This issue we’re shining a spotlight on specific US markets while encouraging you to think about the larger picture of the real estate industry as a whole. Now more than ever, prudent real estate investing is about more than simply picking a hot market. Successful investors need to be relentless in their pursuit of knowledge. Given the multitude of facets both within and affecting the real estate industry, like local market conditions, financing, global markets, job growth; knowledge is key. No one has time to digest it all; that’s why we’re here. We’re excited you’ve taken the time to connect with us, and hope that by continuing to funnel you juicy nuggets, we can help you in your quest for useful investing knowledge.
We’ve taken a look at real estate investing via some broad brush strokes across market conditions, investing strategies and trends. Before we dive into specific markets, we’ll share a few thoughts for you to keep in mind. First, when we talk about real estate investing, remember, we’re not solely referring to the single family home sector, like many mass market sources. Multi-family housing, commercial, rental, retail, development, etc. are all part of the greater real estate industry. (More on that here insert link to previous post.) Second, it’s important to take stock in the overarching market conditions and investment climate.
While market conditions are stabilizing, the real estate volatility of the past few years has been too ferocious to be easily forgotten. Investors continue to demonstrate a propensity for mitigating risk in real estate transactions. At the same time, the increase in buyers coming to market creates more competition and drives up price. As prices increase many investors are shifting strategies as they look to skirt shrinking returns while remaining cautious. We mention investor sentiment because of its impact on activity within specific US submarkets along with the traditional economic factors like population, job growth and market affordability. We’re seeing this in two ways. The first is that investors are becoming more opportunistic, investing in areas close to major markets. This allows investors to hedge against smaller market volatility, while finding opportunities at a more palatable price point. Think Brooklyn to Manhattan or San Jose to San Francisco. The second is the trend for investors to seek the best asset class of investment in secondary markets. Remember the urbanization effect we discussed earlier in cities like Orlando and Denver?
We’ll take a look at markets in three categories. The first spotlight is on a state with three markets that continue to draw national and international attention for real estate activity. Our next two categories are the major markets and secondary markets. Major markets are the core DMAs you’ve repeatedly seen as real estate hotbeds: Boston, Manhattan, Los Angeles, Washington D.C. and Chicago. The secondary markets are essentially the markets outside of the majors that are doing well financially, but are smaller in population size. Many sources will subdivide markets even further, looking at tertiary markets or emerging markets, markets by geographical region, but we’ll save that level of granularity for future discussions.
Our first spotlight shines on the Lone Star State. Texas. While national urban population growth hovers around 2%, Texas continues to dominate with three cities seeing population growth 2-4x the national average. Austin leads at 8%, followed by Dallas as 4.2% and Houston at 3.6%. Austin is becoming synonymous with modern mixed-use developments for live/work/play, and is continuously ranked among the country’s most diverse cities. Mixed use developments combined with population and employment diversity bring an abundance of opportunities across all real estate investment sectors. Dallas/Fort Worth, the area surrounding the DFW airport is home to thousands of corporate headquarters due to its low cost of doing business. Most notably from the Fortune 500 List: Southwest Airlines, AT&T, Exon, Texas Instruments, GameStop and more. Given this giant corporate epicenter, job growth is predicted to hit a new high in 2015. Job growth, combined with the wide availability of raw Texas land attracts builders and buyers across all segments, with the single-family home, industrial and office space sectors predicted to show the most growth in 2015. While the multi-family and retail sectors closer to center city are beginning to feel constrained by supply. Houston, Texas’ most populated urban area remains strong with job growth fueled by the energy industry with additional growth in the construction sector pacing to set a new record. With high expectations for growth across all property sectors (single-family, multi-family, industrial, retail), Houston remains a prime market for real estate investors.
According to Price Water House Cooper’s research on flow of capital into real estate, the major markets continue to attract the largest investment dollars. With $154 billion invested in real estate in the major markets in 2014, investment levels have returned to nearly 70% of our last peak. The uptick in activity in major markets can largely be linked to the job market as well. For example, in Manhattan, while the financial industry has yet to recover to pre-recessionary levels, the growth of technology and media companies is filling the gap creating strong demand for office space and new development. More jobs attracts more people, with competition increasing in the rental market in major cities as a result. This trend isn’t limited to NYC alone. The technology hubs in Silicon Valley, Chicago, even Research Triangle Park in Raleigh-Durham are attracting companies and tech working millennials. Millennials, known to favor the urban lifestyle are increasingly able to afford the market of their choice, being one of the two largest age brackets to impact first time home buyers in 2015.
Our nation’s capital, Washington D.C., while not hit as hard as most markets during the recession, the government’s budget sequester in 2013 and 2014 hindered job growth. Home sales in D.C. have also suffered with a 2% declined in 2014. We expect 2015 to see home sale gains as much as 10% in our nation’s capital given its current pace for job growth. A pace, that is third in the nation in 2015, so far. D.C. is another market where demand will likely outpace supply increasing activity in neighboring markets like Northern Virginia and Baltimore, Maryland.
The other major markets like Los Angeles, Chicago and San Francisco are all on pace to reach 2015 pre-recessionary employment rates which will further support the upper market single-family home sector. Los Angeles, our gateway city from the Orient is seeing an increased amount of foreign investment activity in the hotel and apartment sectors. Shanghai’s Greenland Holding for example has continued to make US real estate investments. Since acquiring the Metropolis Project in Los Angeles from the California Teacher’s Retirement System in late 2013, they’ve made additional investments in the apartment sector in San Francisco and Brooklyn. In Chicago, it’s the multi-family and industrial sectors that look the strongest as Midwestern manufacturing continues to improve in one of our country’s most diverse urban markets.
Austin isn’t the only market experiencing increased population growth as a result of urbanization. Mixed used developments are popping up across the country with urban city center developments underway in 75 different markets. These types of developments bring a multitude of investment opportunities across sectors; residential, retail and commercial to name a few. Denver, Charlotte and Seattle are among the most notable followed by Raleigh, Nashville, New Orleans, Orange County, Portland and Oakland among the rest.
Considered a fully recovered market from the residential price standpoint, Denver Colorado is on pace to hit the largest percent increase in home sales in 2015, and could exceed 14%. Another secondary market they may surprise some is Des Moines, Iowa’s capital. Forbes recently added Des Moines to their list, “Best Places For Business.” Des Moines is also favored by the National Association of Realtors who listed Des Moines as one of the most affordable markets for millennial home buyers in 2015.
Phoenix continues to show up as an active market for real estate attracting investment across the single-family, multi-family, industrial, and hotel sectors. Phoenix is currently among the top five most active markets for new home construction in the US. New single-family homes remain relatively affordable in Phoenix compared to the national average. While affordability is attracting both domestic and international investors as well as first time homebuyers, we expect prices to continue to climb towards pre-recessionary levels in 2015.
One could almost say real estate investment opportunities exist in nearly every market for the shrewd investor. While we don’t underestimate the importance of market selection, around here we believe an educated investor who understands a market at its most granular levels while also having an awareness of larger real estate dynamics is an investor best positioned to capitalize on today’s opportunities.