The Future of Real Estate: the City or the Suburb?

Fund managers and lenders are increasingly focused on the growth of cities thanks to demographic and urbanizations forces. But are they missing a trick in the suburbs?

The future of real estate is in the city. At least, that’s what everyone tells you.

We are repeatedly told to look to the global megatrends taking place—urbanization, demographics, the rising middle class, technology—and realize how the city is the only, true future-proof option for real estate investment strategies.

It’s what fund manager TH Real Estate concluded this week as it unveiled a list of 42 cities it argues are “future-proof” enough for its €5B open-ended European cities fund; it’s what ING Finance is focused on as it re-launches its U.S. lending platform [catch the upcoming interview with Michael Shields on PrivcapRE]; and it’s what GPs globally are constantly talking about as they pitch their strategies to investors.

And it’s the truth. You cannot deny the fact that urbanization—probably the most powerful structural force in real estate today—is growing, with 66 percent of the world’s population expected to live in urban areas by 2050, up from 30 percent in 1950.

Add to that force the fallout from demographics with its urban-seeking, experience-hungry millennials and baby boomers plus technology, which is transforming our very understanding of real estate space, and it makes the cities argument even more compelling.

Yet, I beg to differ.

By stressing the fundamental importance of the city in real estate investment strategy, we are also undermining the value presented by suburbia.

The Gen-X in me argues that cities are great places to live, work and play—to a point.

When a generation starts getting married, having children, needing good public schools, affordable housing, the ability to save for a child’s college fund, let alone retirement, cities often fail to deliver forcing many to retreat to the suburbs.

And the millennials, the largest cohort in U.S. history, which is shaping so much of the decision-making behind multifamily, office, retail, industrial and hospitality construction and redevelopment, aren’t deviating from these life choices. They’re merely delaying them.

So while cities will undoubtedly be where the bulk of real estate investment dollars are invested now and in the future, just as they have dominated transaction volume in the past, suburbia will remain a reality for many people and therefore a true investment opportunity for the real estate asset class.