(NOTE: Want to learn how to flip houses to hedge funds? Click here for our “Partnering With Hedge Funds” special report.)
Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
If you read the headlines, it’s pretty clear that nobody has a freaking clue about where the real estate market is headed. Recently, I read an article that stated that this is the best time in history to invest in real estate because it’s going to continue to go up.
And then I read another one that stated their belief that we’re on the precipice of “Homemageddon” that will start a real estate apocalypse lasting 20 years.
Who’s right?
Beats me.
But because of all the uncertainty, I look at the numbers and trends to get a feel for where we might be headed. Especially over the next 12 or so months.
I read another piece that talked about exactly that. It discussed a number of mostly socio-economic factors that they think will have a massive impact on real estate, and therefore REI, over the next year.
The author looked at 6 areas that he thought would have the biggest impact…
Stock Market
The author stated that stock markets have been highly volatile and international currencies are in trouble, and that the International Monetary Fund (IMF) has revised GDP growth downward across the board for the next year.
He stated that:
“…the potential for decelerating global economic growth will lead to weakened exports, which in turn could lead to smaller infrastructure investment in ports.”
Energy
He went on to write that energy markets are also unstable.
Saudi Arabia’s debt was downgraded by Moody’s in the wake of the crash in oil prices; oil production here in the U.S. is at its lowest level in 50 years, and that’s affecting regional employment and economies, which in turn affect real estate.
That has caused lenders to restrict commercial real estate debt in some oil producing regions, such as North Dakota and Houston.
Lending
The author makes the point that without lending, there can be no real estate development. And that available commercial real estate capital is becoming tighter, as the all-knowing and all-seeing government regulators tell lenders to curtail commercial real estate lending.
Adding to that is the fact that many insurance companies that traditionally invest in real estate are approaching their allocation limits in that asset class. This tightening will lead to more competition for capital, which will in turn lead to a more restrictive lending environment, which could leave many projects looking toward non-traditional lenders such as private equity funds.
Demographics
The author then went on to discuss the demographic and economic shifts that are reshaping real estate demand, which are being fueled by the baby boomers and the millennials, who have now eclipsed their elders in terms of sheer numbers.
He believes that these groups’ evolving needs, income constraints and expectations are driving several trends:
-
Younger millennials are lagging behind in terms of income and/or are saddled with burdensome student debt; many are opting to live with their parents for longer time frames and are therefore delaying entry into the rental or ownership markets.
-
The trend of aging in place means retirees are seeking living options that include medical, assisting living and memory care services.
-
The economic downturn/Great Recession has led to greater demand for rental properties, which persists today in the face of stagnant wages and a struggling middle class.
-
Despite their age and lifestyle disparities, both boomers and millennials are competing for the same housing in many of the same areas, generating demand for multifamily development with attractive amenities.
-
The drive toward high-density housing is also reflected in how strongly urban areas are attracting people of all ages because of the transportation options, walkability and broad work/live/play offerings. These factors are being mirrored by the growth of urban mixed-use developments that attract new tenants and businesses. Suburbs are increasingly pressured in turn to similarly “urbanize” to meet this market demand.
Wages and Salaries
The median income for middle-class households fell by nearly 5% between 2000 and 2014, and their median wealth (assets minus debt) declined by 28% after the housing market crisis and the subsequent recession.
Meanwhile, costs have risen dramatically for many big-ticket items, such as college tuition and out-of-pocket healthcare expenses.
Americans are saving less and an assured comfortable retirement is fraught with concerns over rising costs and declining pension plans. At the same time, the millennial generation is falling behind in assets and income, with many, as noted above, coping with student debt.
Credit
Affordability and credit constraints are challenging both the rental and homeownership markets. It’s harder for many prospective households to qualify for a mortgage, which has fueled increasing demand for rental property.
Even as multifamily development continues, supply and demand have caused rents to outpace many tenants’ incomes. This affordability issue is affecting where younger workers will be able to live — and possibly affect where businesses locate.
Builders are beginning to target “starter homes” and micro-apartments are meeting the demand for affordable housing for millennials.
Whatever Will Be Will Be
The author didn’t draw any conclusions with the data. His point was to give investors and other real estate stakeholders a look into what may happen over the next year or so.
It looks like a mixed bag to me – some opportunities with shifting demographics, and some threats due to the availability of credit.
From where I sit, the important thing is to just keep paying attention to where things are going, and be prepared to change your business model to profit with the changes.
Speak Up
What are your thoughts about the future of the market? Share below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.