The Creation of Unique Wealth Opportunities in Real Estate
Guest post by: Michael Cobb, Chairman and CEO of ECI Development
If you had a time machine and could see the future, would you make better decisions? Would you be a better investor? These may seem like silly questions, but we would make better decisions if we knew the future, wouldn’t we? If we could see what was going to happen, we would develop products and services that everyone would want and need, and then of course, we’d do very well for ourselves.
While we can’t go forward in time for a sneak peek, we can spot emerging trends. When the macro-demographics line up behind that trend, get ready. There is going to be a lot of money to be made by somebody. Why not you?
I was among those fortunate enough to be a part of the early computer wave of the late 1980’s and early 90’s. Now the truth be told, it wasn’t foresight that put me there…just plain luck. But there I was, and it was a great time to be in the computer business specifically and the tech sector broadly.
The principle reasons the tech sector performed so well when it did was of the union of two major factors demographics and scarcity. The first factor was demographic. Baby Boomers began moving into management positions throughout industry in the 1980’s. The second factor was scarcity. The personal computer matured enough to be of significant useful value for individuals and corporations but supply could not keep up with demand. It was a powerful convergence of these two factors that led to the great adoption of PC’s and their massive, widespread use.
The success of the PC and the fortunes made are a great example of the convergence of demographics and scarcity. More people wanted PC’s than were available for a significant period of years. It produced huge opportunities for investors and entrepreneurs. Profits from computer and software sales were enormous because scarcity reigned. Consumers demanded a product, and production facilities were not in place to produce the quantities demanded.
Over a period of about 10 years, the scarcity element waned because thousands of factories were built to supply the components needed to assemble the millions of PC’s required each year. Prices and profits fell. The number of players in the market also constricted substantially leaving only the strong companies that produced a high quality product.
Interestingly, the names of these companies are largely the same as the ones who entered the market first, Dell, HP, Toshiba, Apple, and Microsoft. Those that arrive first, and perform well, stake a strong claim in the most fertile territory, and reward customers and shareholders alike for the long term.
A huge convergence of demographics and scarcity is happening again. This time it is in preparation to serve Baby Boomers as they retire and age in place. Numerous sectors like healthcare are poised to do well, but much of that future success has already been priced into the market. In order to really profit from this convergence, one must look under different rocks, as my friend Steve Sjuggerud says. Find opportunities others are overlooking. That is where the real pay dirt is.
One such opportunity is under our noses right now. We all know that the real estate sector was hammered between 2008 and 2012, and rightly so. In many parts of the world, price gains were fueled by a speculative bubble. The true consumer demand wasn’t there to feed the ultimate usefulness of the product, and prices tumbled in response. It was a bloodbath for many, but the strong survived. The companies in business right now are those that stayed true to the consumer and produced a product that people wanted to own and use.
Products People Want – Sun City South-of-the-Border
The most successful retirement community brand in North America is Sun City. The developer, Del Webb, provided real community to active senior adults, and then let the retiree decide what part of the United States made the most sense for them. He developed communities in the deserts of Arizona, along the coasts of Florida and California, in Texas and the Mid-West, and the piedmonts of the East Coast. Del Webb knew how to build the services and amenities that everyone wanted, and then clients could choose what type of climate and environment suited their needs and wants best. Del Webb’s success has been unparalleled in the industry.
The Sun City concept is now being advanced one step further. One forward thinking company has already created a menu of attractive lifestyle options in several countries to serve the millions now searching for retirement homes in Latin America. This is an already large market and it continues growing quickly. However, once outside of North America, a new set of considerations becomes critical.
Today’s consumers largely take for granted the basic comforts of reliable electricity, excellent water pressure, high-speed bandwidth for internet, access to top notch medical care, and quality construction. In Latin America, many developers fail to provide even these basic services. They are often little more than a collection of barren lots with limited infrastructure. Many projects have few or no homes or residential product in place because significant resources have not been invested up front. These “ghost towns” are likely to remain just that.
Boomer retirees want life, activities, neighbors, and community; something that the majority of these projects, sadly, cannot offer. Only a few developers actually deliver the excellent infrastructure and amenities needed for a high quality of life experience that North Americans have come to expect. A “Sun City of Latin America” would provide high quality products in a variety of climates, like a home along the Pacific or Caribbean coasts, in the cool tropical mountains, or in the arid, high deserts of South America. Investors and companies who provide such a product are likely to do very well.
The Demographics
The Baby Boomers represent more than 84,000,000 individuals in the United States and 9,000,000 in Canada. Over the last 60 years almost everything that was popular with the baby boomers became a huge commercial success. They have produced a huge, disproportionate impact on the economy at each stage of their lives. Companies that placed themselves in the path of this “age wave” did very well. This wave of opportunity continues right now as they enter the age of retirement.
Today, 613,000 U.S. retirees receive Social Security checks overseas. Many of these folks are people who were born before 1946 and are not part of the huge demographic bubble about to hit the market. The Baby Boomers proper, people born 1946 to 1964, are just now entering retirement and many will be relocating and building warm-weather, retirement and second homes in Latin America.
With a over a half a million already retired outside the US, the demographic data projected by surveys and studies is even more powerful. The Zogby Company surveyed 103,000 Americans and discovered that 17% of the respondents, representing more than 26,000,000 Americans, have a desire to move or own property outside the United States. Of those, 4,500,000 listed Latin America as their first choice as a relocation destination.
TD Waterhouse recently surveyed Canadian Baby Boomers, and 45% of those respondents plan to spend one month or more outside Canada in retirement. With 9.3 million Canadian Baby Boomers, this equates to over 4 million retirees who will be renting or owning property outside Canada in their golden years.
The bottom line is that Baby Boomer retirement will largely drive the overseas retirement home market for the next 20 years. The trend is in its infancy. As many new retirees look to the tropics for affordable, yet enhanced retirement lifestyles, phenomenal growth in these already large numbers is likely.
Why Latin America?
The region of Latin America is growing by leaps and bounds. Innovative policies on the part of the countries themselves have become fundamental in attracting foreigners, and hence their capital, to the region. More than 1,000,000 North Americans reside in Mexico part or full time, over 40,000 Americans have homes in Costa Rica, and more than 20,000 call Panama home part or all of the year. Each country in the region has its own attractions and incentives that draw tourists and permanent residents alike, and they are all competing to provide excellent retirement packages.
But perhaps the most important reasons retirees are looking at Latin America are the “soft” factors like proximity to the US, Canada, family, and friends. Flying in a north/south direction limits the time zones crossed to two or three making travel and communications back home simple and easy. Safety, stability, and services are important base lines, but convenience is perhaps just as, or more important in the end for consumer satisfaction.
Financial Factors and Emigration
Ernst & Young produced a study that predicted 60% of US retirees would need to cut back on spending significantly in retirement, or face the prospects of outliving their nest eggs. What will folks cut back? Food, medicine, heat? Imagine living your life every day wondering if you were going to outlive your funds. It’s a scary proposition.
In addition, the U.S. Commerce Department reports that Baby Boomers are now saving almost nothing. For most Boomers there is simply not enough time to accumulate what was not saved. Today, almost half of U.S. Boomer retirees (48%) expect to count on Social Security during retirement, and 15% expect to rely on it for most or all of their retirement needs.
This is a dire situation for many. Where can they have a high quality of life in North America on what they have saved and will get from Social Security? The ability to enjoy the kind that they’ve always dreamed of is simply not feasible in the United States on the limited funds they possess. More retirees will look elsewhere, many to Latin America, for ways to cut costs in retirement. Wonderfully, they will also discover that they can enjoy a higher quality of life on a budget that they can afford.
Capitalizing on a Crisis of Supply
There are plenty of houses in Latin America. So where’s the shortage? It is when one examines the supply of high quality homes in the region, one quickly sees the impending shortage. If one considers the amount of residential product with world-class infrastructure and amenities, the shortage is magnified immensely. Knowing why there is a shortage of supply is critical to understanding why investment in the region makes so much sense.
Most developers in the region sell a speculative type of product. It has also been called “cut and run.” This literally means that a developer buys a large tract of land, adds the minimum infrastructure like dirt roads and electric poles, then sells the lots to speculation buyers. Large expenses like water and sewage treatment are often offloaded onto the consumer, who must drill wells and build septic systems if they decide to build a home. In many cases, soils are heavy clay which won’t perk, and water tables are located deep underground. In addition to the obvious environmental issues, this ends up costing buyers much more than their share of a centralized system.
A 2009 developer survey by Christopher Kelsey & David Norden clearly points to the growing consumer demand for products with high levels of infrastructure, amenities, and “reality.” Prior to the real estate and economic crisis in 2008, most consumers were willing to “bet on the come,” and buy pre-construction and speculative product. Today their attitudes are very different.
When surveyed again in 2011, developers agreed by an overwhelming 94% that consumer’s expectations for clarity and commitment from the developer for the delivery of promised amenities would be greater. 92% agree that consumers will want to see the infrastructure and amenities complete before purchase. 85% see an increased trend by consumers to purchase completed homes and condominiums rather than vacant lots and pre-sales opportunities. Yet very little of this product exists in Latin America designed to serve North American retirees. Hence the shortage and incredible opportunity to fill a huge and growing need in the marketplace.
Consumers who are now retiring want and need something different, as the Norden survey and other research data suggests. Retirement overseas is already happening with more than 500,000 receiving Social Security checks outside the United States. If the Ernst and Young State of Retirees report is accurate, then we will see this trend grow even faster as more people search for ways to lower their cost of living without giving up important quality of life issues.
The Sun City of Latin America
The Baby Boomers are entering their next stage of life with more time and many with more money than any other demographic group in history. As a result of longer life expectancies, these consumers know that they will have many more years of life after retiring than the majority of their predecessors ever did or do. With this time, they want to travel, continue working, and even start new careers. They want infrastructure, amenities, activities, neighbors and community.
Latin America offers exceptional and diverse climates with a high quality of life at an affordable price. The opportunities are dramatic and timely. We don’t often get the chance to spot the trend this early with vehicles in place to ride the wave. Seize the moment. You’ll be glad you did.
