The two big economic stories right now—and probably for the rest of the year—will be the impact of the Euro problems and the impact of the impending “fiscal cliff” in the U.S. We don’t want to minimize the significance of either of these impending problems on the financial world in general and real estate in specific. Indeed, either of these problems has the potential to bring down the global house of cards.
Nonetheless, it’s important to keep our eyes on the longer trends within which these crises exist. The exit strategy for either of these crises depends heavily—maybe even totally—on the trajectory of these longer-term trends.
A very brief article in the current issue of The Economist caught our eye this week. The article was about the disparity between the median population age of various countries and the average age of that country’s cabinet ministers. The goal was to show that in the “rich” world (e.g., Germany), the cabinets more closely resembled the general population, while in the “emerging” world (e.g., India, China) there was a large disparity, with attendant potential instability. In that context, however, the article wasn’t very compelling—the U.S. has a huge disparity, while Russia has a high degree of alignment. Go figure. What caught our eye, though, was the variation in population age among various countries, and the implications for long-term growth. Quite a few years ago, I was at an academic conference which discussed the increasing age of the population in Europe, and in that context how Europe had the potential to be the next Japan. An aging population has very significant implications for real estate—particularly in the commercial sector. As a decreasing portion of the population is working to support a larger and larger retired segment, there is both a generic malaise inherent in the economy (unless high increases in productivity are induced) and a decreasing need for commercial real estate space (particularly in offices, warehouses, and manufacturing).
In that context, the emerging nations of the world have an edge—note the low median ages in India, China, Brazil, and Canada. Ironically, the U.S. is also in that mix, and to a lesser extent Australia and Russia. At the other end of the spectrum, Japan and Germany have nearly the same median age problems. The latter is most problematic, since the German economy has been entrusted with bringing the Euro zone out of its doldrums. Clearly, a rapidly aging German population has less need for commercial real estate, but also less ability to drag the ox cart of Europe along the road to recovery. Britain, solidly part of Europe but outside the Euro, has a somewhat younger population—indeed slightly closer to the U.S. than Germany and about equal to economically stalwart Canada. The short-term horizon will continue to fuel real estate challenges and opportunities, but the “long game” context needs to be taken into account as opportunity-seekers consider down-the-road exit strategies for today’s purchases.
– John Kilpatrick
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