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To be a savvy investor in US real estate these days, you need to look beyond the business news headlines and target human-scale developments that will grow because of long-term demographic trends.Email me your walkscore. Note that I am not giving investment advice with this post. I just found it interesting.
Human-scale homes and communities feature amenities that you can walk, bike, or take public transit to without getting in a car. I live in such a development in Grayslake, Illinois, where I can walk or ride to Starbucks, the supermarket, bank, dry cleaner, library, and hardware store. I wouldn't want to live anywhere else right now.
You won’t generally find human-scale communities in sprawling urban areas dominated by highways, or what I call “spurbs.” Investing in human-scale development is a relatively new and enlightened way of buying real estate. You may be able to profit in real-estate investment trusts, or REITs, or find communities that feature this kind of construction.
Christopher Leinberger, a research fellow at the Brookings Institution and real-estate developer, says human-scale or "walkable" communities command a premium of 40% to 200 % in cost per square foot over properties in car-centric neighborhoods.
Demographics is destiny when defining the growth of human-scale developments.
Places with sidewalks, bike paths, trails, and public transit will continue to prosper while spurbs will wither. That's because millions of empty nesters among the Baby Boomers -- born from 1946 to 1964 -- are selling their large, four-bedroom-plus suburban family homes and downsizing to condos, town homes, co-ops, and apartments half the size.
While the majority of Baby Boomers won't abandon their suburban enclaves quite yet, their sheer numbers will ensure significant migration to more pedestrian-friendly areas.
There were 52 million Baby Boomers aged 55 or older in 1990. By the end of this year, that number is forecast to grow to about 77 million and to 85 million in 2014, according to the National Association of Homebuilders, a Washington-based trade group.
Empty nesters are often moving to urban enclaves in Brooklyn, Philadelphia, Chicago, Seattle, and Portland, Oregon.
In his research on this subject, Leinberger has found that the supply for these kinds of neighborhoods lags the demand in major cities. Leinberger estimates that the New York City metro region, with about 20 million people in four states, should have 80 walkable neighborhoods, but only has 21. He said the area could use more areas like downtown Princeton, New Jersey, Washington DC’s DuPont Circle, or Chicago’s Lincoln Park.
Not only do human-scale neighborhoods help you build equity over time, they're better for your health and have lower carbon footprints. Because you're walking or biking to your destinations -- usually within a mile of your home -- you’re getting more exercise and polluting less.
When investing in human-scale areas, it’s not as simple as looking at listings and prices. Urban planners from the “New Urbanist” movement, who focus on building human-scale communities, examine “vehicle miles traveled.” The fewer number of miles you need to spend in a car, the higher the walkability.
One useful human-scale gauge is provided by WalkScore, a service that measures relative walkability (Leinberger is an adviser to the firm). In the New York metro area, for example, the highest-scoring neighborhoods were Tribeca, Little Italy, and Soho. The lowest were Howland Hook, Ardon Heights, and Woodrow.
How can an investor play this next big thing in real estate? One strategy is to buy REITs that favor human-scale developers. While these publicly traded funds of real-estate companies in general have been taking a beating in recent years, they're worth a look.
Buying REITs right now is probably the most challenging play because the market is still troubled. With the industry going through a recession plagued by ballooning foreclosures, a commercial property slump, and tight credit, it’s not known when it will recover, so consider any REIT buy a risky long-term buy and hold. Only invest a small portion of your portfolio in this vehicle -- less than 10% of your holdings.
REITs worth considering include Federal Realty (FRT) and Post Properties (PPS), according to Leinberger.
Looking to relocate? Be prepared to pay a premium for human-scale neighborhoods. While places like Soho and San Francisco’s Chinatown have a high desirability factor, you’ll find few bargains there.
Thanks for reading.