Llenrock Group

About the Author Llenrock Group

Llenrock Group is a real estate advisory and investment banking firm built on relationships and focused on results. With our unique 360° view and a panorama of services, we bring exceptional levels of experience, responsiveness and creativity to the marketplace. Founded by real estate professionals, our strength lies in the breadth and depth of our relationships — and our expertise. Through our subsidiaries, Llenrock Advisors and Llenrock Realty Partners, we offer a full spectrum of services, including investment sales, direct investment and structured finance. And because we have years of experience in real estate operations, acquisitions and deal structuring, we’re able to do more than just respond to our clients’ challenges — we anticipate them.

Income Inequality and Its Real Estate Implications

1. Income Inequality in America

Despite so much proof to the contrary, some people still cling to the notion of trickle-down economics. The concept, that in any capitalist economy, wealth is naturally redistributed from top to bottom, is still a convenient myth regularly trumpeted by the obscenely wealthy to justify the fundamentally unfair economic status quo that has supported their accumulation of obscene wealth. In the interest of realism, let’s just set this idea aside as useless to our discussion. The discussion, by the way, is on the fact of income inequality and, more relevant to this particular blog, the implications that this reality holds for the commercial real estate sector, particularly on the residential side.

I was recently cruising around Multi-Housing News’ site and discovered this article reporting the findings of the most recent Brookings Institution study on income inequality. MHN reports,

A new report by the Brookings Institution reveals that the gap between the richest and poorest households grew wider between 2007 and 2013.

The analysis focused on incomes among households near the top of the distribution—those earning more than 95 percent of all other households—and households closer to the bottom of the distribution—those earning around 20 percent of all other households. From there, it derived a formula for the gap between the two, called the “95/20 ratio.”

…Across the 50 largest cities, households in the 95th percentile of income earned 11.6 times as much as households at the 20th percentile, a considerably wider margin than the national average ratio of 9.3.

Here are some things we can learn from this report’s findings:

  • the nation’s largest urban areas showed the greatest increases in income disparity, overall
  • the financial crisis was in no way an economic equalizer; at best, the downturn did nothing to limit the American wage gap, and at worst, it actually exacerbated the problem
  • while employment growth is a reality today, across-the-board wage growth has proven much more sluggish in the wake of the Great Recession

2. Implications for the Real Estate Market

So what does this mean for the real estate sector? A number of things. As is frequently the case, the implications of the wage/wealth gap will vary from market to market and asset class to asset class.

Let’s talk about residential real estate: single-family, apartments, condos, etc. On Monday we ran a really interesting infographic focused on the regulatory, economic, and demographic shifts that have made the United States, for the first time in decades, a so-called “nation of renters.” The infographic’s most illuminating chart showed a map of the U.S. with the percentage of renters listed for various cities’ populations. Here are a few markets’ renters’ statics:

  • In New York City, 68% rent rather than own their residence
  • Boston: 67%
  • San Francisco: 64%
  • Miami: 68%
  • Washington, D.C.: 59%

While these are striking numbers, they obviously connect to some of the most high-value markets in the country; these are economically vibrant markets. What about economically cooler markets? As it turns out, less-hot local economies also have large percentages of renters, with places like Philadelphia, Minneapolis, Detroit, Indianapolis, and Phoenix all hovering a little above or below the 50% line.

Trophy and luxury residential properties in gateway markets receive stupifying amounts of investment from domestic and foreign investors, but the high-end residential niche remains a niche, no matter how popular. The real growth opportunity in the residential space exists on the other end of the spectrum: affordable and low-end market-rate housing. Current economic trends–and there’s little evidence that these will change anytime soon–suggest more-affordable housing will remain the most in-demand of residential options, whether we’re talking about renting or buying. Do not discount this asset type, even if it comes with much less prestige than a 432 Park Avenue or other luxury high-rise property.

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