The 2014 Real Estate Market | A Year of Recovery

The majority of the professionals in the real estate field agree that the real estate industry is in various stages of recovery.

The real estate market in all areas are on their own path of recovery, so be careful to recognize this. Not all markets are the same.

As I indicated in my previous articles, the economic and demographic changes will continue to drive demands for real estate that are familiar as well as some that will require the industry to adapt. This next year you should keep a close eye on job growth, population migration and the pace of interest rate increases. These indicators will be the road map to your success in 2014.

The wild card is in what amounts to the institutionalization of the U.S. single-family rental housing market. The single family market went by way of Wall Street in a very big way. After having spent billions of dollars to buy tens of thousands of foreclosed single-family houses in 2012 and 2013, private equity shops will emerge among the largest categories of rental landlords. These private equity shops will look to grow income by leasing to individuals who would have bought homes before the recession but are now delighted to be renters.

“Generation Y lives, works, and plays in different ways than previous generations. The impact will be felt by all real estate sectors. This generation will be more urban and less suburban.”

However, the real estate market clearly turned the corner in 2012. Existing and new home sales and housing starts are all up significantly this year as compared to the low activity of the past four years. The forecast for 2014 is for 1.13 million housing starts, up from 776,000 in 2012. Apartment construction will be uneven, concentrating in about 15 submarkets. So while the housing market has had a remarkable rebound, it is off of a very low base and is being driven, to a significant extent, by the investor market.

The National Association of Realtors (NAR) predicts that by the time this year ends, prices of existing homes will have risen six percent. Next year, new home prices are expected to rise an additional five percent or so. Because of these rising prices, there will be another sales boost from the pent-up demand of people who now have enough equity to sell their homes. This should help next year. There’s also a magnifying effect on sales – for people who are able to list their home and sell it, odds are they’re going to go on and buy another one.

A number of local housing markets have seen prices return to levels comparable to the peak from the previous cycle. In most markets, activity has reached a level that is supportive of economic growth. In the stronger markets, a shortage of inventory has forced homebuyers to compete, driving up prices and leaving some shoppers out of the market. The number of homes for sale reached a low of 1.8 million in early 2013, the fewest in more than a decade, according to data from the NAR.

The leading housing markets are the state of Washington, Oregon, Michigan, the Napa region of California, Nevada, Florida, Arizona, New Mexico, Wyoming and Alaska.

Mortgage rates are at record-breaking lows. Thirty-year fixed-rate mortgages are in the three-and-a-half percent range for the most qualified buyers. That’s quite a difference from 2009 when they averaged about five percent. And it is widely believed that the market can handle an orderly increase in interest rates without serious disruption to the recovery. These low rates won’t stick around forever and fixed rate debt is the best thing anyone can do to hedge inflation. The NAR is forecasting 30-year rates to climb to 4.6 percent within a couple of years.

Population migration will continue to play a role in how the recovery plays out in a number of markets. Total population growth, net migration and growth in influential age cohorts will all shape the future real estate recovery.

Generation Y— those people born between 1979 and 1995 – is an urban and urbane generation. There are 72 million Gen-Yers in the United States. The growth of Generation Y and its impact on all sectors of real estate could be the singular most dominant trend for many years. This group lives, works, and plays in different ways than previous generations. The impact will be felt by all real estate sectors. This generation will be more urban and less suburban.

On the other side of the demographic shift, the Baby Boomers also will drive change as they age. Many will sell their homes and move to urban locations with similar amenities as those desired by Gen Y (but with the added amenity of convenient health care). This will be good news to an industry that has experienced a recovery of fundamentals that has been much slower than it is used to after a recession.

The tailwinds include “good if not great” job growth in industries that are, by no small coincidence, magnets for real estate investment (energy, technology, health care and biological research, and, to some extent, education and financial services), solid corporate profits and a recovery in the housing market. Pay attention to the states that embrace these industries as they will continue to attract jobs and population and eventually price and valuation increases.

On the commercial real estate front, savvy investors will return to previously-ignored secondary markets and less than perfectly positioned assets, as a steady stream of capital stands ready to be invested. As this new phase in recovery takes hold, investors will see income growth through rising occupancy or rising rents. This marks a significant shift from a dependence on cap rate compression for appreciation growth that has become ingrained in investment strategies across property types.

“Office users are demanding less space per worker as they reconfigure for more collaboration, and retailers are looking for urban formats that will be able to serve city dwellers more efficiently.”

The outlook for capital availability from a wide range of equity sources is expected to improve in 2014. The availability of equity capital will increase the most from foreign investors, followed closely by pension funds and other large institutions, private equity funds, hedge funds, and opportunistic funds; and private local investors. All of a sudden, the banks are comfortable with real estate, which scared the daylights out of them from 2007 to 2009, and they are looking for opportunities.

Development over the past several years has been dominated by multifamily and build-to-suit opportunities, but the improvement in market vacancy rates is driving improved rent growth forecasts. The result is that development will be viable in select markets and property types. The office sector could see an increase in redevelopment, as building owners look to reposition properties to meet changing tenant demands.

Office users are demanding less space per worker as they reconfigure for more collaboration, and retailers are looking for urban formats that will be able to serve city dwellers more efficiently. Industrial space is being designed and located where it can meet the needs of online retailers with ever-faster delivery times. And multifamily space is adapting to provide less space per unit, but increased common area.

In 2014, the real estate industry will enter the “middle innings” of the recovery. Successes will emerge where an improving economy with strengthening fundamentals meets an investor’s property operating skills. Whether it’s a focus on overlooked markets and/or property types or a focus on repositioning, re-leasing, re-tenanting, real estate professionals agree that success and profits in 2014 will, as form follows function, come to those with solid real estate operating and management skills.

About The Author

Ken McElroy

Ken McElroy is the co-partner of MC Companies in Scottsdale, Ariz. He is the author of the best-selling books, The ABC's of Real Estate Investing, The Advanced Guide to Real Estate Investing, and The ABC's of Property Management. McElroy is also a contributor for The Real Book of Real Estate by Robert Kioysaki, and The Midas Touch by Donald Trump and Robert Kiyosaki. McElroy's fourth book, The Sleeping Giant, is dedicated to the new class of entrepreneurs who are emerging in today's economy. For editorial consideration please contact [email protected](dot)com.

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