One of the issues I've written a lot about recently is the changing consumption patterns of the generations behind the baby boomers, and most especially the fact that they are either forgoing the purchase of a house and the accoutrements that traditionally go along with it.
In my last column on the subject of what this implies for the homebuilders, I also made note of the fact that the builders are being squeezed on the other side of their market by an aging boomer population that, if their consumption patterns match those of the generations before them, will be downsizing out of their big houses into smaller units; either townhouses, apartments or condominiums.
There are many who believe those observations are wrong on both counts and that the younger generations are only postponing house purchases and the older generations are postponing their downsizing.
There's a discontinuity there, though. The argument for the younger generations postponing rather than forgoing purchases is based on the idea that "it's not different this time," and that as the economy improves first-time buyers will re-enter the housing market in force.
Simultaneously, however, this group also believes "it is different this time" for the boomers and that instead of downsizing and reducing consumption rapidly after peaking at around 54 years of age traditionally, they'll continuing upsizing and increasing their consumption along the lines of the idea that "50 is the new 40" and "60 is the new 50," etc.
The same could, of course, be said of my opposite observations that it is different for the younger generations and not different for the boomers.
However, further empirical support for the demographic shifts was provided yesterday by the Federal Reserve Bank of Kansas City in The Macro Bulletin, "Millennials, Baby Boomers, and Rebounding Multifamily Home Construction."
Although the traditional single-family dwelling builders, the largest of which I last addressed in the April column "Housing Repeats Seasonal Pattern," are attempting to shift their businesses to meet this resurgent preference for multifamily units, the building, operating and management of these kinds of properties is fundamentally different than their expertise.
A better way of investing in these trends is through the multifamily real estate investment trusts (REITs) that have decades of experience each in the building, operating and management of multifamily developments.
The largest of them is AvalonBay Communities (AVB), which has a market capitalization of more than twice the largest single-family builder, Lennar (LEN), at about $21.65 billion vs. $10.5 billion.
It also has less than half as many employees, at about 3,000 vs. about 6,800 and, because it is a REIT, pays a dividend of 3% vs. Lennar's 0.3%.
However, not including the Avalon dividend income, the past five-year performance has only been about 79%, vs. Lennar's 272%.
This same pattern is exhibited by all the multifamily REITs vs. the single-family dwelling builders. The REITs are primarily income vehicles and the builders are traditionally asset appreciation stocks.
Having said that, and as is germane to this column, the demographic and consumption issues raised above are providing a push to the potential performance of the REITs while simultaneously providing a drag on such for the builders.
Also, I think the risks for future growth potential by the builders is limited because investors in them are still expressing a reluctance to admit that the demographic and consumption shifts are occurring, and are still pricing the builders for expectations of growth that are not warranted.
I wrote about this a year and a half ago in the column "Time to Move Out." Since then the builders' stocks have returned between a high of 19% for Lennar and a low of -51% for Hovnanian Enterprises (HOV).
In contrast, in the past year and a half, the multifamily REITs, again without consideration for dividends, have performed much better in aggregate.
Camden Property Trust (CPT) is up 15%; Forest City Enterprises (FCE.A) is up 20%; Essex Property Trust (ESS) is up 30%; and Mid-America Apartment Communities (MAA) is up 9%.
On top of these returns, they respectively provide annual dividend income of 3.6%, 0%, 2.6% and 4.1%.
Although the outperformance of the REITs vs. the builders over the past few years is also reflective of two different kinds of investors, income vs. growth, I think the trend is still in its early stages and will increase from here.
Unlike the iShares U.S. Home Construction ETF (ITB), I'm aware of no ETF that focuses exclusively on the multifamily developers and managers.
The closest is the iShares Residential Real Estate Capped ETF (REZ), which also invests in health care-related real estate and self-storage units.
