Demographics Favor Downtown Investment - For Now

by: Relentless Eco

Downtowns are increasingly seen as cool places to live - and maybe to invest your money. That seems to be the verdict of a new report out of the U.S. Census Bureau, and there are reasons to think that this might be the time for REITs, or to finance entertainment or hospitality projects with a focus on the downtown core. Having said that, take a good look at the numbers before you take out your wallet.

According to the Census Bureau, between 2000 and 2010, the population living in American downtowns (defined as being within 2 miles of City Hall) in cities with 5 million or more in population rose by 13.3 percent, compared to a 9.7 percent increase for the population as a whole. Downtown Chicago, with an increase of 36.2 percent saw, saw the heftiest growth but Washington (14.2 percent), Philadelphia (9.7 percent) New York (9.3 percent) and San Francisco (5.9 percent) also experienced healthy growth.

Although the report does not go into details on this, clearly the in-flow into downtowns is driving a boom in condo building, even amidst the real estate meltdown of the past decade.

Understanding the demographic trends in the U.S. (more on that in a minute), I was not particularly surprised to see the growth. I was, however, bemused by the commentary in much of the media about why. Comments in various newspaper articles talked about the revitalization of cities, the campaigns to get people downtown, the general weariness with the time and cost of commuting. All valid reason, absolutely. Having said that, the main driver of the growth was demographics and were it not for the recession you would likely have seen more of it.

Let's think for a minute who is drawn to big-city living. Traditionally, it has been twenty-something college graduates starting their exciting new jobs, or early thirtsysomethings who have yet to have kids (who might need more than the 500 square feet offered by their downtown junior one bedrooms). That demographic group, however, did not grow particularly quickly between 2000 and 2010. According to the Census Bureau, it was up just 2.9 percent in the U.S. over the ten year period. In addition, we know that younger workers, indebted and underemployed as they are, have become more likely to live with their parents for a period past college. So it really is not this group that is likely driving the downtown boom.

So where has the growth been? Well, the Census Bureau does not give us the detailed breakdown but I would wager that it is empty-nest boomers who are driving the growth in downtowns.

Between 2000 and 2010, the U.S. population aged between 55 to 64 grew by an incredible 50.3 percent - in absolute numbers 12.2 million. There is a great fit between this group and downtown living. They do not need as much space as they might have in the past, when they were more likely to have had kids at home. They are more likely to have the time to enjoy the things downtown has to offer. And they are at a point in their lives when they want to shake things up, so selling the suburban home and moving downtown makes sense.

But wait - there's the problem. Surely selling the suburban home has not seemed like a good move since, oh, 2008? That's why I think the shift downtown would have been even stronger if the recession and real estate correction had not happened.

So what are the implications? Should you invest in companies or projects with a presence in downtown areas? Well, there are a lot of things to consider of course, but you can start with population.

(click to enlarge)Click to enlargeFor downtowns to keep growing, you at least need source population in the appropriate age groups to also grow. Any group could choose to live in the city, but you can probably bank on the 25 to 34 year olds and the 55 to 64 year olds to be the most likely to buy up new units. So lets just concentrate on those groups.

Looking at the projections from the Census Bureau (they are based on the 2000 Census, and I chose the projection with constant immigration) shows pretty healthy growth for each of the 25 to 34 year olds (9 percent) and 55 to 64 year olds (18 percent) between 2010 and 2020. On top of that, we can only believe that the economy will get kinder in terms of employment prospects for youth and in terms of the housing market.. After that, it gets a bit less favorable. Between 2020 and 2030, the 25 to 34 year old group is projected to decline by 1 percent, while 55 to 64 year olds will dip by 8 percent.

Verdict? So as far as I can see, the trends are in favor of downtown living for the medium term - but nothing lasts forever. If you do go ahead and buy the REITs or invest in the downtown oriented businesses, for a few years the money may come rolling in with what seems like minimal effort (hopefully, anyway). A few years after that - post 2020, to be specific - the trends will shift and profitability may take a lot more effort on the part of the companies directly involved in property or other assets with a downtown focus.

So go ahead and invest - but keep your eye on the longer term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.