If you’re looking at a new market to invest in, you must understand the demographics and economic growth factors of the area. Demographics and economic growth are important indicators of whether a market is healthy. Aaron Renn, a Senior Fellow at the Manhattan Institute for Policy Research, joins Jonathan on this episode. Professionally, Aaron focuses on economic development, infrastructure, and demographics.
On this episode, Jonathan asks Aaron to comment on what forces lead to strong population growth or decline, what cities can do to counter broad demographic trends working against them, why it’s potentially dangerous to invest in markets with population decline, what under-the-radar markets are growing, and much more! This episode is a must listen for those who appreciate the connection between demographics and real estate investing.
How demographics and economic growth indicate the health of a city
Demographics help you understand the health or lack of health of a community. In looking around the country, population loss is one of the best proxies for seeing whether a community is struggling. Aaron points to a current study of his to make this point. The study lists regions of less than a million people whose central city has declined more than 20% since its peak. Coincidentally, on this list are some of the most distressed cities in the country.
Aaron mentions economies of scale as a large reason that population growth is linked to the health of the city. In economies of scale, you have fixed and variable costs. As population increases, the fixed costs of a city are spread across more people. A thriving city has more people to share the cost. With population loss, there are fewer people to absorb fixed costs. This is burdensome for the citizens, and also makes the city less attractive to newcomers.
Why population decline is dangerous
Population decline is dangerous because it devalues property. Aaron mentions the midwest as an example. There are many abandoned, old houses available because the population has shrunk. Although the cost of real estate is low, all the homes would need to be renovated before a professional would consider living in them. People cannot make back the money spent on these homes after the cost of renovation. Homes become a wasting asset, where they devalue like cars.
With population decline, businesses also close. With the lack of jobs, the entrepreneurial class shrinks. The area no longer attracts new people. Many times the inhabitants of these cities are majority natives, which creates a local culture that is hard to penetrate. In a cycle where a city is not growing, it cannot attract new people.
The new donut
There is now a concept called the new donut in demography. In the past, cities like Detroit were considered donuts. Their downtown was disappearing while the suburbs flourished. This new donut has a thriving downtown and urban core as well as an outer suburb that is doing well. However, it has a ring between the downtown and the outer thriving suburbs. This ring has become a challenge for municipalities today. There are two approaches to revitalizing this middle ring.
1: Urban growth boundary policy – this freezes construction so nothing new can be built, causing infill of this middle ring but also jacking prices up
2: Sprawl model – cheaper homes are built on the outer edge of the donut, but since the population is not growing, there is even more pressure put on the middle ring
Cities drawing people nationally vs cities drawing people from their own state
It is important for a growing city to be drawing people in nationally. Aaron compares Nashville, Tennessee and Columbus, Ohio. He says that both cities have a similar quality of living. However, Nashville is attracting people from a national footprint while Columbus is attracting people from within its own state. Aaron says that eventually, cities need to attract people nationally to grow, instead of draining the population pool within their own state.
He mentions that though these cities both have the potential for growth, its region is influential in why Nashville is able to attract nationally. Southern cities create a larger than life ethos, attracting people to them. Many Midwest cities are unable to realize their potential because they are good with the status quo and how things are.
In This Episode Aaron Renn says…
- [3:38] Why study demography?
- [5:16] What large businesses look for when they choose a city to locate to
- [11:15] Why population decline is dangerous
- [17:16] The myth of the super mayor saving declining cities
- [25:14] The relationship between a thriving city core and suburbs
- [32:27] Under the radar markets that are doing well
- [41:14] Up and coming small cities
- [50:32] Successful cities must reinvent and rebuild themselves
- [53:54] Policy prescriptions for healthy cities
Resources Mentioned In The Episode
- Multifamily Launchpad Membership Community– Join the waitlist for 1 of 100 discounted charter memberships available January of 2019
- Bellwether Enterprise(sponsor) – contact Will Oldham firstname.lastname@example.org
- BOOK: If Mayors Ruled the World
Connect with Aaron Renn
- ARenn (at) urbanophile.com