From city to suburbia then back

This article comes from First Tuesday Journal Online

Part I of this article series comments on the coming depopulation of suburbia as the highly educated Generation Y and retiring Baby Boomers return to California’s urban cores.

Conditions signal a mass return to cities

Since World War II, suburbia has enjoyed its status as an embodiment of the American Dream. However, the dream is fading as California wakens hung-over from 30 years of financial debauchery which culminated in the Millennium Boom and comes to terms with the realities of unchecked pre-Boom suburban growth.

Over the past 60 years, societal trends and economic pressures drove people from the cities to the undeveloped rural regions known as suburbs, also called bedroom communities. Allured by the suburban dream of large lot sizes and attached garages, suburbia featured real estate that was more plentiful and less expensive than the city, due to cheaper land values and mass production methods.

This phenomenon, known as urban sprawl, drove large portions of the city population to the suburbs. Extensive road systems and related infrastructure were built to accommodate the landowners, subdividers and eventual homeowners who lived amongst the chaparral and sage but worked in the urban centers – a ubiquitous condition which California is as famous for as its temperate climate. Cities collaborated by imposing height and density restrictions anchored in expansionist thoughts of territory grabs and a beefed-up tax base.

The growth pattern established after World War II relied heavily on:

  • the rapid horizontal expansion of metropolitan areas;
  • the conversion of farm and wild land into residential neighborhoods; and
  • the near exclusive use of the automobile and freeway systems to transport individual Californians from their bedroom communities to remote places of employment and culture.

In the wake of the mass exodus to suburbia after World War II, California’s inner cities began to suffer a slow deterioration much like blood hemorrhaging irretrievably from a pumping heart. Their populations shrank (if not in size, in quality) breaking down socially and economically as Californians were pulled from their large cities and transplanted to the Inland Valleys and desert areas.

As a result, crime rates soared in the abandoned urban centers, cultural amenities were shut down and, perhaps the largest wound of all, businesses and available jobs began fleeing on the coattails of the suburb-driven evacuees.

These non-sustainable growth patterns helped California emerge as an economic leader of the West Coast. However, in a cruel twist of irony, the deliberate but unguided sprawl which catapulted California to dominance in the post-war era is now an obstacle limiting its growth. The same land use patterns of urban sprawl which nurtured the growth of California from a time when it had only ten million inhabitants has morphed into a hindering albatross around the neck of the current California with over 37 million residents, elongating California’s ascent out of the economic doldrums following the Great Recession of 2008.

California’s love affair with suburbia reached its apex (and arguably grand finale) during the sweltering financial frenzy of the Millennium Boom. The resulting real estate paradigm shift put a sudden end to the real estate trends and practices forged in the prior 60 years (and topped off with 30 years of creative Wall Street financing), of which suburbia played a significant part.

In the coming years under the real estate paradigm we now face, California will be seeing another such migratory shift, but one in the opposite direction – from the varnished relic of suburbia, to the cultural magnet of the city. [For more information on the real estate paradigm shift, see the May 2010 first tuesday article, Looking through the window towards recovery: a real estate paradigm shift – Part I and Part II.]

Rise of the Gen Y

In the post-Boom paradigm, future demand for housing will focus on urban multi-family units, such as condominiums, multi-story townhouses and apartments, near the coast. Adversely, demand will shrink for inland single family residences (SFRs), according to the University of California Los Angeles (UCLA’s) Anderson School of Business Forecast and numerous real estate prognosticators – first tuesday included.

But what accounts for this change in population movement and which demographic will pave the way?

California’s population is trending younger and more educated, thus there will be less demand for suburban McMansions and greater demand for trendy, urban living space. California is one of the youngest states in the nation and thus its future will be disproportionally shaped by the post-Boomer generations. According to 2010 Census data, the median age of California is 35.2 (Maine, by comparison, is 42.7 and New York is 38). [For additional commentary on population trends in California, see the first tuesday Market Chart, Golden state population trends.]

This massive younger population of those who were born in the ‘80s and ‘90s is known as Generation Y, also called Gen Y. A bulk of this demographic has returned to school to obtain a higher education and greater specialization as they were pushed from the job market during the Great Recession. Just over 70% of 2009 high school graduates enrolled in college, the highest percentage of college matriculation since this data began being tracked in 1959, according to the Bureau of Labor Statics.

With this higher level of education, the highly-skilled Gen Y will gravitate towards urban areas where they can implement their skills and receive higher compensation than allowed in the outlying areas. Not satisfied with money alone, Gen Y will likely also seek something slightly more obscure than simple economic prosperity. They will move to areas boasting cultural significance, places referred to by Gen Y as “hip,” denoting a certain ephemeral quality that belies youth, natural optimism and innovation. Not much happens for Gen Y on the metaphorical farm.

These magnets of prosperity will become places lush with cultural establishments which act as a physical testament to the ideals of the new generation. Areas featuring history and art museums, galleries, laudable universities, professional and financial centers, sporting events and upscale eating and drinking establishments.

These educated individuals are the Creative Class, as labeled by Richard Florida, author of The Rise of the Creative Class, a 2002 book on the urban renaissance. A majority of the Creative Class consist of accountants, lawyers and managers, whereas the Super-Creative Core is further classified as a cluster of high-skilled occupations, including academics, architects, artists and scientists. This Creative Class, to be driven by members of Gen Y, will congregate in cities with other innovative individuals to create industries we never had before.

Additionally, learning from their parent’s missteps in suburbia, many Gen Y buyers will be likely to think twice before they subordinate their life-savings to the risk of a long-term mortgage. Gen Y expresses a very different personal ideology than previous generations, including their parents (the Baby Boomers).

Gen Y’s visions of owning an All-American dream home in the suburbs have been stifled by perpetually low employment rates. Thus, they will rent for a longer period of time than their Boomer parents did. [For more information on the new appeal of rental property, see the February 2011 first tuesday article, Rentals: The future of Real Estate in CA?]

Seeds of this magnet paradigm have already begun to take root: permits for multi-family homes are currently at 40% of their peak level during the past decade, whereas permits for SFRs are only at 20% of their peak level.

The allure of the efficient city

High-rise buildings in California’s urban centers allow for large amounts of people to live in the smallest amount of space and at the highest degree of safety as they are secure with 24/7 security and surveillance. More importantly, travel time is reduced from an individual’s residence to his job, services, shopping, schools and places of socializing. To help conceptualize these benefits, think of energy efficiency (home ratings), carbon emissions (gas engines) and the time freed (not parked on the freeway) to do other things. [For more information on the merits of urban living, see the May 2010 first tuesday article, The plight of California to be solve by…cities?]

High-rise buildings house a large quantity of people in a relatively small geographic area, and they also invite a surge of service and research companies as employers take advantage of a centralized workforce. Scale also enables more competition, compiling like-minded individuals into a relatively small geographic area in which they can build off one another’s ideas and innovation can propagate. Humans have proved very good at collaborating, especially when competing with one another.

Consider Silicon Valley, the Fashion District in Los Angeles, Hollywood, Sacramento’s government headquarters, San Diego’s military industrial complex and the financial market businesses of San Francisco and South-Central Orange County. When the zoning of a location allows for high-rise density, small businesses will cluster, and create oases of economic prosperity. In turn, California’s small businesses are unrestricted in their ability to grow and grow, then become really big.

Marriage wanes with suburbia

The prevalence of the traditional nuclear family, consisting of a married couple with children, is on the decline, and with it, the relevance of the more secular suburban lifestyle. The 2010 Census reveals that the number of married couples makes up 45% of all households nationally, the first time the number of unmarried households outweighs those that are married.

The level of education also plays into this mix. In 1960, 76% of college graduates were married while 72% of high school graduates were married, a difference of only 4% between the two groups, as reported by the Pew Research Center. However, by 2010 this gap widened significantly – to 16% from 4% in 1960 as fewer educated individuals are getting married.

And while marriage is being postponed or ignored, many of the educated members of Gen Y are similarly postponing having children. In the late ‘40s-‘50s, families with young children made up half of all households nationally. By 2000, households with families were only a third of all households.

Boomers flee the suburbs too

But is Gen Y the only demographic to make this migratory shift back to California’s urban centers?

For many Californian Baby Boomers, retirement will be postponed due to the combined loss of asset wealth and retirement savings wrought by the stock market crash and the Great Recession. Baby Boomers, defined by the Census as the generation born between 1946 and 1964, will be required to stay in the labor force longer in order to acquire enough funds to finance their retirement.

As a direct consequence of keeping their jobs longer, Boomers will also be keeping their homes in suburbia longer to stay near their places of employment. Negative equity conditions for large numbers of Boomers will further tie them to their suburban properties until their loan-to-value (LTV) ratios drop below 94%. They may well strategically default in the coming years to rid themselves of the home and debt as credit scoring will mean less to them.

However, once enough retirement savings have been amassed and the Boomers are able to slough off their suburban dwellings, many will move to the city (likely to be nearer to their Gen Y children and grandchildren). The advantages of urban living are many. Most condos come with amenities, such as community pools, workout facilities and much common space. Condo projects in higher density urban locations typically provide a high level of personal security. This allows for condo owners to spend time traveling without concern for the contents of their unit.

Rented multi-family units – condos and apartments – also offer a high degree of flexibility in a time when life can take a sudden, unexpected turn due to medical complications associated with aging. A lease can typically be cancelled within just a few months by working with the landlord. The same cannot be said for selling a property to quickly relocate.

Urban condos also require very little maintenance and no yard work by the owner, as is required by a detached SFR. Little wonder then that the Census reports three out of four citizens aged over 62 lived in metropolitan areas in the year 2000 – a trend that has likely increased in the past ten years. [For more information about Baby Boomers, see the March 2011 first tuesday article, Boomers retire, and California trembles.]

The Great Confluence

Sometime in or around 2020, a real estate bottle-neck will occur, known as the Great Confluence. As part of the Great Confluence, two demographic groups will simultaneously desire living space in the urban cores of California. By 2020, Gen Y will have completed college and entered the high-skilled labor force, eventually becoming financially capable of purchasing or renting a property. In the opposing corner, the Boomers will have worked those extra years necessary to be able to finally retire, some five to ten years later than they planned for in the ‘80s and ‘90s. [For more information on the development of Gen Y and their delayed entry into the real estate market, see the October 2010 first tuesday article, The demographics forging California’s real estate market: a study of forthcoming trends and opportunities – Part I.]

These demand events for housing will occur at approximately the same time, prompting both demographic groups to migrate in large numbers to the cities simultaneously.

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