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How Do the Changing Demographics Affect Commercial Real Estate?

May 20, 2013

Alasdair Cripps Senior Managing Director Mesirow Financial

Matthew Johnson Executive Director UBS Global Asset Management

Sean Ruhmann Senior Consultant, Private Market NEPC, LLC

2013 Annual Conference & Exhibition “Unifying in a Changing Environment”

Stacy Birdwell Vice Chairman Louisiana Firefighters’ Retirement System

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NCPERS 2013 Annual Conference & Exhibition

Table of Contents

I. Worldwide Population Demographics and Growth Projections

II. U.S. Demographics, Age Cohorts and Population Growth

III. U.S. Population Growth: CRE Ramifications by Property Sector

IV. Conclusions

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I. Worldwide Population Demographics and Growth

Projections


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Why Do Demographics Matter?

Population growth, both native born and immigration, drives housing, employment, educational

needs, commerce…and, consequently, real estate needs

Demand Drivers to Consider:

The differing real estate needs of various age cohorts

Effects of net immigration rates

Urbanization migration from rural areas to cities

Growth in income and propensity to spend rise in middle class

Cultural emphasis on education (home and abroad)

5


Worldwide Population - Most Populous Countries

China and India alone account for 37% of the world’s 7.1 billion people

6


Source: © Collins Bartholomew 2013

Worldwide Population Density

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Worldwide Population - Demographic Outlook

Current population of 7.1 billion is expected to vary significantly among continents before the next

century

Europe’s population forecasted to peak around 2020

Asia and South America are projected to depopulate beginning in 2055

Africa and North America expected to continue to grow ratably

8


Worldwide Projected Population Changes

A common theme is the “graying” of world populations, due to rising longevity and declining

fertility rates over the next decade

9


Worldwide Projected Population Changes

Higher median ages in parts of Asia and Russia without large younger populations behind them

will create higher dependency ratios

10


Population Outlook - Europe

Expect gradual decline, up to 20 million over the next 40 years, due to declining fertility and net

migration Largest population decreases to be seen in Russia, Ukraine, Germany and Poland

Largest population increases to be seen in the U.K., France and Spain

Of note, the 60+ age cohort will increase by 25% over the next 10 years, while the 20-30 year old group will shrink by 21%

across Europe, creating a rise in the dependency ratio

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European Population Growth - CRE Implications

The changing size of age cohorts will impact the types, functionality and locations of all real estate

sectors

What does the changing European demographics mean for commercial real estate?

12


Asia Population Growth

Projected continual growth in Asia, up to 1 billion, over next 40 years

Expect strong urbanization to continue with up to 2.25 billion in urban areas by 2025

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Homebuilding: surge in home ownership

Rapid urbanization and declining household size

Strong growth of population

Retail and Office: rise of Asia consumerism; China and India as major economic forces

High foreign direct investment

Rising middle and upper class

Increasing spending power on housing and consumption

Strong economic growth

Growth in tourism

Asia Population Growth - CRE Implications by Property Sector

Student Housing: key Asian cities as education hubs

Cultural emphasis on education

Growing foreign student population

Hotels/ serviced apartments: tourism in Asia

Expanding share of the meeting/conference market

Increase in business and leisure travel

Heath and medical tourism

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II. U.S. Demographics, Age Cohorts and Population

Growth


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Silent Generation Born: 1928 - 1945, Ages 85 to 68 in 2013

Silent Years: They were children during the Great Depression and World War II with conformist and civic instincts

Baby Boomers Born: 1946 - 1964, Ages 67 to 49 in 2013

Boomer Years: The boomers were born during a fertility spike after World War II. That spike came to an end with the emergence of the birth control

pill in 1964

Baby Bust / Generation X Born: 1965 - 1981, Ages 48 to 32 in 2013

X Years: This generation was once called “baby bust” due to the sharp decline in births after 1964 - the new name became popular with the release of

author Douglas Coupland’s book “Generation X: Tales for an American Culture”

Echo Boomers/ Millennials Born: 1982 - 2004, Ages 31 to 9 in 2013

Millennial Years: An echo of the baby boomer generation, this group is the first to come of age in the new millennium

Source: Pew Research Center’s “Millennials: A portrait of Generation Next”; US Census.

Definitions of U.S. Age Cohorts

Investment Summary (unaudited)

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Source: U.S. Census Bureau, Population Division, December 2012

Population Growth (000s)

0

10

20

30

40

50

60

70

80

90

100

2015 2020 2025 2030 2035 2040

Under 18 18-24 25-44 45-64 >65


The over 65 group is the fastest growing age cohort over the next 25 years

U.S. Projected Population Growth by Selected Age Groups:

2015 to 2040

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U.S. Millennials Will Outnumber Non-Millennials

by 22 Million by 2030

Filling the gaps left by the Baby Boomers will be the Echo Boomers/Millennials

As Boomers age, their needs for housing, consumption, employment and medical care will evolve

Echo Boomers are already larger than the Baby Boomers at similar ages

U.S. Population Growth: Millennials will be as Impactful as the

Baby Boomers…30 Years Later

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The Path Students Take to Get to College Today….

U.S. Population Growth: Education Demographics

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Why People Will Keep Enrolling in College….

U.S. Population Growth: Education Demographics

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Los Angeles/ Long Beach

Chicago

Dallas/Ft. Worth

Houston

New York / New Jersey

Philadelphia

Washington DC

Atlanta

Miami/ Ft. Lauderdale

Boston

Top 10 Metros in the U.S.


Source: U.S. Bureau of Census, March 2013

1

2

3

4

5

8

9

10

6

7

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50%

Boston

Atlanta

Miami / Ft. Lauderdale

Washington DC

Philadelphia

Houston

Dallas / Fort Worth

Chicago

Los Angeles / Long Beach

New York / New Jersey

Source: U.S. Bureau of Census, March 2013

Population Growth July 2010 – July 2012

1 1

2 2

3 3

4 4

5 6

6 5

7 7

8 8

9 9

10 10

2012 2010

Ranking

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U.S. Population Growth by MSA: Top 10 Metros - 2012 vs. 2010

Dallas and Houston had largest percentage increases over 2 years

Houston moved to 5th largest MSA in 2012

U.S. averages 0.9% population growth per year

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III. U.S. Population Growth: CRE Ramifications by

Property Sector


U.S. Population Growth:

CRE Ramifications by Property Sector - Senior Housing and

Medical Office

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Source: American Healthcare Investors, 2011

Baby Boomers’ relative wealth and demographic size will continue

to fuel demand in all segments of Senior Housing: independent,

assisted living and skilled care

Aging population will require greater medical needs

32 million newly insured people under the national healthcare law

will further influence growth of sector

The over-65 percentage of the population will grow from <15% to >20% in 30 years

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Baby Boomers currently occupy 46 million homes, older households dissolve and new households are often

formed due to death or infirmity of older owners. Most of this happens post 75 years of age (which is still

10 years in the future for the Baby Boomers) but then this inventory will be released over the next two

decades.

Echo Boomers who were estimated at 85 million in 2010, are already larger than the Baby Boomers at similar

ages, (oldest Echo turned 28 in 2013) and are now beginning to form their own households. During the

recession, if young adults had formed households at historical average rates, an estimated 1.3 million

additional households would have been formed.

2011-12 represented returns to historical amounts in household formations.

In addition to household formation, changes in home ownership rates also creates self storage demand.

Home ownership rates have fallen since 2004 and are at lowest rates since the mid-1990’s.

While the single family home market has started to improve, the reduced home ownership has created a new

pool of renters, estimated at 3-5 million, who are more prone to move and must make that decision

annually. This mobility adds to the demand for storage.

Household formation is a primary driver of self storage…..


CRE Ramifications by Property Sector - Self Storage

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Echo Boomers’ size will continue to create demand for rental

housing

Delays in marriage and childbearing, plus savings constraints will

cause renters to postpone homeownership and remain renting

Immigration growth will further spur demand, especially in top 6

states: California, Florida, Illinois, New Jersey, New York and

Texas

Last decade set new record for growth of renter households, which is expected to continue


CRE Ramifications by Property Sector - Multifamily

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Employers will relocate to gateway metros with deep pools of trained labor and thriving CBDs

Counterbalancing trends of employment hubs shifting to CBD locations and the “Yahoo Effect” against the continued push for remote

access will continue to affect office demand

Office square footage per employee to revert to long term average of 163 sf per worker

Worker productivity and urban amenities will determine demand


CRE Ramifications by Property Sector - Office

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Baby Boomers’ retail needs will drive type of retailer growth (drug

and grocery stores , apparel and entertainment )

20-28 year olds have experienced stagnant wealth since 1983,

which will negatively impact their retail consumption

E-commerce, more prevalent among shoppers under 50, will

impact bricks-and-mortar store performance


CRE Ramifications by Property Sector - Retail

Baby Boomers’ wealth is double the previous generations’ wealth at the same age

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Global population growth and urbanization is driving demand

particularly in major U.S. port cities

E-commerce, is driving approximately 1/3 of all demand for “big

box” industrial space

New industrial facilities have 36’ foot clear heights and high-end

racking systems. The new generation facilities are up to 5 times

more labor intensive than traditional distribution facilities,

requiring more parking and more mezzanine office build-out.


CRE Ramifications by Property Sector - Industrial

Global trade and consumer demand will continue to drive industrial demand

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IV. Conclusions


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Conclusions

Global population will rise from 7.1 billion in 2012 to 10 billion by the end of the century, the majority of which will occur

in Africa

Population change will not be uniform across Europe over the next 40 years: the largest decreases will be in Russia, Germany

and Eastern Europe; however, the UK, France and Spain will experience population growth

In Europe, the 60+ age groups are set to record significant growth over the next decade with the 20-30 year age group

shrinking by 22 million, creating an increased dependency ratio and lowering the productive capacity of these economies

In the US, the large Baby Boomer cohort is beginning to hit retirement; however, the Echo Boomers (30 years younger) will

be large enough to take their place, however, are projected to be less wealthy

Demographic changes will have substantial commercial real estate implications – driving demand and influencing the type,

functionality and location of real estate needs in all major property sectors

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