Post-Recession US Real Estate Markets: Is It Phoenix Rising From The Flames?
At the end of the third quarter
At the end of the third quarter in 2012, the US Census Bureau reported that the home ownership rate was 65.5 percent, which was the lowest rate in the past 50 years. Additionally, 3.9 million more home owners are 90 days or more delinquent on house payments. The high rate of non-home ownership, the increasing population of the US, the uncertainty in the market which is holding back future home buyers, and the high number of potential foreclosures mean a lot of people are finding themselves looking for a place to rent.
Where are the big players in the industry looking to sink their money? David Franklin, REINs in house legal expert, has reported in the recent past about the takeover of Main Street by Wall Street. In it, Mr. Franklin reports that investment groups with access to large amounts of capital are taking advantage of the record low housing prices in certain markets in California, Nevada, Florida, and Arizona. Through this new venture, these groups are adopting a buy, rent and hold strategy. These REITs will affect the housing prices and vacancies as less inventory is available to small scale buyers. What generally follows is an increase in development due to the market recovering; what is important to watch is that this does not result in an overbuild in these markets, as developers jump on the bandwagon to cash in on this uptick.
According to Moodys Analytics forecasts, in 2013 only six housing markets will be in the black compared to their peak prices. Trends data show that these markets either did not experience such steep price declines during the recession or are in areas that have big expectations for job growth next year.
Hiring has surged in the cities of Houston and San Antonio, TX and Raleigh, NC.
Echo Boomers (25 to 34 year olds) are fast becoming voracious consumers of housing as they finally begin to move out of their parents? homes, leave their dorms and move closer to employment. Their numbers rival that of the boomers, many of whom are just heading into retirement. Areas undergoing revitalization, with a focus on pedestrian traffic and easy access by transit, are being demanded by this cohort. Add the Y Generation to the mix a cohort with similar housing desires- and the impact is compounded. Check out walkscore.com, a tool used by renters to measure the pedestrian ease and the vicinity to amenities.
The preferences of this key demographic have led to a boom in the purpose-rental market in some cities including: San Francisco, New York City and Boston. Low vacancy rates and top end rents rule the day in these cities, off-setting the sky high cost of development and re-development in most cases. This age group generally comprises 15% of the population; however, in New York, NY, Austin, TX, Seattle, WA, and Salt Lake City, UT this age group has a larger representation.
The in-migration numbers in some cities in the US are surprising to someone entrenched in the housing industry and who firmly believes GDP growth spurs job creation, which spurs in-migration rates. Net migration is highest in Raleigh, NC, Phoenix, AZ, Tucson, AZ, Las Vegas, NV, Austin, TX and Orlando, FL. This influx of people is likely due to a couple of things:
1. Most of these cities, if not located in the sunbelt, have climates much more preferable then other US cities. For this reason, they are attractive to people looking to retire. Keep in mind however, that retired people do not contribute to the economy in the same way as those who are still working, thus weakening the civic tax base. This factor means that a market may not be sustainable if it is not comprised more of employed people.
2. Further to the point above, many of the top markets are attractive to Canadians and other foreigners seeking to take advantage of the high Canadian dollar and low housing prices. Once again, non-resident owners fall in the same category as retirees by not contributing income tax dollars to the local economy.
3. The cheap housing prices, without the offer of employment may be attracting people to the area. Perhaps families can afford to live in these regions on one income. Perhaps they are telecommuting. Perhaps the job numbers have not yet caught up.
Large, diverse metropolitan areas in the US continue to attract the big money. Port cities and Gateways flourish, with many large developers and investors believing in their longevity in spite of the enormous costs of doing business there. The belief is that the macro-economic fundamentals will not be going anywhere in San Francisco, CA, New York, NY, Boston, MA, Washington, DC, Los Angeles, CA and Chicago, IL.
Riskier endeavors, as ascertained by many of the major investment players are the smaller, less diverse, but still strong cities. With less cost of doing business than in the major markets, Salt Lake City, UT, Tampa, FL, and Nashville, TN are attractive to investors who are willing to take a little more risk in exchange for spending less. For example, in Florida, numerous buildings and commercial structures seem to be built by reputed construction companies in jacksonville fl to attract more investors for the opening of their new business.
Ancillary markets, or locations experiencing a ripple effect from other, larger markets are often good bets for investors without the means to multi-million dollar capital.
So with many factors accounted for, including migration, transportation, demographics, costs of doing business and employment numbers, the Urban Land Institute, in concert with Price Waterhouse Coopers has reported the Top 20 Markets in he US. Here are the top five.
1. San Francisco, CA. Driven by job growth and in-migration, excellent transportation infrastructure, and a flourishing high tech sector, San Fran comes out at number one. Its unique demographic (an extremely high number of singles as opposed to couples) and its through-the-roof prices have resulted in smaller units in both residential and commercial space and a trend towards more building in the downtown instead of sprawl to the suburbs. This city only follows New York City in its walkability, a feature extremely attractive to both a younger, greener age group and an older, car-less one. The young and old both want to walk down the street to the store and the restaurant and there is no better city in which to do that! Moodys Analytics predicts that the Gross Metropolitan Product (GMP) will grow 1.7% this year and will add 50,000 new jobs from its 2007 peak. This makes sense: first a growth in GMP (or GDP) followed by an increase in jobs. Its future is bright.
2. New York City, NY – The run up in prices has meant that the safety in parking capital here is dissipating and rental rates are not comparing favourably to the cost of purchase. Employment is expected to bounce back to pre-recession rates. Jobs in education and health care support the needs of the demographics: boomers and echo boomers are well served. Investors tend to favour the hotel market as a place to sink investment capital right now.
3. San Jose, CA. A one hour drive from San Francisco gives San Jose a boost; however, its own real estate market is holding its own. High tech rules the employment field here (25% of all employment) as Silicon Valley continues its upward climb in success. Concerns about a lack of economic diversity are valid; 6,600 technology companies operate here.
4. Austin, TX. Austin is doing very well in the employment sector and the weekly earnings department. Once again, a big employment driver here is the technology industry. Echo boomers represent a whopping 17.3% of the population. In spite of a prominent university and the location for state politics, the economy rates an average score for diversity. Real estate opportunities here are also thriving. For example, Habitat Hunters, Inc. won the Austin Chronicle’s award for Best Realtor and Best Apartment Locator in Austin.
5. Houston, TX. Much like the markets in Alberta, Houston is ruled by oil and gas. Everything about this place is driven by the energy sector. Cap rates are high and growth in the long term will be excellent. New construction does not seem to be the place to invest at this moment however. Multi-family interest is declining and it is still cheaper to buy a home in Houston than to rent one. Good news for property investors who are commanding rents that would put positive cash flow in their pockets but bad news if the economy recovers too much, wages increase and renters decide to buy en masse. Investment in the industrial sector is favoured; the widening of the Panama Canal will have an excellent positive impact on this city.
The states of California and Texas are favoured by the large investment groups; however, some have cautioned that the billfold of California is getting thin and the state teeters precariously as cities continue to declare bankruptcy. Texas seems solid with good in-migration, excellent industry growth fueled by the energy sector and a young population. It is interesting to note that in all of the markets, caution abounds. Some markets are great for retail, others for purpose-built rentals, and some for the creation of hotel space or industrial parks.
Melanie Reuter is the Director of Research for The Real Estate Investment Network and has been with the company for seven years. She has a Master of Arts Degree from California State University, San Bernardino and a Bachelors Degree from Simon Fraser University. To read more insights, please go to www.reincanada.com.