A great case can be made for targeting markets that are designed with higher density in mind — and not just urban cores in major cities. High-density development is becoming popular in more smaller cities and suburbs and offers a great opportunity for investors in the coming years, especially as younger people move out of high price cities like New York and San Francisco seeking to escape rabid rental markets or start families. Density and walkability appeal to both Millennials and retiring Baby Boomers, who combine to create an incredible pocket of demand. From a wider market standpoint, density also fosters the type of buying and selling climate that appreciates quickly, drives demand, and even creates an economic culture that cultivates middle class mobility at a higher rate. More on that later, though. 

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

What qualifies a metro or neighborhood as high density? For our purposes, it doesn’t just mean the number of people per square mile, though that obviously is a major factor. Density in our reading also involves infrastructure designed for a higher population, such as public transit, communal meeting spaces, and mixed land uses. A key metric tied to successful high-density spaces is walkability — the ability for residents to run errands, get coffee or lunch, and get to work with little or no need for an automobile. Walkability operates culturally as the opposite of sprawl, where reliance upon automobiles and non-dense development arguably distances residents from one another both physically and socially. Walkability requires that neighborhoods have minimal wasted space and close quarters between housing and commerce — two hallmarks that separate successful high density areas from unsuccessful ones.

Related: Revealed: The Top 20 U.S. Markets With the Highest Rental Returns

Walkability Scores and Price

Several recent studies have shown that walkability is closely tied to the value of homes. A 2009 survey from CEOs for Cities found a strong positive correlation between walkability and housing prices in which a one point increase in Walk Score — a popular metric for assessing walkability — was associated with “between a $700 and $3000 increase in home values” for 13 of 15 metros studied. Across these metros, houses with above-average walkability command a premium of about $4000 to $34,000 over houses with just average levels. These home prices reflect the type of resident each metro attracts.

Another 2014 study by George Washington University's School of Business found a strong connection between walkability scores and both education and metro GDP per capita, suggesting a stronger business climate. The authors note, "The GDP per capita of the three highest-ranked walkable urban metros ($60,500) is 52 percent higher than the GDP per capita of the lowest three walkable urban metros ($39,700)." From an office and retail space perspective, rentals in walk ups achieve a 74 percent premium over drivable suburban office rents in the 30 largest metros ($35.33 per square foot vs. $20.32 per square foot). Higher prices and higher growth, of course, are signals of high demand and will appreciate at steeper rates than less desirable properties and spend less time on the market. 

Upward Mobility and Middle Class Demand

Density not only affects the demand for people moving into cities and neighborhoods, but may dictate opportunities and outcomes for lower income residents. A fascinating study from Smart Growth America on sprawl found that higher compactness in urban metros greatly influenced the ability of children born in the lowest income quintile to reach the top income quintile. Cities with higher sprawl had much lower rates of working class advancement than cities with higher density. Using an index that measures density along with other factors like land use and street connectivity, researchers found that “for every 10 percent increase in index score, there is a 4.1 percent increase in the probability that a child born to a family in the bottom quintile of the national income distribution reaches the top quintile by age 30.”

Several reasons may factor into this number, from physical proximity to jobs to access to affordable public transit and beyond, as noted by the New York Times. This same study also found that people “spend less of their household income on the combined cost of housing and transportation” in higher density areas, meaning a higher percentage of income for lower-and-middle-lower income individuals on the rise is theoretically opened up for developing savings and investments — two of the true hallmarks of middle class advancement.

How does this relate to real estate? Well, a healthy middle class is key to a consistent level of housing demand. As is illustrated by the Great Gatsby Curve theory, rates of inequality and wealth concentration are tied to upward mobility around the world. People on the bottom end of the income spectrum in the United States are usually locked in the rental class. Those renters who move into the middle and upper class make up a new class of home consumers. More upward mobility in a metro means more people moving into homes, and supporting the type of development that advances people is in the interest of putting more people into homes they own. 

Millennial Preferences and Suburbs

While the numbers still show the majority of Americans moving away from more dense areas to cities and suburbs with less density, what consumers are looking for in a neighborhood has begun to change. A recent survey of Emerging Trends in Real Estate for 2015 collected by PwC and the Urban Land Institute suggests a considerable push by multiple demographics towards smaller cities and suburbs that emulate density like a big city: in walkability, infrastructure, transit, and more.

Related: 5.8 Million Homeowners No Longer Underwater – But Not All Markets Rebound

Both Millennials — who will be the next great real estate push over the course of the next several years — and their parents the Boomers are expected to gravitate towards the urban cores of smaller “18 hour” cities or choose inner-ring suburbs that have access to adjacent metros. Emerging Trends predictions suggest the ’90s and ’00s push toward the exurbs in search of more space and bigger homes is very much on the ropes. 

What to look for: Small blocks. Mixed use zoning laws. Public transit. Small business development. Green space and community parks.

In the coming years, the roles real estate professionals take on will be further transformed by technology. As consumers have more access to information before they meet with real estate professionals, their focus on specific neighborhoods and attributes will be more self directed, changing what makes the realtor a necessary partner in the final sale. Knowing the neighborhoods and the underlying factors that will drive demand allows realtors to focus on selling in desirable areas despite high competition.

If current trends and predictions hold true, certain undesirable markets in sprawl-centric suburbs and exurbs may languish longer on the market in the future than they have traditionally. As consumer demands and trends shift, realtors and developers will need to stay informed on the types of properties that will garner high demand and have access to them in order to stay competitive.

What do you think: Will the new boomtowns be communities that boast walkability and feature high density development? What have you seen in your area?

Leave a comment below, and let’s discuss.