| This paper intends to make a case for 3 key points: | | | | Most (88 percent) of the nation's population growth |
| 1. Real estate statistics showing national appreciation | | | | between 2000 and 2030 would occur in the South |
| figures are miscalculated and misleading, causing | | | | and West, which would be home to the 10 |
| alarming reaction to reasonable market appreciation in | | | | fastest-growing states over the period. The share of |
| most cases. | | | | the population living in the South and West would |
| 2. The Baby Boom population is going to demand | | | | increase from 58 percent in 2000 to 65 percent in |
| second homes, and is bigger than just US boomers. | | | | 2030, while the share in the Northeast and Midwest |
| 3. The market for condo hotel units and innovative | | | | would decline from 42 percent to 35 percent. |
| forms of second/retirement home ownership is on | | | | The Big Chill, when boomers shift preferences, is as |
| the verge of a boom, not a bust. | | | | real as the boom itself. The Echo Boom generation, |
| I. The Bubble: Debunked | | | | or the Boomers' kids, will not sufficiently feed |
| Our media has dramatized the entire US real estate | | | | demand for 7-9 years. This effect on real estate |
| market as 'overheated', 'bubble like' and ready to | | | | values is beginning to show up in single family |
| crash at any moment. Even conservative economists | | | | suburbia through out the industrial and middle western |
| point out that there are only pockets of 'froth'. | | | | states. While the echo boom generation is also |
| Real estate is NOT red hot all across America. In | | | | seeking starter condos and lofts, the Bust generation |
| fact, many mature US real estate markets are soft, | | | | is demanding the larger yards for their 30's child |
| measured in real (inflation adjusted) terms they may | | | | rearing years. Is it any wonder that condo sales are |
| even be declining in value. But media has a hard time | | | | stronger than any time in US history? |
| making a 0.3% home appreciation rate in the industrial | | | | III. The Wealth of Nations: Earned and Inherited, |
| Midwest news, while 28% gains in once rural or | | | | Where is the Money Coming From? |
| underdeveloped areas of Arizona or Florida is exciting | | | | The World's population is growing at the fastest rate |
| headline news. | | | | in Developing Countries, not in the Developed World. |
| Midwestern populations are migrating to sunny, | | | | Most of the World's population cannot consider a |
| Southern and Western States at increasing rates, by | | | | second home in the United States or In 1998-2003, |
| purchasing "future residences". The trend is evident, | | | | low interest rates ignited record home refinancing, |
| but quiet, because many northerners are maintaining | | | | many homeowners pulled "cash out" to reinvest in |
| 2 residences for the time being. But will there be a | | | | their homes: even the first world, but the people |
| mass exodus when the bulk of boomers retire? Is | | | | who can, will choose the USA. |
| the real story not the over heated markets of the | | | | Now that he is invested in The US, he will hope for |
| south and resort/second home areas but rather the | | | | the Dollar to rise again before he sells and repatriates |
| future potential implosion of values in the heart land? | | | | his Dollar profits to Euros. And if foreign buyers |
| Is the bubble actually in the markets with low | | | | continue to purchase our real estate, the Dollar may |
| appreciation rates? | | | | just bounce back sooner rather than later. |
| What is an appreciation rate, and who is measuring | | | | Since the rest of the world has experienced similar |
| these stats? The National Association of Realtors, | | | | low stock market returns and low interest rates, a |
| The Federal Home Loan Bank, Fannie Mae, and The | | | | double digit return in blue-chip US real estate that has |
| Federal Reserve all have a role in compiling the | | | | the added benefit of a sunny holiday, looks good |
| statistics. But what is disturbing is the lack of | | | | around the globe. Boomers globally are inheriting the |
| economic reason that seems to enter the public | | | | WWII generation's wealth. So the image of the |
| debate after the official statistics are released to the | | | | wealthy foreign visitor is growing, and somewhat real, |
| media. | | | | but certainly there is an 80/20 rule at work. Not |
| The media announces that a home in the Southeast | | | | every foreigner is becoming a conspicuous consumer |
| rose by 14% in value, Northeast by 9%, Midwest by | | | | of US real estate because of the Dollar's decline? |
| 4% and in the West by 13%. This would lead a | | | | In the US, 73.5% of US boomer households have |
| $100,000 home owner in Utah to believe he gained | | | | under $150,000 in wealth. As many as 47% of |
| $13,000 while the San Fransican gained the same | | | | boomer respondents surveyed in the 2002 Cost of |
| amount? There is no discussion of inflation | | | | Leisure Index by Allstate Financial say that they will |
| adjustments, or renovation investments, or regional | | | | continue to work after retirement. So how big is the |
| job or emigrant growth, all factors that might have | | | | second home market? Can even the majority of |
| effected the real gain. How does such a useless | | | | boomers (US and abroad) afford 2 homes? |
| statistic as 'appreciation rate' even find it's way to | | | | Boomers: Conspicuous Spenders or Savers and |
| page 12, let alone the headlines? | | | | Investors? |
| Markets are regional, and regions are micro, not | | | | Americans used to save and invest their bequests. |
| macro-economic studies. Consider appreciation then in | | | | No more. The sputtering stock market has prompted |
| an individual micro-economic example. | | | | Americans to consider other options if they receive a |
| The Refinance/Renovation Effect | | | | $25,000+ inheritance. Boomers are more likely to |
| In 1998-2003, low interest rates ignited record home | | | | spend the money than other groups. Ever the |
| refinancing, many homeowners pulled "cash out" to | | | | optimists, Boomers believe that many more of them |
| reinvest in their homes: | | | | will get inheritances, and for larger amounts than |
| A $100,000 home in 2000, with $60,000 in debt may | | | | previous research has suggested, according to a |
| have been refinanced to $75,000 (75%), with | | | | survey of 1,204 Americans conducted by Knowledge |
| $15,000 cash out going right back into the home in | | | | Networks for American Demographics. And contrary |
| capital improvements. This home then sold for | | | | to their image as conspicuous consumers, Boomers |
| $120,000 in 2001, wealth was created, but less than | | | | claim they plan to put the money into savings, pay |
| the statistics assume. Did it rise by 20% in | | | | down debt or invest in a retirement home. |
| "appreciative" value? Or did the improvements and | | | | IV. Finite Supply: We All Want the Same Thing |
| borrowing just increase the value? National statistics | | | | This is such a debateable fact, I want to make my |
| measure this as a 20% rise. You decide, then multiply | | | | point swiftly: "I've lived richly, and I've lived poorly... |
| by your neighbors who added additions to their | | | | rich is better." If the boomers can afford to live |
| 1940's bungalows between 1999-2005. If the national | | | | richly, they will. |
| appreciation rate was recalculated to account for | | | | What Housing Do Boomers Plan to Spend Their |
| home renovation expenses, real gain in value would | | | | Money On? |
| be determined and would be a much more calming | | | | According to a Harvard study, "baby boomers, are |
| and useful statistic to determine if housing is | | | | expected to make up 20 percent of the population |
| 'overheated'. | | | | by the year 2030. Baby boomers already comprise |
| The Redevelopment Effect | | | | the single largest group of homeowners - nearly |
| America's housing stock in 2000 was on average 47 | | | | one-quarter of all homeowners - with 75 percent of |
| years old. The rise in Home Depot stock should be a | | | | those over the age of 50 owning their own home. |
| market indicator of where Americans are shopping - | | | | Research shows that boomers are looking to second |
| home improvement. At the same time urban areas | | | | home ownership as a smart investment opportunity. |
| are seeing unprecedented regentrification. When a | | | | Considering that boomers are starting to think |
| blighted area is improved, values go from zero. The | | | | differently about real estate investments as part of |
| calculated appreciation rate is spectacular. | | | | their retirement plans, the U.S. Census Bureau |
| Farmland to Suburbia | | | | predicts second home purchases for boomers to |
| Don't the Housing Statistics adjust for this effect? | | | | reach 6.4 million units by 2010, up from 5.5 million units |
| NO. For example, when a corn field sells for $5000 an | | | | purchased in the 1990's. According to NAR, |
| acre, then $50,000 per lot, then $500,000 per home | | | | investment homes accounted for a quarter of all |
| the stats reflect an appreciation rate without regard | | | | home purchases in 2004, and vacation home |
| for the capital investment that went into this | | | | purchases an additional 13 percent." |
| meteoric rise. | | | | According to a Coldwell Banker survey "Affluent |
| The Currency Effect: Inflation/Deflation, Quiet and | | | | Baby Boomers Are Not Ready to Stay in Their |
| Invisible at First | | | | Current Homes Forever." Today's Boomers are not |
| The frothiest real estate markets are also the most | | | | slowing down, and the majority remains "on the |
| popular with foreign buyers. Is this a correlative or | | | | move. They want... luxurious homes and want to |
| causal effect? The US Dollar has fallen against the | | | | remain active. They are in their peak earning years, |
| EURO by 11% since July 2003. For real estate buyers | | | | have benefited from many years of strong stock |
| spending EURO, an 11% rise in second home prices is | | | | market returns and have built tremendous equity and |
| invisible. With official inflation at 2.8%, a 14% rise in | | | | appreciation in their homes. These factors, along with |
| prices is static to European Investors. Incomes in | | | | many receiving inheritances from their parents, are |
| Europe have also outpaced US wages by another | | | | allowing the luxury home market to thrive and it |
| 4.1%. Therefore, US property values could rise 18% | | | | should be robust for years to come." |
| higher with no additional cost a European buyer. This | | | | V. Boomers will choose New Options for Second |
| fact is very important to real estate appreciation | | | | Home Ownership: Condo Hotel |
| rates. Foreign buyers can purchase relatively easily, | | | | Active and dynamic retirement lifestyles require |
| but cannot sell any faster than US owners and will | | | | either a substantial net worth, or creative new ideas. |
| can sell at lower relative values if the currency trend | | | | Luckily the boomer generation is adapt at innovation |
| switches. Markets where high concentrations of | | | | and leverage. The concept of Condo Hotel is not a |
| foreign buyers exist will be more volatile for this | | | | new invention, but the Condo Hotel-Resort is a new |
| reason. | | | | evolution. More than just a hotel room/suite, condo |
| The Interest Rate Effect: Reversion to The Mean? | | | | hotel units sell at a higher price-per-square foot |
| Will appreciation rates revert to the 30 year mean of | | | | multiple (10-25% premium, $300-1000 per square |
| 5% (or below) when interest rates rise? Real estate | | | | foot) to a traditional condo, and are typically smaller. |
| values have risen due to the low 'cost of capital' | | | | Successful projects will have location, quality, |
| since 1998. Certainly low rates have added fuel to | | | | amenities and services that are superior. Boomers will |
| the speculative fires of real estate investors, and | | | | buy for the central location, spa/health club services, |
| froth has been created by easy money. Zero down | | | | and of course maid/valet/concierge services round |
| loans to first time home buyers, easy no doc loans | | | | out the dream lifestyle. Condo hotel units often do |
| to investors, banks competing for borrowers, even | | | | not have kitchens or have efficiency kitchens. But for |
| the internet have all made capital less costly and | | | | a generation that perfected dining out, and the |
| driven the real estate market higher. | | | | trophy kitchen - been there, done that -- what are |
| The Transfer of Wealth: 20 More Years | | | | they serving downstairs for dinner? |
| Demographic analysis disputes the facts of whether | | | | How many boomers want to retire to a hotel room |
| this transfer began in mass in 1997, 1998 or 1999, but | | | | for a few months every year? This is a generation |
| one fact is clear, it is a 20+ year wave that won't | | | | that has spent 5 days a week building up frequent |
| end until $17 trillion of wealth is transferred within our | | | | flyer mileage perks, a 2 days at home. After a year |
| population by 2018-2020. With or without Social | | | | or so back at the ranch, where will they feel most at |
| Security, these funds will be required to keep the | | | | home? And what about all your stuff? Most boomers |
| Baby Boom generation at the standard of living to | | | | will not choose to live in condo hotel units for more |
| which they have become accustomed. What will | | | | than a couple months a year, the last generation |
| retirement look like for Baby Boomers? Many believe | | | | settled for a mobile home in the sunshine for the |
| it will look like whatever Boomers (or Zoomers) want | | | | winters, but this generation is accustomed to/desiring |
| it to, even if they have to borrow to get the | | | | a little more. They will want more than one residence, |
| lifestyle. | | | | and if they can figure out how to afford several |
| Leopards and Spots. | | | | homes, the sky is the limit. How does a boomer buy |
| Boomers are not about to change their lifestyle | | | | a hotel room? Can this luxury be afford to the 76.5% |
| dramatically in retirement. New ways to afford an | | | | of less wealthy boomers? The answer is yes, condo |
| exciting retirement will be invented by this dynamic | | | | hotel is just one of the new evolving second home |
| generation. The real estate boom will continue | | | | ownership options that offer a more affordable |
| because boomers demand home ownership, real | | | | choice than a traditional second home. |
| estate has worked in their past, and they will find | | | | Between 2000-2003 the average price of a "luxury" |
| ways to make it work for their lifestyle demands of | | | | hotel room was $239,066 ($415/sq ft), down 18%, |
| the future. Boomers will demand more of less, the | | | | because hotels are bought and sold based on a |
| most coveted places and spaces will be driven to | | | | capitalization rate (Value/NOI = Cap Rate). As income |
| stellar levels, because this is a generation raised on | | | | rises and falls, hotel room values fluctuate. |
| competition for the best against a large cohort of | | | | Potential vs. Real Income |
| competing players. | | | | A couple big holes can be poked in this ideal picture. |
| II. Population Data | | | | If the condo hotel unit owner decides to use his suite |
| A Large Cohort: Boomers Around The World | | | | for the entire high season, he can erode much of its |
| American Boomers often think of The Rolling Stones | | | | income potential. Since the condo hotel unit owner |
| as an American band of their generation. So do the | | | | often shares in the expense of the professional |
| Brits, French and Germans... and Japanese. The media | | | | maintenance/management of the unit, dues |
| has touted the 78 million US Baby Boomers that will | | | | expenses can be higher and vary more than a |
| retire in the next 15 years (the largest population | | | | traditional condo. |
| turned 50 last year, with 50th birthdays occurring | | | | Lastly, since future buyers will likely be drawn to |
| every 7 seconds), but there will be 103 million Empty | | | | owning a condo hotel for many of the same desires |
| Nesters in Europe by 2009. Japan will have 32 million | | | | to 'offset expense' or better afford this second |
| boomers by 2010, in a total population of only 127 | | | | residence, the value of the unit may be tempered by |
| million people. 213 million Boomers competing for a | | | | the income it produces, or doesn't. |
| uniquely similar lifestyle in retirement. | | | | Macro-Economic Forces: Condo Hotel Values |
| 213 million Baby Boomers, all raised on Hollywood, | | | | If interest rates rise 1%, assume 6.5% to 7.5%, and |
| Disney and The Stones? All experiencing the same | | | | real estate is strictly valued for the income/cap rate |
| trans-generational inheritance from the 'greatest | | | | it produces, the value of this $332,750 condo hotel |
| saver generation'. Even in Japan where savings is a | | | | unit may fall by $14,755 (4.4%). Higher rates, should |
| national virtue, the baby boomer generation grossly | | | | in theory, also strengthen the US Dollar, which could |
| out spends the previous (WWII) generation. The | | | | also have an added negative effect on real estate |
| baby boom generation was the first cohort of the | | | | values. Stronger dollars could also reduce tourist |
| 20th century to embrace debt, spending over thrift, | | | | demand for rooms, and lower NOI. |
| and a global economy. | | | | On the positive side of the ledger is sheer boomer |
| How many of these 135 million World Boomers will | | | | demand. Over the next 15 years, 291 boomers will |
| opt for a retirement residence somewhere on US | | | | reach retirement age and demand new residence |
| soil? If just 10% of the European & Japanese | | | | options to fit an active, luxurious lifestyle. If only 1% |
| boomers choose the USA, our population could | | | | of this generation demands condo hotel as a second |
| increase by 13 million or nearly 900,000 higher net | | | | home option, 1.45 million units will be needed. That's |
| worth boomer retirees per year. Whole new cities | | | | 96,600 condos per year, every year. If we assume |
| could be, and are being formed. | | | | there are 12 key markets in the US for condo hotel |
| This statistic leaves out so many other world | | | | resorts, then there will be 8,050 units per year in |
| Boomers with the means to choose the US Lifestyle | | | | each market. Demand will be grossly outstripped by |
| in retirement. But starting with 213 million Boomers | | | | supply. |
| proves the point, demographically something big is | | | | IV. Conclusions |
| happening. In an age when our media pines over our | | | | Harvard, NAR, and NAHB all agree Boomers want to |
| trade deficit, we need to recognize our unique export | | | | buy luxurious second homes, and will likely spend their |
| in which we truly have a competitive advantage - our | | | | inheritance and present residential home equity to |
| lifestyle. First world health care, economy, security, | | | | downsize to multiple residences with similar features, |
| free and open borders, entertainment, a relatively | | | | amenities and locations. Demographics, and life cycle, |
| low taxation rate, stable currency and markets, and | | | | can predict future demand. |
| lastly - a historically appreciating real estate market. | | | | Boomers will afford this real estate the same way |
| So is there a bust after the Baby Boom retires in | | | | they bought all their previous homes, with debt |
| America? First, demographic data suggests that | | | | leverage. |
| incomes of the previous generation did taper off | | | | US Boomers will compete with foreign boomers for |
| between age 45-54, but researchers believe | | | | the same desirable retirement and second home real |
| Boomers will delay their exit from the labor force - | | | | estate. Prices of the best properties have already |
| and forestall any decline in household income - in the | | | | soared, and will continue for at least 10-15 more |
| same way they delayed marriage and having children. | | | | years as the Boomer generation approaches |
| As a result, Boomers may enter their mid-50s and | | | | retirement. |
| 60s with their household income undiminished - a | | | | "The Current Bubble Theory" has one gapping hole, |
| change in a demographic pattern that would create | | | | When: 2005 or 2020? The answer is when domestic |
| huge investment and business opportunities. With age | | | | interest rates rise above 9%, and the dollar |
| 65 still 15 years away for most boomers, this spells a | | | | simultaneously begins to strengthen against world |
| wave of consumption that should continue. Boomers | | | | currencies and boomers (around the world) decide |
| over 50 think of themselves in early "middle age" and | | | | they have found the perfect piece of retirement |
| that "old age" is still almost 20 years in the future. | | | | paradise. The Bubble will inflate, at varying rates, until |
| It should be a national priority to court the world's | | | | all 3 things occur. |
| wealthiest soon-to-be retirees. Many of the fastest | | | | Most boomers desire luxury and amenities found in |
| appreciating real estate markets in America are | | | | resorts when planning their active retirements. Less |
| already experiencing the benefits of these new | | | | than 20 million (26.5%) US boomers will be wealthy |
| emigrants. No longer in huddled masses, they arrive | | | | enough to afford a whole-ownership second home |
| on first class and private flights or in yachts. | | | | without rental income. Condo hotel offers subsidized |
| As the oldest baby boomers become senior citizens | | | | luxury that will be a growing choice of savvy |
| in 2011, the population 65 and older is projected to | | | | boomers. |
| grow faster than the total population in every state. | | | | America should be marketing our rich lifestyle to the |
| In fact, 26 states are projected to double their 65- | | | | world's boomers, borders are disappearing, why not |
| and-older population between 2000 and 2030. | | | | live in the greatest nation on earth? |
| Florida, California and Nevada would each gain more | | | | Boomers will get creative by purchasing a |
| than 12 million people between 2000 and 2030. | | | | combination of a primary residence, Condo Hotel and |
| Arizona is projected to add 5.6 million people, and | | | | Fractional and PRC ownership options, to more |
| North Carolina, 4.2 million, Texas and Utah each would | | | | efficiently use their limited nest eggs and to have |
| add 3 million new residents. As a result, Arizona and | | | | active and dynamic golden years. |
| North Carolina would move into the top 10 in total | | | | If only 1% of boomers demand condo hotel, 1.45 |
| population by 2030 - Arizona rising from 20th place in | | | | million condo hotel units will be demanded by |
| 2000 to 10th place in 2030 and North Carolina from | | | | Boomers over the next 15 years. Demand will |
| 11th place to seventh place. Michigan and New Jersey | | | | outstrip supply. |
| are projected to drop out of the top 10. | | | | |