“Real estate spending clearly is driven by demographics, which alerts investors to great buys decades in advance.”

As we age, the kind of property we want and need ; from the small apartment in college to the family home in our forties ; is completely predictable. When an entire generation goes through such predictable property spending patterns, we get a macroeconomic view of the wave-like fluctuations in real estate demand. As a result, investors can know years and even decades in advance what kinds of properties are going to be hot and when.

For example, someone who is 52 and at the peak of his earnings doesn’t typically rent a one-or two-bedroom apartment for himself—though he might rent one for his 24-year old daughter. Instead, he’s thinking about what kind of vacation home he wants or, if he’s already purchased it, how to transition to retirement in 10 years or so.

To understand these long-term trends in real estate, I have identified six different property categories. Over the life span of a generation, spending on each category accelerates to peak at predictable age intervals.

• Spending on commercial real estate including offices and factories, rises to a peak as the new generation enters the workforce en masse, between the ages of 19 to 22.
• The demand for rental apartments and retail space including shopping centers, begins to accelerate from 19 and peaks around age 26.
• Starter home purchases begins accelerating at around age 26 and reaches a peak around age 33.
• Spending on trade-up homes accelerates from age 35 and reaches a peak by around age 44.
• Sales of vacation property begins to accelerate from age 46 and peaks around age 52 to 55.
• Investment in retirement property begins to accelerate from the late 50s and peaks in the mid-60s.

The Real Estate life cycle chart below encapsulates these predictable waves of real estate spending for the baby boom generation.

Click chart for larger view

“The hottest real estate investment in this decade is vacation and resort property.”

This chart shows that four kinds of property are hot now and will be for the next few years.

Most baby boomers will be seeking trade-up homes as they move into their mid-forties. We’ve seen the market for these homes rising rapidly since about 1994. The demand will peak between 2001 and 2005 and is likely sustain until 2008.

The demand for vacation property is accelerating even more rapidly than trade-up homes and will peak later, around 2012 to 2015.

I expect to see the demand for rental property begin to accelerate from 2002, as the leading edge of the echo baby-boomer generation begins to move into their mid-20s and starts looking for their own apartments. This cycle should sustain itself until around 2017, which makes it one of the better real estate investments for the next depression era , beginning between late 2008 and 2010. The echo baby boomers are also driving the accelerating demand for commercial real estate, which began in 1997 and will continue until around 2012.

The slowest growing sector of the real estate market now and for the remainder of this boom is starter homes, though they will continue to do in areas of high immigration, in growth cities favored by geographical migration, and particularly in boomtowns.