Winter is coming...
This is a seasonal update about recent activities and general trends.
Updates: The US real estate market continues to demonstrate a strong demand for housing and urban centers saw a steep bump in prices in the last 12 months. In GREI we’re listing a few multi family properties in Atlanta for sale. All the properties were upgraded, and some have doubled in price in less than 3 years, which should serve as a nice bonus to our investors. Selling a multi family property is more complicated than selling a house and proper buyer segmentation is required.
The US market in a nutshell: The American economy is strong. This is evident from all economic parameters and doesn’t require special explanation. Will it last? Many believe it will stay strong in the short-term. Most think it will stay strong in the medium-term as well but a correction is inevitable. As for the long term, you may want to read an analysis by John Maynard Keynes here… How will this impact Real Estate Investors? Continue reading….
The short-term: the US is near full employment. This isn’t a common situation in any economy. It means that demand is stronger than supply and the economy is growing. Inflation will grow as well but not enough according to official statistics. This fact limits the FED’s ability to raise interest rates. The real estate market “senses” these economic factors well: professional labor is hard to find, wages are on the rise and workforce demands are increasing. (If you want to read a more detailed explanation about the labor market, you may click here and read my post from March 2017).
In the medium-term, the US is still in a totally different place in the world economy and, even if a setback is looming, any attempt to compare the US to other countries is artificial: It’s the world’s largest democracy, one of the largest countries in terms of land size, with vast natural resources, with the most skilled and educated labor force, the strongest financial institutions, the world’s most powerful political power with the largest economic resources.
China and India are still behind in terms of world dominance and Europe seems fragile. From a historic standpoint, the US is the largest empire the world has seen since the Roman Empire (click here for a comparison map). Therefore, many believe that the US is still the safest place for investing. Not just because of the resources and the money, but also because of law, culture, business practices and transparency that are far superior to most other countries and work to the benefit of international investors. But as the saying goes: even trees don’t grow to the sky, which is to say that a correction will come. The stock market is at an all time high, the real estate market is reaching new heights, corporate bonds coupon rates are low and this situation can’t last forever.
The current economic growth stems from low interest rates and quantitative easing which the FED has recently stopped. How will this affect the markets? The common belief is that it may create a slowdown which will be followed by another growth cycle. I won’t get into macro-economic analysis, but I’ll try to shed some light on the multi family (residential rental real estate) market which I know well and how it’s different from other popular investment tactics.
Residential Rental Real Estate Vs. other means of investment
The multi family rental market is traditionally considered a solid market when compared to many popular investment vehicles (i.e. stock market, bonds, currencies, gold, condominiums, commercial real estate, office, logistics, etc). The reason for this is that usually there’s a steady demand for rentals. In an economic slowdown, the rent may be lower but apartments will be rented. In times of economic growth, the rent may increase and so will income. In other words, in most economic scenarios, the property will continue to generate income and won’t be wiped out (unless your leverage is very high and in that case you bought an option and not real estate). This is contrary to stocks, bonds and foreign currencies that may collapse or totally be wiped out. Investors who lost their money on respectful popular stocks and those who had bonds with a brutal haircut can attest to that.
Due to the strong economic growth in the US in the recent years and the transition to rental over owning (a trend that has to do with a cultural phenomenon more than the economy), all segments of residential real estate are now priced much higher. In a few specific places (i.e. luxury condos in NYC and Miami) prices have peaked, and prices are now declining. However, prices continue to grow where demand stems from positive immigration and grassroots demand. Many believe that this trend will stay steady in the next 2 years.
The stop in new-housing starts in the last decade (you may click here for a previous post on this topic), has created a housing shortage in large urban areas in the US and the supply hasn’t caught up yet with the demand. Due to full employment and inflation mentioned earlier, house prices in those areas keep climbing steadily.
What will happen in the medium-term should a slowdown emerge? In such a case, the real defensive nature of multi family investment is evident: the stock market may witness sharp drops and commercial real estate may suffer from high vacancy rates. However, the rental residential market may face a slight drop in rents, but income will keep coming and tenants will still seek a place to rent. The multi family market is less dramatic and with fewer sharp curves in both directions and therefore considered less risky than other means of investing.
This publication is personal and not for general circulation. It does not form part of any offer or recommendation. It does not take into consideration investment objectives, financial situation or needs of any specific person. Prior to committing to an investment, please seek advice from a licensed professional regarding the suitability of the product for you and read the relevant product offer documents, including the risk disclosures, If you do not wish to seek financial advice, please consider carefully whether the product is suitable for you.
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