Research

The drag on recovery: Wealth gap, demographics and jobs

What will growth in the real estate industry look like post-recession? That depends on a number of factors. Development will be much more focused on fulfilling specific needs and on infill. Development on the periphery will not cease, but it will likely be less grand in volume. Much more equity will be needed to buy and develop.

2014-01-30

By Mark Stapp, Director, Master of Real Estate Development Program The big changes that will result in a healthy, fluid real estate market are unlikely until late 2014 or early 2015, and may even occur later depending on the resolution of some critical issues: the wealth gap, demographics and job growth. These issues are inextricably linked. We need a strong middle class that has the opportunity to prosper, because the middle class has much more impact on growth than corporate efficiency and profits or increased wealth for the wealthiest. We need consumer spending to return to pre-recession levels, and if wages don’t grow then we will not get that spending. We must also address immigration policies. If we have no wage growth and severely restricted immigration, I question where we’ll find stimulus for growth. Maybe growth will begin with those segments of the market related to absolute needs, such as health care, aging population and education. Sectors that support innovation especially renewable energy, biomedical and technology that supports changing lifestyles may also lead the recovery or rental housing: Rich or poor, we need places to live and this remains the case. Consumer spending and wealth creation in the middle and lower classes will drive growth. The reduction in consumer spending contributes to a downward spiral in the economy. This results in further unemployment, further reduction in income and further reduction in consumer spending. We need some inflation too. We need inflation to recover but not without growth in wages equal to or greater than the inflation. Basically, as goes the economy so goes community growth, and as goes community growth so goes real estate market. The real estate market needs community growth because it drives demand for real estate development and redevelopment. So, what should the real estate industry be doing to help itself and help the local economy recover? It needs to be a strong proponent for significant investment by state, city and town governments in education, infrastructure and new business formation. Unfortunately, the political ideology that attempted to privatize, deregulate and reduce the size of government, also greatly diminished investment in the very things that created our prosperity from 1945 to the mid '70s. During that time period we had significant government investment in education, infrastructure and research. Our immigration policy fostered in-migration. And the rules that controlled capital formation caused our growth. We have reduced investment in education to frightening, low levels. We have ignored our infrastructure to the point that it is deteriorating — and rapidly. Our immigration laws are in need of significant revamping, to allow talent to come to the U.S. and stay, so that our “melting pot” continues to fuel our growth.

Commentary Real Estate