Another family moving into new home.
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The future of real estate was thrown into uncertainty by the pandemic, both from its direct effects on how we live as well as speeding up pre-existing trends. To understand the future, we must focus on what real estate does for people. Buildings are not constructed other than to serve people. We want shelter where we live. We need and want goods and services that are produced or delivered in buildings. We work somewhere—often inside a building—to buy those goods and services. And we get pleasure or satisfaction from certain activities that take place in buildings, ranging from churches to bowling allies. And at least some of us like to see, or at least know of, great monuments, temples and tombs. So a look at the future of real estate is simply a look at how people will live, work, shop, and enjoy life. This article focuses on residential real estate, while later articles will address other property types.
Living space has always been about tradeoffs. Most people would like more room, though some empty-nesters prefer fewer rooms to be vacuumed and dusted. But generally, more space is good, but expensive. Working from home, and spending more time at home because we cannot go out, has further increased the desire for floorspace in our homes.
The availability of activities outside of our home mitigated demand for floorspace in our homes. City residents who spent many hours in coffee shops, restaurants and bars accepted smaller kitchens, dining rooms and living rooms. Folks for whom recreation meant visiting museums and nightclubs didn’t need a yard or room for a pool table.
During the pandemic, though, city life became a drag. The key attraction of the city is being amidst millions of other people. When proximity to others is undesirable or forbidden, there isn’t much need to be in the city. Manhattanites now ponder living in New Jersey! But the pandemic won’t last forever. A vaccine will probably be developed before the end of 2021, with mass vaccination achieved by either 2021 or 2022.
What will life be like after social distancing is over? Will cabin fever outweigh the new habits we’ve formed? Most likely the influence of the pandemic will decline over time. It wasn’t an accident that we lived as we used to. Humans are social creatures. Even the introverts need some contact with other people. So look for continued connectedness among folks.
Yet the pandemic taught us some lessons about how we live. First, it taught us that many people don’t need to go to the office to get work done. Certainly some people have to go someplace to do their jobs. A home office isn’t much good for operating industrial machinery or hanging drywall or thumping a patient’s chest. But much of the work of a modern economy can be accomplished most anywhere a telephone and internet connection can be made. Some people will want to return to the office, while others will prefer working from home, and yet others will want to work outside the home, but perhaps not commute downtown. The result will be a dispersal to suburbia, but close enough for a weekly visit to the office. Not everyone will move, of course. Some people will cling to the city life. But change does not require total participation, just a small percentage of people. We economists talk about decisions at the margin, meaning those who have been on the fence, or near the fence, about a decision. A small change in costs and benefits may tip their decision from one side to the other. So some people will leave the city.
Those moving to the suburbs will look for larger homes. People who will be working from home want office space, either as separate rooms or at least corners that can be dedicated to work.
The second fundamental change from the pandemic is people reassessing what is important in their lives. Major changes in circumstances, such as illness, loss of a job or death of a loved one often lead people to think about what is important to them. Many people turn to family and recreation at such times. This takes the form of early retirements for some people, and a work schedule more balanced with family and recreation for others. Early retirees won’t care about commute time to an office, so exurban possibilities will attract some. However, most people will be hesitant to leave neighbors and friends, so inertia will prevent a massive movement to rural areas. Nonetheless, look for further growth of places like Asheville, North Carolina or Coeur d’Alene, Idaho, smaller cities with great quality of life.
(The trend to early retirement will exacerbate the “silver tsunami” exodus of baby boomers from the labor force. More on that in a future article.)
Rethinking priorities will affect some who are too young for early retirement. This could take the form of less work by the workaholics. Others may gravitate to part-time jobs or contract work that offers flexibility. Although the gig economy is under attack by some politicians, aspects of it are great for people who prefer more leisure. A person writing poetry may keep the Uber and Lyft apps open on the phone. When rain falls and surge pricing pushes up fares, these people start driving. The availability of flexible work fits the needs of working-age people who decline to take 9-to-5 jobs. These folks will want housing suitable to their leisure time, which may mean space to create art, cook or garden.
As a result, demand for larger dwelling units will increase. That will apply to apartments as well as single-family homes. Gardening is a popular activity, so look for yard space even in townhouses and apartments.
The surge in suburban housing demand has begun and will continue, though after widespread vaccination the trend will abate somewhat. A few people will sit in the suburbs pining for the city, taking advantage of falling rents in urban apartments. Most, however, will be happy with their new digs.