The Middle Class Squeeze Will Impact Real Estate

After more than four decades of being as the nation’s economic majority the American middle class is now matched in number by those above and below it.

The erosion of middle class in the United States has been a persistent theme in editorial writing and political campaigns recently, but only occasionally is the trend quantified in any depth beyond the fact that much more income than previously is now going to the upper quintile or 1 percent or even far into the stratosphere of the upmost 0.01 percent, depending on the thrust of the article (or politico’s speech).

On Wednesday, the Pew Research Center released a more detailed report on the squeeze on the middle class. After more than four decades of being as the nation’s economic majority, the report noted, the American middle class is now matched in number by those above and below it. In early 2015, 120.8 million adults were in middle-income households, compared with 121.3 million in lower- and upper-income households combined, according to Pew Research.

That’s one of the main takeaways of the report, which is based on an analysis of data from the Census Bureau and the Federal Reserve, and it has serious implications for commercial and residential real estate. Pew Research defined “middle-income” as adults whose annual household income is two-thirds to double the national median, or about $42,000 to $126,000 in 2014 dollars for a household of three. By that definition, the middle class made up 50 percent of the adult population in 2015, down from 61 percent in 1971.

Nearly half—49 percent—of U.S. aggregate income went to upper-income households in 2014, up from 29 percent in 1970. The share accruing to middle-income households was 43 percent in 2014, down drastically from 62 percent in 1970. In 2015, 20 percent of American adults were in the lowest-income tier, up from 16 percent in 1971. On the other hand, 9 percent are in the highest-income tier, more than double the 4 percent share in 1971. In the short, there are more lower-income households and more upper-income households, and the upper households make a higher percentage of all income than 45 years ago.

Retailers have already been effected by the squeeze, and unless there’s some reversal of the trend, that isn’t likely to change. The retail market will continue to bifurcate, with upper-end and lower-end stores growing at the expense of stores that cater, or used to cater, to middle-income Americans (if Sears can figure out how to escape the squeeze, it might have a future). Residential real estate faces a similar set of issues. There will be plenty of development for the top (for example, the many deluxe apartments in the sky in Manhattan and Miami), and—plenty isn’t the right word—a steady trickle of affordable housing, considering the various subsidies in place. Basic middle-class housing faces a diminished outlook.