Investments Update: In GREI we completed the purchase of 4 buildings, 56-unit of 2BR/2BA Class B multifamily. The property was purchased with a Freddie Mac mortgage. The estimated upgrade and holding period is 3-5 years and the business plan includes interior upgrade. Property photo below. We’re looking at more properties in the area. Please contact me if you’d like to take part in the next round.
Population growth trends are a good indication for real estate investments. If you didn’t detect a problem with that sentence you may want to continue reading carefully!
Throughout history, it was obvious that the population was growing. After WW2, the population grew even faster, and the Baby-Boom Generation was responsible for unprecedented expansion. That sharp growth curve had an impact on every aspect of the economy, including real estate.
The same generation that got the party started will be the one to end it too. According to censuses in the West, this generation is getting old and is retiring from the workforce without proper substitute by younger generations. This means that the population is shrinking and the assumption that it will continue to grow isn’t correct anymore! To fill the void in the West, we're witnessing massive human migration from developing countries to OECD countries. However, since the expatriation includes immigrants with different cultural backgrounds, this has created social tensions and the official gates are narrowing. As a result, we may experience a freeze in Western population growth and a drop in purchasing power unless a technological breakthrough allows retirees to maintain a high standard of living. For example, the Financial Times estimates that Britain faces ‘zero workforce growth from 2020’ and that’s close…
How will this affect real estate? There are many views but there seems to be some consensus:
1. Housing Units will become smaller due to changes in Household size: There are more old people, more childless young couples (some with no plans to reproduce at all), many single-parent families, and many professional singles that reside alone. Large immigrant families won’t change the picture since they save and live in small units as well. So, there are plenty of good reasons for a high demand for smaller units. Owners of large units may prefer to divide them into smaller independent spaces and in the future, we’ll see architectural ideas that may allow for flexible division of floors. Ideas like WeLive are still in the experimentation phase and there are other architectural innovations in the pipeline. This indicates that the market is looking for solutions.
2. Population nowadays tends to concentrate in urban areas. Older people prefer the convenience and services of big cities and younger generations prefer the big city because it offers an attractive social environment and workplace. Therefore, we may assume that we’ll continue to see the growth of large urban metropolises. Remark: the switch to Autonomous-Cars may save the suburbs but that’s a different discussion.
An average apartment size statistically shrank by 5% in the last decade and anyone can clearly see the shift in big cities toward smaller apartments. Therefore, it’s highly probable to assume that the population will concentrate in Mega-Cities and small apartment towers will rule cityscapes. Movie scenes from The Fifth Element and Blade Runner may become the reality in the not-so-distant future.
Conclusion: The idea of a Flexible Apartment will still require change in Property Law and construction methods, but owners of small city units and high tower management companies already hold a bright future…
In my last newsletter, I mentioned the Opportunity Zones Program (OZ) which is expected to have a major impact on US real estate. Without a doubt, this is a game changer and has already got praise by some commentators as the Largest Economic Development Program ever in the US. The sales of sites in OZ are up 80%. The program was ranked as the Best CRE bet for Investors in 2019, ahead of Multifamily and Marijuana… Some search engines even added a dedicated filter for OZ.
Following the recent article, I was asked to expand on the subject and here are more details: 1. OZ is a Federal program and every State has areas that were classified as OZ. 2. There are 3 major time periods. 5-year tax break (5%), 7-year break (10%) and full exemption if you hold for 10 years. 3. The qualified zones aren’t necessarily poor neighborhoods. The boundaries of a zone depend on average demographic and economic statistics. There are some strong areas that were included in the program since they border with weaker areas. For example, parts of fashionable Hell’s Kitchen in Manhattan were included in the program even though the area is a 5-minute walk to Billionaires Row and Central Park. Another promising area is Long Island City in Queens which will soon be occupied with high income Amazon employees. 4. You can’t invest directly in a property. To invest you must do so through a dedicated fund that invests only in OZ. The fund will be subject to specific regulation. 5. To enjoy all the benefits, the time to invest is up until the end of 2019 and that’s close. It takes time to locate, negotiate and purchase properties. It may be possible to invest in a fund that will operate after 2019 but the fund must have a clear plan in 2019. 6. No “New Money” is allowed. The source of the money may only come from capital gains, (presuming your investment portfolio was kind to you…) and the funds should be invested within 180 days in a specialty OZ fund. For more information you may search the IRS website here.
Wishing everyone a Happy and Prosperous 2019
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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