The Slow Death of Real Estate as an Asset

"Buy Real Estate", they said; "There's a limited supply!"

And they were right... but there was also unlimited demand, which, in a profitability equation, is the other half. 

But that demand is changing; quicker than most realize. The latest global birth rate estimate was 2.2 births per female, which is barely above population replacement levels. (Link) The article suggests that 2050 will be the turning point when the global birth rate falls below 2.1, but that is supposing that the slowing birth rate doesn't continue to slow as much as it has over the past 10 years and returns to an "average" slowing.

Personally, I don't see that happening - I see birth rates slowing more rapidly, as cultural changes continue to place financial freedoms and personal enjoyment of life over having children, along with pollution in the environment destroying the fertility of men and women across the globe so that they can't have kids even if they want to. If the birth rate continues slowing at about 1%/year, as it has since 2014, then the global population decline begins about 12 years earlier, in 2038. Add in a surprise large death event, like the "excess mortality" of the Covid Pandemic, and the tipping point is even earlier.

It's a grim view, perhaps, but in terms of long range planning of a financial future, I would avoid real estate as an investment class. (I am not an investment adviser, nor am I an expert in real estate: this whole article is just an existential crisis thought experiment.)

Once the population begins declining, the demand for real estate will also begin to dry up (excepting local pockets of surplus immigration). Vacant buildings without potential use will decay. Neighborhoods without residents will blight.

The current massive change in use of commercial real estate caused by the work-at-home movement is still sending massive ripples across the commercial real estate market. People would rather work from home if their job allows. Businesses need fewer offices, fewer cubbies, and much less real estate. Right now even, the decline in demand for office property still has banks and property owners on edge over the investments they own, even though the commercial vacancy rate has begun to stabilize.

Will commercial demand return to previous levels - most likely not. Imagine the demand when there are simply fewer people who are even working, let alone as the work-from-home demand increases.

But what about residential? Aren't we in the middle of a housing crisis? Well, we are in the middle of a housing crisis - but for most areas, it's not an availability crisis - it's an affordability crisis. Mortgage rates are high, and housing prices are massively inflated by the "asset" value of a house vs. the practical value of a house. I wouldn't expect this to change much over the next couple of years, though.

We do live in a debt-slavery culture, where you're being milked for every possible cent you're capable of earning in the future in order to struggle for livable conditions in the moment. Renting or owning a house is part of that equation, and you will have your utters tweaked until they're empty.

Soon enough, though, there simply won't be the people who need or want the space. Even now, children are living longer with their parents because they can't afford houses. Parents are moving in with their children because they have to sell their houses to afford retirement (or other incidentals of aging). Imagine the slow down when there simply isn't anyone who wants to buy a house, and the rentals are vacant because there aren't enough people to rent them?

A lot of this is already happening, but is masked by other financial interests. AirBNB and other such ventures have consumed a portion of the residential market that would otherwise be available for purchase or rental and might be hiding any overall decrease in demand. What would housing demand and prices be like currently in tourist destinations without these ventures? It's not that this is necessarily a bad thing, but it does hide the true demand levels.

WHO suggests these new population trends start 25 years from now. I firmly believe it's only 10-15 years out. Are you taking out mortgages to buy rental properties? Are you developing a commercial property that you'll have to lease out? The time to adjust to these changing world conditions might be right now. The asset value of real estate can't be supported forever when these new conditions begin surfacing; there simply won't be the demand to sustain the value, and property costs a good deal of money to maintain. If the values of property don't continue to increase, then holding property becomes a losing position, financially, unless the property somehow maintains a high demand worthy of continued maintenance investment for use.

So what does this mean for Architecture? Unfortunately, it likely means a slowing of new design and construction. More focus will be placed on converting buildings to different uses, and maintaining existing buildings. This isn't necessarily a bad thing, and could be a good thing, particularly if the change in value of properties, and the mentality of the real estate market changes from a purpose of profit extraction, to a greater consideration of the property's use and its future adaptability to other uses.

Eventually, I'll have to add robots and climate disasters into this argument to evaluate it yet again. Another day...

Unexpected Responsibilities of Owning Property

It might seem like an obvious statement: "If you own a property, you are responsible for its upkeep and maintenance." Simple and straightforward, right? Doesn't sound too complicated...

What you probably weren't thinking is that it means you have to maintain your property to the minimum safety standards of the most current adopted building code. If you live in a jurisdiction that has adopted the IPMC (International Property Maintenance Code), anyway. This includes the entire state of Louisiana - if you're somewhere else you'll have to go check. If the International Building Code or International Residential Code are adopted in your jurisdiction, then the IPMC is adopted by reference, unless specifically excluded in the legislation.

From the 2021 IPMC:

301.2 Responsibility. The owner of the premises shall maintain the structures and exterior property in compliance with these requirements, except as otherwise provided for in this code. ...

Now it's sounding a little more complicated. Do you, as an owner, need to become familiar with the entire building code in order to simply maintain your property? Well, unfortunately... yes, you do. At least enough to keep yourself out of trouble.

I would highly recommend that everyone who owns property or is looking to own property read Chapter 3 of the IPMC.

Under the 2021 IPMC and all before it, the IPMC made no distinction between the current code and the code under which a property was constructed. This meant that all property needed to be maintained to the current code, and there was no allowance for conflicts created by code changes since the construction was built. Ladd called this technicality "Grandpa died," as current code violations could no longer be 'grandfathered' in to existing constructions during their evaluation.

The newest 2024 IPMC has modified the language slightly:

301.2 Responsibility. The owner of the premises shall maintain the structures and exterior property in compliance with these requirements and the code under which the building was constructed, except as otherwise provided for in this code. ...

This is an important change, as it does reintroduce "grandfathering" of existing code violations, provided the violation is well maintained and meets the minimum safety standards otherwise outlined in the IPMC. However, if an element of a property needs to be rebuilt or replaced, the most current building code will still be applicable - it can not be constructed or repaired to the earlier outdated standards.

It's also a change that's not in effect yet in Louisiana, as the 2021 versions were only adopted in March of this year.

For most situations, though, this change will be entirely meaningless to the Owner of the property, as the IPMC minimum requirements apply regardless of the code under which the building was built, and any violations of those requirements must be repaired to the current code, which are often more strict than the minimum IPMC standards. 

Where it will make a big difference will be in the evaluation of disputes over the safety of a building component that violates current safety standards versus earlier safety standards. For example, sprinkler systems are now required for many more building uses and sizes than were required not even 10 years ago. The new IPMC wording prevents an existing building from suddenly being considered "hazardous" because the owner failed to add a sprinkler system when the newer code was adopted. 

So, many property Owners can breathe a collective sigh of potential liability and upgrade cost relief once the 2024 IPMC is officially adopted. 

Even so, the partial reintroduction of "grandfathering" still doesn't excuse the code basics of property maintenance, which still contains a number of potential pitfalls if not navigated properly...

Eventually, I'll write another article outlining these additional pitfalls and how to avoid them.

Introduction

 Hi,

My name is Perrin Ehlinger and I'm the President of Ehlinger & Associates, P.C., an Architecture firm based in New Orleans, Louisiana. I'm licensed in the State of Louisiana and the State of Alabama. The firm was founded by my father, Ladd P. Ehlinger, in 1968. I worked regularly at our offices since I was in high school, joining full time after graduating from Auburn University in 1996. I grew up in New Orleans, but settled in Huntsville, Alabama after graduation. There, I obtained my first architectural license in 2000 and obtained my reciprocal license in Louisiana in 2001. I assumed management of the Huntsville office in 2005, and our two offices would share work and personnel over the years as needed. We were both integral to the quality control and oversight of each others' work.

Ladd passed away in May of 2021, and I assumed Presidency of the firm. Frankly, it's been a complete shit-show since then. Well, it's always been a shit-show; Ladd was like a force of nature and had a special forceful way of bending the world around him to convince it to conform to his beliefs of quality, production, fairness, and justice. Without his loud voice and unbending determination, it's been a rocky road for me back to a firm foundation upon which to continue in this profession. But, he taught me well...

I've moved back full time to New Orleans since his death, as the firm had more work in New Orleans than I had in Huntsville. Huntsville has been a very nasty place for small business over the past 10 years, worsening considerably since the Covid Pandemic, so I've no qualms about leaving there. I still maintain my license and corporate presence, but I'm not actively seeking work there.

Of course, working in New Orleans has its own unique set of issues, but they feel much more familiar, having grown up here, and slightly easier to navigate. Breaking through the "good 'ol boy" corruption network to get any State or Local government work in Alabama was completely inscrutable to me, except for the obvious - which I have no interest in engaging in. It's not like government projects pay much to begin with; I'm not going to sell my soul for a couple of extra pennies.

In Louisiana, I can at least hope to maintain the position of "if you really need it fixed, help me get the job," and rely on my firm's extensive history of projects that have successfully fixed problems with difficult buildings. It worked for Ladd, and occasionally landed some new design work from the State and Local governments.

I just don't yet have the recognition he did, and I'm not nearly as loud or socially connected as he was. What I can do is write, though, so I'm going to mercilessly generate content to represent myself and my firm. Ladd was known for his quarterly newsletters, which he issued from 1988 to the first quarter of 2021. I wrote many of the articles for those over the years, and while I can sketch, I could never do it as quickly or nicely as Ladd, so I won't be continuing those at this date, but I will continue writing.

In addition to architectural content, I'll be writing about whatever else interests me, because creating content these days as marketing is like pissing in the wind when faced with unending A.I. generated content and an internet repurposed to separate and isolate people from each other and extract money. Sure, I want money, but I want to earn it by providing something of value, either in this written form or through the capabilities of my architectural firm.

So, please subscribe and continue reading as we find the time to write more.