I love real estate. I read books, blogs, news, talk to friends, attend real estate meetings and conferences, and host my own real estate meetup in San Mateo. I've come to realize that the real estate market is not easily describable as a whole, but better understood as submarkets, each impacted and driven by various factors - weather, supply and demand, jobs and economic outlook.
Gathered from various sources, below are some recent facts, short-term forecasts and what they may mean long-term. A few extra details are included about our home market: California/ Bay Area. At the end, I discuss our personal strategy.
- One of the most expensive natural disaster in U.S. history, Houston property damage from hurricane Harvey is estimated at upwards of $100 billion.
- Losses from damage to properties from Hurricane Irma in Florida are estimated at $42.5 - $65 billion.
Short-Term: There are temporary opportunities for rehabs/ fix and flips in natural disaster areas. However, history proves that after market saturation of rehabbed properties, prices rebound negatively then stabilize at pre-disaster long-term trend (i.e. if it was negative growth, it will go back to negative growth).
Supply and Demand:
- The construction industry will see significant number of workers migrating to Texas and Florida, further exacerbating the construction labor shortage.
- Concerns that development is getting overheated in some trendy markets will ease as projects will be getting delayed by these migrating workers.
- Overall, occupancy rates remain above 95% on a national level, suggesting that generally the supply boom has not yet exceeded demand.
Short-Term: The slowdown in deliveries should help sales prices and rents continue to increase at moderate levels. It is a seller's market across most of the country: Great time to be selling properties in submarkets with low supply. These areas are typically where CAP rates are compressed (sales prices high in comparison to the net operating income).
Jobs and Economic Outlook:
- Employment continues to bolster the economy; average monthly job creation was above 175,000 with a national unemployment rate of 4.4% in August. Unemployment rates are especially low in these markets: Denver (2.3%), Nashville (2.6%) and Portland (3.6%).
- Tech-centric markets such as San Francisco, Austin, Denver and Seattle remain in high demand for both corporate and personal migration, which should strengthen the local multifamily and commercial office markets.
- Tacoma (8.1%), Sacramento (7.7%), Colorado Springs (7.6%) and the Inland Empire (4.3%) are four of the five fastest-growing markets this year. These fastest-growing markets appear to be benefiting from their proximity to larger markets, such as Seattle, the Bay Area, Denver and Southern California, which have robust employment growth and are magnets for domestic migrants, especially Millennials.
Short-Term: Now is a great time to be holding a rental portfolio due to a) high rents, b) low CAP rates and c) low bank interest rates. These three factors will lead to better refinancing and access to more equity.
- California is the #1 producing state in the country and 6th largest economy in the WORLD with a GDP of $2.4 Trillion in 2015. Of that, 17% was attributable to the Bay Area, 38% to LA and Orange County and 45% to rest of the state.
- Since 2012, the San Francisco population has grown by almost 5%, far exceeding the 3% national average. Rents and house prices have reached a point where even highly paid workers can’t afford the premium prices despite the metro’s consistent job expansion.
- Beginning 2018, San Francisco requires new developments to reserve 19% of units for low-income tenants (24% by 2027).
- The National Housing Affordability Index (HAI) graph below shows that the Santa Clara and San Francisco metro areas are the least affordable places to live in the country while other areas of the US are much more affordable to the median-income families.
- Even though other states are more affordable, the below graphs (click on each individually to see the details) illustrate that affordability is relative. Whether a family has income that is low or high in that state, many are still below the equality line meaning they cannot afford to live there.
So What Does This All Mean?
- Bull Market won't last forever: Unemployment, interest rates and supply of housing are at their lows. When one or more of these factors change, property prices will decrease in those submarkets.
- If buying, buy right! No property should be purchased at retail prices (EVER). Always look for an opportunity to force value or be able to sustain 20-30% reduction in net operating income.
KPI Lending strategy:
- We've sold a couple of our rentals recently to capitalize on the high prices and have cash available for the eventual market correction.
- In the short-term, we hedge our portfolio with private lending and look for light to moderate fix and flip properties both inside and outside the San Francisco Bay Area (we avoid major rehabs right now).
- In the long-term, we look for assets with asset classes with high CAP rates where we can add value (i.e. improvements and reduction in expenses).