- Part of Our Coverage on Decentralization in Real Estate
- Real estate represents an attractive investment globally especially in urban centers, with millennials entering the market in ever greater numbers. Millennials will be the key buying demographic going forward.
- Global real estate tech investments reached $40B in 2017, a remarkable 35 percent increase over the year before.
- Millennials are driving more transparent, user-friendly real estate platforms, and financial products ranging from virtual reality open houses to no-fee, automated mortgages.
- Gig economy workers are giving rise to a wide range of new business opportunities in real estate, including co-working spaces, shared housing, and crowd-sourced real estate development.
Real estate is again a compelling investment goal globally, with large and small investors entering the market via a variety of channels. For purely pragmatic reasons, millennials are entering the market in growing numbers, alongside sophisticated investors and family shops.
Millennial-driven decentralization in the real estate market is arriving in the form of more transparent, user-friendly mortgage products, the proliferation of alternative listing options, and crowdfunded investment platforms like Fundrise, Cadre, and Coimmvest. The proliferation of these crowdfunded platforms is opening the door for small investors to access previously impenetrable top deal commercial real estate opportunities. These same platforms are offering developers new channels of funding, further decentralizing the power of big banks and deal makers like CBRE.
The Flow of Capital
The robust growth of investment by institutional and private equity investors confirms the appeal of the market globally. Based on numbers collected by White & Case, PE investment activity in the real estate sector continued to grow in 2017 with global deal volumes reaching $40B across 47 deals. That is a remarkable 35 percent increase in deal volume relative to 2016, and it continues the strong trend of PE investments growth in the real estate sector in the post-financial crisis period. There was an increase in investment activity across all regions of the world led by Asia.
North American PE investments in real estate continued to grow to $12.68B in 2017 across eight deals, up from the $9.07B of investment activity seen in 2016. The EU also registered a significant increase in trade volume up to $14.19B across 22 deals in 2017. The deal volume was up 28 percent and the number of deals were also up by 46 percent relative to 2016.
The star of PE investments in real estate in 2017 was the Asia-Pacific region. Deal volumes nearly doubled from $6.78B across 10 deals in 2016 to $12.66B across 15 deals in 2017. Most of the investment activity continues to be centered around China, which accounted for $9.44B of trade volume across 6 deals in 2017.
The home buying process is needlessly inefficient, which is why technological disruption is hitting the real estate industry across the board, impacting how agents show listings, how buyers apply for mortgages, and how developers finance major new construction.
Startups like MatterPort and Atlas Bay VR are providing VR walkthroughs of existing listings. Soon, home hunters will be able to hook up VR goggles to their cell phone and tour listings without leaving their home or office.
Virtual Xperience creates high resolution VR walkthrough experiences for yet-to-be-built developments.
Home listings with VR components are much stickier, increasing dwell time on real estate listings dramatically, but the threat to traditional real estate agents is clear. Will virtual walkthroughs make open houses a thing of the past? Will listings cease to require the human touch or will real estate agents enter virtual spaces to interact with home buyers?
Mortgages for Millennials
Mortgage banking is quickly shifting from a relationship and service business to a technology business. This is due, in part, to the fact that traditional mortgage application processes feel less like a service and more like a shakedown with relentless fees and demands creating an ongoing sense of disempowerment for customers. Millennials are moving to platforms that level the power relationships and speed up the process.
Founded in 2002, Network Capital Funding Corporation offers home loan products with no lending fees, competitive rates, and an automated document process that allows loans to close in as little as fifteen business days. Their sizable millennial support staff is trained to keep the focus on their millennial clients’ need for transparency and clarity.
Crowdfunded Real Estate Investing
Companies like RealtyShares and ArborCrowd are working to create crowdfunded real estate investments for the masses, allowing smaller players to invest in top level commercial developments. While the cost of entry is still relatively high, new players are entering the market, giving developers an alternative channel to fund projects and threatening the centralized models of traditional large scale funding.
Why Now for Millennials?
Millennials are entering the real estate market, motivated by rising rents, climbing mortgage rates, higher job security, and the formation of family units. Faith in the housing market is as high as is it has ever been since 2005, one year prior to the collapse of the real estate market. In May of this year, the Gallup Organization released a poll, which shows that 64 percent of Americans expect home prices to increase while two-thirds consider it a good time to buy a house. Regardless of the risks, real estate remains a tangible, easily understandable, and conservative investment.
The gig economy has also given rise to new market opportunities. Branded workspaces address the need for temporary offices and meeting spaces, but they also cater to a growing awareness among gig economy workers that social connection is not just a driver for ongoing gig opportunities; it’s central to social and emotional well-being. In response to demand, the business has shifted to a more B2B model by providing space for customer facing brands. WeWork, Knotel, and others represent a growing market, as millennials’ distinctive take on work/life balance creates decentralization in commercial real estate.
Calculating the Benefits
For millennials, growing confidence in home ownership is primarily informed by the major urban markets where they live and work. The New York real estate market remained durable even during the 2006 housing market collapse while most of the country was mired in double-digit down turns that didn’t finish playing out for nearly a decade. By early 2007, New York City real estate was again booming across all price ranges with bidding wars and jammed open houses.
This seeming durability, balanced against rising rents, makes buying real estate in cities like New York an increasingly attractive proposition, positioning fixed rate mortgages as a long term hedge against rental housing inflation.
The relative benefit of taking on a mortgage today is exactly the kind of pragmatic calculation that kept millennials out of the housing market five years ago, when jobs were scarce and rents where lower. Millennials exhibit a high degree of pragmatism when considering investing, home ownership, and other basic tenets of the American dream. For workers in the highly mobile gig economy, the choice to own a home is not tied to some vague aspirational idea about what it looks like to have “arrived.” When millennials choose to buy a home, they do so based on much more pragmatic considerations. This focus on practicality makes millennials contemptuous of traditionally archaic, opaque, and time-consuming home buying processes. For them, this practical issue of creating and preserving wealth, calls for equally practical transparency, ease of access, cost effectiveness, and speed.
According to a 2015 report from the US Census Bureau, the American population consists of 83.1 million millennials, outnumbering the 74.5 million baby boomers. As of Q4 2017, 79 percent of Americans aged 65 and older own their home, but only 36 percent of Americans under age 35 do.
Home buying, long a laborious and opaque process, is ripe for disruption. Millennials represent a vast and untapped population of potential home buyers, and given their appetite for more more agentic, empowered customer experiences, new online client-facing real estate platforms will thrive as they disrupt incumbent lenders and agents.