Niche Offers Possibilities

Commercial real estate companies are always looking for the next niche market. And while this might be blurring the traditional definitions a bit, we have discovered that one of the great niche opportunities for the next decade is second homes. This decade--and next--will see a rapid rise in second-home ownership. Development opportunities at all price points will expand significantly. And related service industries supporting the trend will follow.

What's driving this? Demographics, culture, and technology are all converging to create powerful demand. Specifically, we identify eight factors--in no order--for the surge.

Demographics. The traditional target market for second homes--and specially luxury homes--has been households in the 50s and 60s age groups, primarily households whose children are grown. Low and behold, we're now talking about Baby Boomers, who at the beginning of 2005, were aged 40 to 58. Today there are about 78 million Baby Boomers in the US, representing the largest and still the most powerful generation culturally, politically and economically.

Investments. While most people own or buy a second home for their own use, investment potential is also a driving force behind the market. The National Association of Realtors' 2005 survey of second-home buyers reports that 92% of owners believe their second home was a good investment. Second-home investment opportunity comes from cash flow from renting out the property on a regular or irregular basis and from equity appreciation. Appreciation is difficult to measure accurately and, of course, varies widely by product and location, but in recent years, second homes do appear to have appreciated significantly especially in vacation locations.

Workplace Culture. Technology provides the means to stay connected while away from the traditional office; workplace culture provides acceptance of alternative work arrangements. Second homes make splendid alternatives for a work environment on either a temporary or permanent basis.

High Income. Not only are there large numbers of Baby Boomers, but a large number are also affluent enough to buy second homes. Most Boomers are at their peak earning years, and more than 20% of these households make in excess of $100,000 per year according to the Census Bureau. Combine these statistics with the fact that most Baby Boomers have already experienced or will shortly experience a reduction in household expenses as children leave home and purchases of major household items diminish.

Other Wealth. Many Boomer households have other sources of wealth enabling second-home acquisitions. These include savings; non-salaried income (such as from investments); gains from selling businesses; and intergenerational wealth transfer. Most notable, Baby Boomers are expected to inherit a total $7.2 trillion (based on research conducted by the Institute for Social Welfare Research, Boston College, in 1999 and 2003).

Lifestyle. "Lifestyle living" exemplifies the Baby Boom generation or at least its ideal, especially for those of means. This concept provides a strong cultural basis for second-home ownership.

Active Recreation. Related to the Baby Boom culture of youth, many Boomers are active and place a high value on sports and other recreational activities. Second homes, located typically in recreational areas, are highly desirable. Second homes in highly amenitized resort developments have particularly strong appeal to many of these active Boomer households.

Gathering Spots. Second homes are convenient places for extended families to get together. While there has always been a trend to bring families together at resort destinations, with the geographic dispersion of many Baby Boom families, the desire to have a place for extended families to meet is enhanced, and family reunions are surging. With Baby Boomers rapidly becoming grandparents, this trend is sure to increase.

Jeanette I. Rice is vice president, market research for Fort Worth-based Crescent Real Estate Equities Ltd.