Real estate and the shrinking middle class

By: J. David Chapman/February 8, 2018

I caught just enough of President Trump’s State of the Union speech to hear him mention the importance of the middle class. All politicians are looking for a plan to repopulate the middle class; however, there is no official definition of middle class in America.

Some of us in academia define middle class as adults whose annual household income is two-thirds to double the national median. The median income is the exact middle in the range of incomes. The median household income in 2016 was $59,036, which puts low income below $39,554 and high income above $118,072 annual household income.

Using this definition, roughly 42 percent of American households are considered middle class, 32 percent would be low-income and 26 percent would find themselves in the high-income category. There are many ways to calculate middle class and it certainly depends on where you live; however, we can all agree the middle class is shrinking in America. I’ve been considering the effect that this shrinking middle class is likely to have on commercial real estate.

The first place we might see the effect of middle-class reduction is in multifamily. This might explain why we have seen a significant increase in investment in both higher-end, amenity-rich apartments and low-income government subsidized housing. This is producing a split effect of new construction, ignoring the middle-class renter. The middle-class earners are facing wage stagnation, which makes it difficult to pay higher rents, keeping them in B- and C-class apartment accommodations. This allows for high occupancy in these properties, but limits new construction options for these earners.

A similar story is playing out in the retail sector. Much of the new development has been on either high-end retail properties or discount/outlet-type centers. Properties with retailers that cater to the middle-class, like Sears and others you would find in the typical shopping mall, are struggling to stay relevant and closing at an alarming rate.

The source of money that goes into commercial real estate investments is also affected. Retirement funds are one of the largest investors in commercial real estate projects and the middle-class wage earner is the largest contributor to those plans/accounts. With fewer people in those plans and more funds going into 401(k) plans, we are seeing less investment in real estate projects from these accounts.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).