Winds of Change...
This is my periodic update on recent business activities and my personal observations on emerging trends in the Real Estate market.
Rising interest rates won’t go unnoticed in the real estate market. The US demand for housing is still strong but buyers are in no hurry and won’t buy at “market” prices. Sellers that were spoiled by the continuous price increase of the last years can sense that the atmosphere has changed. Real estate traditionally reacts slowly to changes and as a result, transaction volume has decreased and is expected to stay this way until a new equilibrium is achieved. In recent years, properties were priced based on the assumption that prices will be higher, and cap rates will remain constant. However, certain properties may stay on the shelves longer until a new price adjustment takes effect. Substantial price decreases are visibly evident with luxury condos in NYC and Miami (432 Park unit sells at 24% discount). This article in Bloomberg suggests that the coming Fall may be a good time to re-enter the condos market. Nonetheless, good things come to those who wait and at GREI after long negotiations we’ve signed on a new 60-unit Atlanta complex in a great location with a seller that has adjusted the price to our business plan (see photo below).
The US economy continues to lead on. Inflation and rising interest rates are basically positive indicators which demonstrate economic strength. Economists will always stress that political stability is a key factor to the economy and many were concerned by the fact that the US is now led by an American President known for “Disruption” and for breaking political traditions. Well, never make predictions, especially about the future... As of now, it seems that Trump hasn’t hurt the US economy and contrary to dire predictions, the US economy is even stronger, as demonstrated by the stock exchange that at some point was 30% higher from when he was elected.
The Unemployment graph shows that the US is in full employment. As of May 2018, the unemployment rate was 3.8%. That’s a phenomenal figure that was seen just once previously in the last 30 years (end of 2000). Since I work with contractors all the time, I have a firsthand experience of how the shortage in working hands affects prices and timetables. I can only assume that there are no unemployed contractors currently in the US… The scarcity in professional labor obviously impacts wages and house costs and this in turn, contributes to higher inflation. The official goal of the FED is to maintain this situation until 2020 and then an unavoidable increase in unemployment will take place (Click here for the official data). By the way, one of the countries that competes successfully with the US is Israel, where an all-time low unemployment rate of 3.7% was noted in the first quarter of 2018.
The second graph shows Privately Owned Housing Units Starts in the USA which were positive in 2017 but the curve is flatter in 2018. Although the unemployment rate is low, and nominal wages are higher than 2008, the inflation adjusted purchasing power of the US workforce hasn’t increased much. Higher mortgage rates are having a negative effect on single-family home purchases. The new tax reform also isn’t kind to new homebuyers. However, as I’ve mentioned in the beginning of this article, it’s likely that after a minor adjustment a new equilibrium will emerge, and the demand will stay as strong as before.
According to a research by Fannie Mae, this generation is in the process of moving from their paid and owned single-family homes to smaller rented apartments. This phenomenon has already begun and is expected to end by 2036. This “Great Migration” will add about 25 million homes to the US market! For various reasons, such supply may not be met by proper demand and prices may drop as a result. Not everyone agrees with Fannie Mae’s conclusions, but that's positive news to investors in multifamily, senior living, small apartments in urban areas and assisted living. Investors in single-family homes should at least be aware of this issue.
On a personal note, I’ve invested the last 2 years in my own professional development. At the end of last year, I graduated with a Real Estate Master’s degree (M.R.E. with distinction). Immediately after that, I took on a project for a NY real estate fund. And now I’m very glad to have joined 40 Broad St. Fund as a partner. The fund is managed by Zvi Chalamish, who was the Deputy Accountant-General in The Israeli Ministry of Finance, managing bond underwriting for the Government of Israel, and who is well known for his experience in infrastructure and multi family homes in the US. The fund will join as General Partner in the acquisition of Value Add multi family home deals of between $20m-$50m.
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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