According to global property consultant JLL, by 2030, one-third of all global direct investment into real estate will occur in the living (Residential) sector, rising from 25% in 2020 and 14% in 2010. The sector's share of capital flows will continue to be supported by favorable demographic, economic and capital markets tailwinds which will drive expansion in established markets and accelerate growth in emerging markets in Asia Pacific and Europe.
Investment in the living sector will rival volumes deployed into traditional commercial real estate asset classes, including office, over the next decade as capital allocations shift and portfolios further diversify.
Analysis published in JLL's Growth Opportunities in Living research report shows that capital flows into the sector have accelerated over the past five years. Capital flows are most concentrated in the conventional multifamily or build-to-rent segments of the markets, as investors increasingly recognize the favorable return profile, growth opportunities and leasing fundamentals offered by these specific living assets. In 2020, approximately $200 billion in global capital was deployed into the living sector by investors globally, and with rising urbanization and other factors including housing affordability, the appetite of investors is anticipated to increase.
"Competition for living product has intensified globally, and there are no signs that investor appetite for this evolving asset class will abate. Recognizing the cash-flow stability and operational resilience of the living sector, particularly through cycles and periods of economic uncertainty, investors and developers have aggressively entered and expanded their position in the market and will seek to expand beyond established institutional markets," says Sean Coghlan, Global Director, Capital Markets Research, JLL.
The opportunities for the living sector are dependent on key demographic trends, economic fundamentals and local regulations, says JLL, all of which have driven the development of mature sectors in geographies like the United States, Germany, the Netherlands and the United Kingdom. Although only a handful of markets are presently considered mature, sectoral prominence is intensifying in economically strong countries like Australia and Canada, whereas ownership consolidation evident in smaller European countries and abundant opportunities persist in difficult-to-enter geographies.
However, analysis by JLL shows risk and return potential are not evenly distributed, with markets where supply and demand imbalances are most severe offering the greatest opportunity for sector permeation and growth, but with more challenges for investors than mature markets.
"With the sector's expansion and maturation broadening to new geographies, buyer and lender pools are deepening and diversifying. Structural tailwinds are poised to persist, providing current and future support for investment into living, especially given the sector's ability to adapt quickly to market conditions and generate strong and consistent returns through cycles," says Coghlan.
The living sector's consistent returns and leasing performance allowed it to become the most liquid commercial real estate sector in the United States, and it is now challenging the office sector's position globally investment-wise. In the previous economic cycle, compounded annual growth in investment volumes reached 17%, notably higher than office and retail. More recently, diversifying capital flows are leading to heightened levels of competition for on-market product and pushing investors into previously nascent living markets - notably in parts of Europe and Asia Pacific.
According to JLL, the following demand drivers and considerations underscore the opportunity in sector and market potential of developing living sectors in markets:
- Urbanization: Urbanization in recent decades has resulted in supply-demand imbalances and housing affordability challenges in many markets. The desire to reside in core, walkable and lively neighborhoods has been embraced by both younger and older generations. These factors highlight the favorability of denser neighborhoods in terms of renter demand and development pipelines.
- In-migration: Both within cities (between urban and suburban submarkets) and countries, population movement is a key consideration in living demand. Exacerbated by the pandemic, many residents relocated from small units in the urban core to spacious accommodations in the suburbs; however, the long-term trend continues to favor urban submarkets.
- Demographic fundamentals: Historically reliant on younger age cohorts, particularly residents in their 20s and 30s, rental housing offerings have expanded and now attract wider swaths of the population. An aging millennial population will be complemented by the comparably large generation z, underscoring sustained growth opportunities in the mid- to long-term.
- Housing affordability: Over the past decade, for-sale accommodations have become increasingly unaffordable to much of the population across the globe, a function of tight lending conditions and constrained for-sale housing inventories. Across the 24 markets analyzed by JLL, the median home price is more than twelve times the median household income.
- Local regulations: National and local legislation can impact the feasibility and scope of rental and for-sale housing markets. Policymakers may implement rent controls to combat housing unaffordability, impacting income returns. Conversely, local zoning laws in urban markets may support higher-density accommodations, spurring development and rental housing demand.