Demographics and in particular net migration plays an outsized role in Real Estate. In this article, we’ll look at the key factors affecting real estate and why net migration is a good indicator to follow for real estate investors.
We’ll delve into why net migration is actually a great indicator for the top states, counties, and towns to invest in. We’ll look at some migration reports from 2020 and see if they can form the basis of some investment ideas in 2021 and beyond.
Key Pillars of Real Estate Investing
Real Estate business and investing is impacted by multiple factors, but we can group them into three major categories:
- Demographics
- Population Growth, Urbanization/Sub-urbanization, and Migration
- Employment Growth
- Income/Cost of living
- Economic
- Supply & Demand
- Infrastructure – Technology / Transportation
- Fiscal and monetary policies (for e.g. interest rates)
- Incentives
- Affordable housing policies
- Tax and Federal housing incentives
- State and local incentives and policies
For an individual investor, keeping track of the above can be overwhelming though some of the policies and economics may remain the same over years or even decades. Still, it is a stretch for individual investors. In this article, we’ll focus on demographics and see if net migration can be a proxy (or close to a proxy) to find states or cities to invest in.
Demographics and demographic trends
Our focus will be on demographics and in particular net migration in this article. Why is demographics a key pillar and why should we focus on that? Because demographics is all about the consumers i.e. tenants. One can have the best economic climate and the greatest policies, but at the end of the day a customer has to rent real estate and that is driven by demographics makeup. First, let us see the definition of demographics.
Demographics are the data that describes the composition of a population, such as age, race, gender, income, migration patterns, and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand
Source: https://www.investopedia.com/articles/mortages-real-estate/11/factors-affecting-real-estate-market.asp
A customer (i.e. tenant) has to rent real estate in a given location and demographics is all about the customers. Investors should look at demographics at a given point of time as well as over a period of time (i.e. trends). It is also good to remember that many demographical trends were already underway and they only got accelerated due to the global pandemic in 2020.
Net Migration and Migration Trends
Investors realize that certain states or cities are growing because they see or hear about many moving to those places. For e.g. many people in New York realize that a lot of jobs are moving to the south, particularly Florida, and people follow those jobs. Net migration in certain regions, states, and cities surpass those of poorly faring places.
Savills, the International real estate firm has done studies on the reasons for migration throughout the world. Here is the summary of the impact of migration on real estate.
In-migration has a major impact on real estate as demand for both residential and commercial space increases. If supply is unable to match the demand, this often results in pressure on prices. We have analyzed data from Oxford Economics to understand which cities are expected to attract the largest net migration over the next five years as a percentage of their population.
Source: https://www.savills.com/impacts/social-change/the-impact-of-migration-on-real-estate.html
Savills has the following take on the reasons major cities are seeing a lot of net migration:
- Europe: Swiss Cities in demand
- Asia: Attracting talent
- North America: Quality of life
We’ll look at net migration data and statistics on the following factors in US and see if we see some patterns that will give some ideas on locations to invest.
- Flight to suburbs and smaller cities
- Flight to quality of life
- Flight to “business” friendly and no-tax states
Net migration to secondary cities and suburbs
Mymove has studied migration patterns in 2020 with the COVID pandemic and over 15.9 million have moved during the pandemic based on USPS data. Urban density has been a big reason for people to move to smaller cities and suburbs. As you can see from the chart below, big cities have had a large outflow in the first half of 2020. This has resulted in rent reduction in dense and pricey cities, but the opposite in smaller cities and suburban places.
Net migration to “business” friendly or no-tax states
In the 20th century, people migrated to cities like New York or Los Angeles for better opporunities, but in the past couple of decades states like Texas have been able to lure many people with their “business” friendly or no-tax policies. Florida and Arizona are also considered “business” and tax friendly states and hence the net migration needs to be reviewed further.
Net Migration for quality of life
Quality of life is primarily defined by cost of living and access to amenities that people are looking for. Savills Research shows the top 10 cities for net migration in the US. The results should not be surprising for many. We see cities in Texas, Flordia and Georgia that have attracted sizable new population. This should give investors some ideas about places to invest.
Source: Savills Research using Oxford Economics Note: Only cities with GDP greater than $50bn considered
Investor Takeaways
In summary, we’ve seen how demographics is a key pillar of real estate investing. We’ve seen how net migration is a great indicator or proxy of demographics and even attractiveness of investment locations. We’ve also looked at migration patterns in US to help investors find states and cities that may be attractive investing targets.
Though net migration data should not be looked at on its own, looking at migration along with other key data will net investors some good investment locations and ideas. The action items for investors are to answer the questions: Do the locations you want to invest in have these positive migration characteristics? Can you update your investment thesis based on these locations?