden of caring for aging parents, as well as their own debt, and how it’s affecting housing affordability and demand.

Investors are already looking into repurposing offices, retail, industrial space and even movie theaters for medical use. The idea of repurposing is an attractive option for facilities that want to move quickly and cost effectively into a market.

I personally am investing using the basic fundamentals of supply and demand as my guide.

If you want to learn more, make sure to read my book: The Advance Guide to Real Estate Investing.

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