Demographics Are Inevitable – Ep. 293

Welcome to the Accumulating Wealth podcast. I’m Hunter Satterfield. And I’m Judson Crawford. We’re CPAs, wealth advisors, and partners at Cain Watters and Associates, a financial services firm here to help you navigate the decisions you face every day. Today we’re talking about one of the biggest forces shaping the economy right now: demographics. 

The age mix of the population is shifting in ways that will influence spending, labor markets, housing, healthcare, and long-term market growth. And joining us today is Josh Pristaw, Clarion Partners, to help us unpack the data, connect the dots, and think through what these demographic changes may signal for the years ahead. Let’s go. 

Okay, listeners, this topic of demographics is super fascinating. Judson and I’ve talked at length about it, but we knew we needed an expert to join us, right, Judson? That’s right. So, we’ve got Josh with us. He is remote up in New York City. He is the president of Clarion Partners, which is one of the partners that we work with, is a member of the portfolio of Franklin Templeton. 

They’re a global real estate investment manager, $70+ billion. He’s a member of the firm’s executive board, investment committee, and brings more than 20 years of real estate experience across acquisitions, asset management, portfolio development, and capital markets. Before joining Clarion, he held senior leadership roles at Pretium and co-founded GTIS Partners. 

Boy, he sounds like an expert, Judson. Yeah. Josh, good to have you. Thanks for having me, guys. Pleasure. All right so we were, I was up in New York, but Judson really… I was up in New York meeting with Franklin and Clarion and all these guys, and this came up. But man, we’ve been talking about this really since Ronnie went to college last year on the podcast because I mentioned that his freshman class nationwide was the largest ever, and it was only going down because of the declining birth rate. 

And so, when I was up in New York City and listened to these guys about their expertise on demographics, I was like, “This would be so great.” And listeners, we’re not necessarily even thinking about just investing, right? We’re really talking, Judson, about what are the impacts on the economy and the future of the United States based on some of these demographics. 

Well, yeah, and as Josh brought up when we were talking pre-recording, we’ve been talking about demographics in ways that you may not even remember us talking about demographics. When we talk about the Great Wealth Transfer and other things like that, a lot of these things are based in exactly that demographic. 

So, Josh, as we said in the intro, we want to talk demographics, and then we say, “Oh, well, we’ll bring on a real estate investor for that.” So, expand on a little bit about what you do, but also specifically, how did you start to bring in demographics as such an important part of your real estate management? 

Sure. Well first of all, we live in a world where almost the only certain thing right now is uncertainty. And so, we look across the landscape and monetary policy, fiscal policy, geopolitical events, we live in an uncertain time. But in that moment or in this current environment, demographics are actually quite predictable and quite accurate. 

You can look forward and based on things like life expectancy, you can have a sense for what the different cohorts of population will be over the next 10, 15 years and what the resulting size of those populations will mean for demand for different types of real estate. 

Think employment, which drives office use. Think household formation, which drives demand for shelter, for homes, for apartments. Consumption, which drives demand for warehouses and shopping malls. And so, at Clarion, we overwhelmingly manage, long-term evergreen investments in real estate. And so, our job is to deliver income, low volatility, and sort of consistent growth over the long term for our investment partners like Cain Watters and your clients. 

And so, in doing that we want to basically identify long-term structural or secular trends that will drive demand and cash flow growth. We’re not traders looking to buy something- not that there’s anything wrong with that. It’s not our business to buy something for a nickel and sell it for seven cents six months later. 

And so, demographics are such an important driver of that, and there’s two really twin forces when you look at the population in America right now. You’ve got the baby boom generation, and you’ve got the millennial generation, which are the two largest in history, and as they go through different parts of life, the impact to the economy and the demand for different types of real estate is profound.  

Yeah, no, I love… and we’ll get into, listeners, we’re going to get into like- affordable housing why? Why is it such an issue? We’re going to get into things like self-storage and college housing and all this really fascinating stuff. But I love, Josh, I’ve heard y’all’s team talk all the time. 

I mean, goodness gracious, y’all’s team is over 300 people studying this, and I’ve heard y’all’s team and it’s really like, okay, how do demographic trends drive decision-making real estate investing? That’s all it is. It’s, like, so simple and down the fairway, right? And so, when we start talking about these two barbells, and perhaps the best one is to start with actually the aging population, because you’ve said that is our highest conviction. 

Like, anything related to the aging population, whether it’s healthcare needs, whether it’s assisted living, whatever else it is. So maybe let’s start there. Let’s talk about, like, what are you guys seeing from a demographic standpoint with the baby boomer generation? 

I love even this- you can go into this, too. I love the concept of, like, they’re healthier and wealthier than ever, right? They’re living longer, and so as a result, they’re staying in homes longer, but they are going to need this healthcare access at some point. So, let’s start there. What kind of things do you guys focus on from a demographic standpoint that inform the decisions you make on the investment side? 

Perfect. So, let’s start with the 80-year-old population is expected to double between now and 2040. So, when you think about what are the types of services that people that are 80 or older need, you’re going to need twice as much of them, and the people that are going to be 80 are wealthier than any generation in history. 

So, what does that mean? When we look at that, so, typically once people are over 80, their ability to stay safely living in their home by themselves diminishes. And so, the demand for senior housing as an alternative lifestyle for people, we expect to explode. Sort of in the same way demographics and structural tailwinds drove the demand for e-commerce and warehouses looking back 10 or 15 years. 

We see something similar over the next 15 years in senior housing. And just to give you some rough stats, so right now nationally, the senior housing market is about 90% occupied. It’s very, very, very healthy. And so, every day there’s 10,000 people turning 80 in America. When you look at the penetration rate, the percentage of people that, when they can’t live alone anymore, go into senior housing. 

If you just keep it the same and you adjust for the size of the demographic pool changing, you would need to build something like 125,000 units of senior housing every single year for the next 15 years. The peak we’ve ever built in this country was 56,000 units, and we did it one time. The current pipeline is about 25,000 units, so you need to quintuple the supply chain, the ability to deliver these units, and do it for 15 years in a row. 

And so, we think the demand for that is so profound it will be difficult for the supply to keep up, and it’s why it’s one of our highest conviction ideas. But in addition to that, what it will also be driven is the demand for things like outpatient medical services. So, think cardiology, oncology, urgent care rehab facilities, physical therapy. 

People are healthier and wealthier, as you mentioned. They’re living longer, and they will consume more services. And so, one of our highest conviction ideas is that healthcare real estate. All driven by demographics. 

No, it’s so fascinating, Judson, because, like, if you think about not just in the real estate space, that exact same argument. Like, what is… I thought about this before. What is the number one thing that the aging population hates is when you take away their car keys. Well, guess what? Self-driving cars are here, right? And so, you start to actually go, “Oh, well, that’s different than prior generations.” We no longer have to worry about Granddad or Grandma driving at night or driving to the supermarket. They can still have a lot of that freedom even when they’re, again, to Josh’s point, over 80. 

Another interesting one to think about because of this aging population is, man, this is the perfect time for, like, robotics in surgery and other healthcare fields to come along, right? Because there are more and more than ever, and you are not necessarily going to have the workers to do a lot of that stuff. 

So, the more we can get efficient with robotics and whatnot in the medical field, the better, right? And I think that’s the theme here is it’s, again, we’re informed by Josh in the real estate side, but dude, this goes everywhere in the economy, right? It does. The problem I see is connecting Grandpa to the self-driving Uber is never going to happen. Yeah. They’re better than ever at that, but yeah. 

So, I think it’s super fascinating, Josh, especially when you talk about, okay, these folks are going to move into, in all likelihood, assisted living. They’re probably going to have very high demands on what that looks like, especially given they are living in homes right now. 

But I think, again, that pulls this next thread, which is they’re living in homes right now. And much of what y’all’s team has seen is that a lot of the single-family homes that are out there are actually owned by this generation, right? It’s one of the highest ever. What are the implications on the economy as they start moving out of those homes into this affordable housing? Or into this assisted living, excuse me. 

Yeah. So, there’s an interesting phenomenon that we followed for a while called aging in place. And so, when we look at I think most people would acknowledge that there’s an affordability challenge with housing in the United States, and that it’s difficult for young families, new households to buy that starter home, whether it’s accumulating the down payment or the monthly installment or the mortgage availability. 

It’s expensive for people. And a big driver of that, we think, is demographics. So, if you look at- going back to this idea of aging in place, it used to be that the home ownership rate, once people turned 65, would drop pretty precipitously. And if you look at previous generations, that would, is what would happen. Did not happen with the baby boom generation. 

As we talked about earlier, they’re healthier, they’re wealthier, so the home ownership rate nationally across all generations is about 65%, and that’s stayed pretty steady for 50 or 60 years. But for the baby boom generation, people that are over 75, it’s 80%. 

So, 80% of Americans over 75 own a home, and that’s 25 million to 27 million homes. And so, what’s the expression? The only things that are certain are death and taxes. Eventually, those homes, as part of the great wealth transfer, will come back on the market. So, we think that demographic, that aging process where people may move into senior living, those houses will be sold young families will buy them, and that will help to ameliorate the housing affordability crisis that exists today. 

By our estimates, there’s a couple million homes that other… based on the sort of previous generation homeownership rate, if it stayed where it was, would have already been recycled back into the system. But instead, they’re owned by baby boomers. So, when people say, “Where’d all the homes go?” Grandma and Grandpa still own them.  

So that when you connect those dots, right? So, you look forward and you say, “Okay, over the next 10 to 15 years, we’re going to have this big inventory coming on the market.” We expect that, as you talked about earlier, that the millennial generation is hitting this age of formed household, which will put them right in place to be buying those homes. How does that then affect y’all’s view on, like, multifamily, or does it affect your view on multifamily? 

Yeah. So, when we look at the millennial generation, that is… So, our research suggests when people reach 35 to 49 years old, that’s peak household formation age. So that’s, people they get married, they partner up, they have pets, kids, and they need more space, and they get their own shelter. 

So, the size of that population, 35 to 49, over the next 10, 15 years, is expected to grow by something like 6.5 to 10 million people. And again, that’s pretty certain, absent like a catastrophe, a war, that’s going to happen. So, we’re quite optimistic medium-term about the demand for rental housing and for sale housing, but we’re not in that business. 

So, we think that fortunately for, I would say the overall population and the affordability of housing, more supply will come of existing homes back on the market from baby boomers selling them. But there’s still going to be plenty of demand that’s going to sop up both the multifamily and single-family rental supply that’s out there. 

So, and you can say you don’t have an answer for this, but do y’all have a thesis at all with this shift of baby boomers in all likelihood selling their homes back onto the market, moving into assisted living, these younger generations acquiring those homes. Do you have any information on like what are the implications on rural versus suburban versus urban? I mean, do these younger generations have a desire to go back toward the city, away from the city? Do y’all have any data on that? Or are they just going to follow where the homes go?  

Yeah. So, look, I think we do quite a lot of it. One of the things that really attracted me to Clarion and FT was the sort of the commitment to research. So, there’s now 18 people on our research team. And so, we forecast it within Clarion on the real estate side, we forecast for every asset class, national market and sub-market, and sometimes even zip code level rent and total return performance. And a big driver of that are what do we believe is going to happen with population growth and job growth in each of these geographic locations, and then what’s the impact on the demand for real estate as a result? 

So, I don’t know that it’s necessarily like an urban or a suburban, but we’re definitely focused on places that are sort of pro-business, pro-job growth. Now right now, if you look at housing, for example, multifamily the markets that are probably struggling the most in the fundamentals are the Southeast and the Southwest, the Sun Belt, but that’s all because of oversupply. 

If you look through the noise, we’re still very positive medium- and long-term that jobs are going to keep going there and people are going to keep moving there, and the demand will be there. And so as a long-term investor, it’s actually quite interesting to sort of look through the noise for the real signal and allocate some capital where you can tolerate a little bit of near-term volatility, but you know long term these are great places. So, we’re more, I would say, job and population driven and less urban versus suburban. 

Yeah, it’s super fascinating. Okay, so this sort of segue piece I want to use to get from the aging to maybe the younger is actually a very interesting space we talked about before we came on, which is self-storage. 

Because at first you would think the self-storage space is definitely, it has to be there for the younger generation because they’re moving apartments. I mean, right now we just moved Ronnie back from college, and now we had to put his stuff somewhere because we have to move him right into his new townhouse, and then we’re going to have a second kid and a third kid here shortly. 

But what you said before we went on, Josh, is that the thesis on self-storage is actually the retirees, which I thought was fascinating. You want to go into a little bit about what y’all’s research is showing there? 

Sure. Well, our research suggests that as it relates to self-storage, what really drives demand is what we call housing velocity. So, somebody moving from one place to another that either can’t fit all their things, doesn’t want to move all their things, or needs to put their belongings someplace for some intermittent period of time. And so, what you really care about is the movement of people, and that’s been really stifled over the last five years since rates moved. 

Part of that is because of what we call the mortgage lock-in effect. So, so many people have a cheap 2020, 2021 era mortgage they don’t want to give up, so they’re not moving. But demographics is inevitable, right? So, what do we know? We know that, as we talked about, people over 75 own somewhere between 25 and 27 million homes. 

Whether they choose to go into senior living or they move back in with their adult children when those homes… they will inevitably be sold, and the belongings there will go somewhere. And so, we believe that as the baby boom generation ages further and needs to sell, based on health reasons, those homes, that’s going to create a significant demand for self-storage that hasn’t yet shown up in the operating fundamentals. 

And I think you’ll see something similar with millennials as they form more households, and they move out of their parents’ house or they move out of the three-bedroom they’re sharing with a bunch of roommates and they move into their own shelter. You’ll see demand for self-storage move. 

I love it, and we also came up with our title for this episode, which is “Demographics is Inevitable.” I love that. It’s a great line. It is true. So, thank you for that. Thanks for the title. Okay, let’s move on to the kiddos, as we like to call them, those that are below us, the millennials and then even my kiddos and below that. 

So, I mentioned when we were just starting that last year’s graduating class and freshman class in college is the largest ever. Which is part of what, Judson, which is part of what’s creating this issue on universities being able to grant students in, right? It’s like all of our alma maters are struggling to let our own children in because there’s just not enough space, especially for campuses that are in urban areas. 

And a lot of what has driven some conversations in our house with our kiddos and stuff is like in a few years some of these colleges are just going to shut down, right? I saw a study here recently on some smaller liberal arts schools that can’t get students because everybody’s going to these big mega conference schools and as more and more of these demographics play out. 

Because you can’t make 18-year-olds. We already know where they’re coming from and so as a result, a lot of these universities are going to end up shutting down. I can tell you how to make an 18-year-old. It just takes time. But it’s interesting when you talk about that in line with other things that are going on. 

I’ve had questions recently again about limits on student loans, right? So, you have these not only demographic changes but also some other changes with even access to universities and how that will change… could it actually change college costs for the first time in many, many years? 

Could we actually see some colleges getting more affordable because they’re trying to attract students over, again, what you’re saying, some of the mega conference universities. Yeah. 

Okay, so let’s come over to you, Josh. I’m going to give the listeners a stat very quickly. So, listeners, birth rates peaked in the late 1950s following the World War, okay? Which is of course the baby boomer, to Josh’s point. Since the GFC, birth rates have fallen below replacement level. So, U.S. Census Bureau estimates replacement level at 2.1 and right now we’re at about 1.6 to 1.8 children per woman. 

And so again, you’re seeing this decline. The kids that have been made in this millennial generation, they are made, but we are going down to Josh’s point earlier. So, Josh, given the line how do demographics trend drive decision-making in real estate investing, where do you guys start with the declining birth rate as far as how you’re looking at the broader economy? 

Sure. So, I think the declining birth rate will take a while for it to filter through things like consumption. And so, when we look at for the next 10 years, one of our other highest conviction themes is around industrial, which might be surprising for some people it’s actually our… we’re the, I think the third largest owner of industrial in the US. 

But what really drives industrial is e-commerce sales. So, when we look at our research, the same type of research we did on the self-storage, we do on industrial, and a dollar of e-commerce sales is the most impactful thing that drives a demand for a square foot of industrial distribution centers. 

And what surprises people is that over the next 10 years, the average sales of e-commerce is going to grow by a trillion dollars per year. It’s going to grow by 30% to 32%, and that’s because those millennials are, when they get into peak household formation age, they also have more money and they spend more. 

So that declining birth rate, I don’t think impacts consumption very much over the next 10 or 15 years. It’s going to take a while for those people to get to the peak age, and then we’ll have to see what immigration looks like, and we’ll have to deal with that at the time. 

Where I think it’s more near-term is in things like student housing. So, we have been a historical investor in student housing. We’ve had a good experience. But the way I describe certain asset classes, there’s some things where you want beta and there’s some things where you have to be more of a stock picker. And so, if you look at senior housing or you look at industrial, we would expect because of these really powerful demographic trends, you’d expect the whole market to do well. 

Now, you want to outperform the market, but in things like student housing, where the number of 18-year-olds is going to decline, and that is inevitable. You really need to be thoughtful about what universities are going to grow and why, because there’s going to be winners and losers, and it’s really much more of a stock picker’s game. 

And so, you won’t see us over-allocate to that kind of sector. We’ll definitely allocate to it, but it’s going to be much more of a bespoke kind of stock picker’s approach. You’ll see us over-allocate to the ones where the secular tailwind means, like, you want to make sure you don’t miss out on the beta. 

So, it’s interesting you talk about the correlation between e-commerce and industrial space, which is interesting and makes all the sense in the world. And the three of us grew up in the age of the mall, and we’ve seen the complete change in- I don’t know what you’d call it, just consumer shopping space. And now today it’s like, you’ve got the big boxes that people still go to, but has that hit its low or is that still also trending to be smaller and smaller of a segment of space? 

Well, I love the way you put that, Judson, because I think about it the same way, which is when the whole e-commerce trend- and I started my career in real estate investing in the shopping center business. 

And every 10 years, it changes pretty significantly. And so the whole industrial explosion, in a good way, is really just- was sort of like the evolution of retail, right? When I started my career, you had these big boxes that were disintermediating. The Walmarts, the Targets were disintermediating regional chains and small stores. 

And then, a lot of that business went online and then some of those tenants were disintermediated. And that’s just the evolution of it. But we actually have a pretty high conviction on retail shopping centers right now for a little bit of a different reason, and that doesn’t mean malls per se. It’s more open air shopping centers. 

So, as we talked about, we’re very data-driven. This is not so much a demographic story as it’s just a data story. So, since the global financial crisis, non-e-commerce, non-gasoline sales in America have almost doubled. They’ve grown by 90-something percent. 

In that same period, the supply chain of new shopping centers has grown by less than 9%. Most people know there haven’t been a lot of new malls built because it’s been such a hard business. But the fact that sales away from e-commerce almost doubled since the financial crisis surprises a lot of people. 

And so now you have a real supply-demand imbalance where people still like to go to restaurants, people still like to go outdoor shopping centers and also you have work from home. So the shopping patterns have changed a lot, where if a lot of people are spending an extra day or two a week near where they live, that’s consumption that moved from the downtown where their office building was to the suburbs where they lived, and those changing shopping patterns are creating some pretty profound opportunities that we see. 

Yeah. The shopping pattern thing where… I mean, it’s so funny because you used to, if you wanted to go to the dentist or get a haircut, you could go at 10 a.m. on any day of the week. Now it’s like, “Oh, I’m full for the next week,” and you’re like, “Wait, it’s 10 a.m.,” right? But it is exactly what you said. 

And I think that, listeners, our whole point of this was to just get you to think differently about where the world is going, right? Demographics are inevitable, to Josh’s point. I love that line. And it drives so much of where things are going in the world. And what I love, Judson, about being up at that Franklin meeting is, it had their real estate team, their credit team, their fixed income team, their equities team, and we’re all sitting there, and everybody’s just bouncing ideas back and forth. 

And it ultimately, I think that’s where it comes, right? The whole economy is so intertwined, and so you have to find the common thread that goes through everything, and the only common thread is demographics. Which is why I wanted to cover it today. 

Well, and I think it’s really interesting for different segments of our dental population, our dental listeners is, you talked very early on about, again, the growing aging population, which also because they’re healthier longer and they have money, they need these services that many of our clients provide. 

On the flip side, we have a segment of clients in the Ortho/Pediatric space that are looking at a very different challenge over the next 10 years, which could be even a smaller population, which again, I think really makes them think about how they position themself best if that patient population is shrinking a little bit, how to position them best from a marketing standpoint to capture the patients that they want.  

Absolutely. Well, Josh, awesome conversation. Thanks, man. Thanks for tapping in from New York City with us today. I’ll be back up there in a few months, and so it’ll be good to see you again. Otherwise, appreciate the time. Look forward to it. Thanks. Appreciate you. 

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