Keeping an eye on demographic patterns, fellows at the Urban Land Institute (ULI) said recently that they expect to see some fundamental shifts that will help define the “new normal” for housing and other development as the nation limps back from a hard economic crash and contemplates prospects for an era of less.

The fellows made their remarks on Oct. 12 at the ULI’s fall meeting in Washington, D.C., with the release of their latest research publication, "Finding Certainty in Uncertain Times."

While acknowledging that the recession has taken a heavy toll on the development community, the researchers said they expect to see a considerable amount of economic vitality in metro markets, many of which are cities to watch for business opportunities.

“Population growth combined with regional migration and expansion of emerging markets are combining to produce a new pool of middle-class, metropolitan area-dwelling consumers,” said Maureen McAvey, executive vice president of ULI Initiatives.

“Beyond the broadly acknowledged countries of China, India and Brazil, the United States stands out as the only industrialized country that will increase its population by another 30% in the coming decades,” she said.

This should put the U.S. on a steady growth course, McAvey suggested, unlike countries that are losing significant population — including Russia, much of Europe and Japan — that will need to find new models to support their economies.

Growth in the U.S. and elsewhere is primarily headed to sprawling metropolitan areas. Over the next 30 years, she said, 130 million additional people will either grow up in or move to metro areas in this country — including central cities and inner and outer suburbs — joining the 250 million who are already there.

A Stronger Rental Market

Population growth, however, is only part of the story, and John McIlwain, a ULI senior resident fellow and the J. Ronald Terwilliger chair for housing, described new trends that are likely to recast housing demand in the period that lies ahead.

McIlwain noted that because of the recession household formations in the U.S. crashed to less than one-third of their long-term average of 1.4 million a year, leaving “several million people waiting in the wings to form new households when jobs come back.” The two big questions, he said, “are what they will be able to afford and whether they will buy or rent.”

“Most market analysts believe that because of the recession, falling wages, high college debts and overburdened parents, the rental market will be stronger and the for-sale market will decline, returning to historic homeownership levels of 62% to 64% of households from the recent high of 69% in 2004,” he said.

Key to what happens next in the housing market is Generation Y, the largest generation in history, he said, 83 million strong , comprised of those now ranging from their late teens to their early 30s and more urban than previous generations. They should soon start moving out of their parents’ basements and finding homes of their own, he said, but the economy is likely to impose significant constraints upon their demand for housing.

They have been among the hardest hit by the recession, McIlwain noted, with an unemployment rate topping 30%, and they are graduating from college with average debt of $23,000.

“Studies show that it can take a decade or longer for people coming of age in a recession to recover financially,” he said. “Add large school loans and parents with constrained finances, and the result is a generation limited in what it can pay for housing.”

Days of the McMansion Are Over

“Even those who want to own a home will rent far longer than people of previous generations,” he said. “When they do buy, their homes will be smaller, less expensive and more energy-efficient in order to manage tight monthly household budgets. The days of the McMansion are over.”

Even before setting out without the financial means to buy homes, he said, “they will have to rent because they haven’t figured out where they want to live.” McIlwain estimated it will take five to 10 years before they are able to afford homeownership and settle down.

Immigrants will also be a force for change in housing, he said. Although immigration into the U.S. has been cut in half by the recession, it “will return when the jobs come back.”

Almost half of the growth in the U.S. population will be among immigrants and ethnic minorities, he projected.

With homeownership rates trending down, over the next 10 years McIlwain said he expects to see an additional four to five million people renting instead of owning, an annual average of at least 400,000.

“The days of cut-and-paste suburban housing developments are past,” said McIlwain. “The new generation of home buyers, when it emerges, will want more customization, while at the same time needing housing to be more affordable than it has been for decades.”

“Energy efficiency is the new granite countertop,” he added. “The market will focus increasingly on those items that save energy, especially where there is a real, short-term payback. Watch this trend expand quickly if the price of energy rises again, as it did in 2008.”

Gaining favor will be larger town centers with a diverse range of housing options built in a mixed-use, walkable environment, he said. Amenities will cost less and there will be more walking and biking trails, fewer golf courses and more conservation of natural lands.

To achieve affordability, homes themselves will be totally redesigned and opened up, with interior walls blown out, he said.

Green Is Here to Stay

Edward McMahon, a ULI senior residential fellow and the Charles E. Fraser chair for sustainable development and environmental policy, said that green is here to stay.

“Both in the United States and abroad, it is clear that investors increasingly recognize that sustainability, particularly energy efficiency measures, makes financial sense. What’s more, various market forces, regulatory incentives and mandates will continue to pressure real estate owners and property managers to enhance the sustainability of their portfolios,” he said.

Demographics will also be on the side of the sustainability trend, he indicated. “Generation Y is by far the most environmentally aware generation in history, followed by Generation X.”

McMahon quoted Charles Lockwood, who predicted in the June 2006 issue of the Harvard Business Review that, “As green buildings become more common, conventional buildings will rapidly lose value and become obsolete.”

Or as the 2008 edition of ULI’s “Emerging Trends in Real Estate” report put it: “Stay on top of green or eat everyone’s dust. There will be differentiation. Over the long run, adapt or get crushed.”

“It seems certain that the market will ultimately favor the greenest buildings in the greenest locations in the greenest cities,” McMahon said.

The ULI researchers identified North American cities that are worth watching in four tiers:

• Among global gateways characterized by a strong and diverse economy, a strong set of economic anchors, world connectivity and status as a magnet for the best and brightest of all ages are: Chicago, Los Angeles, New York, San Francisco/San Jose and Washington, D.C.
  
  
• International hubs “have seen outsized and sustained growth over decades. While some, such as Miami, are currently overbuilt and facing setbacks, the strength of their anchor institutions, corporate headquarters will continue to make them strong.” These cities are: Atlanta, Boston, Dallas/Fort Worth, Denver, Houston, Miami, San Diego and Seattle.
  
  
• Creative and nimble metro areas “have remade themselves in material ways over the past decades and often offer a unique quality of life. Pittsburgh grew away from steel to embrace research. Charlotte, N.C., became a major financial center, and technological know-how has put Raleigh/Durham, N.C. and Tampa/Orlando, Fla. on the map. These cities have the leadership, embrace of change and quick action needed to capitalize on global trends.” Others in the group include: Austin, Texas, the coastal Carolinas, Minneapolis/St. Paul, Nashville, Tenn., and Portland, Ore.
  
  
• Comeback kids “may have hit the floor hard, but their dogged spirit of reinvention lives on.” Many of these markets currently have commercial rents substantially below replacement costs, yet had outsized population growth from 2000 to 2008. They include Cleveland, Detroit, Las Vegas, New Orleans, Philadelphia, Pittsburgh and Sacramento, Calif.