PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) recently published the 2020 edition of their highly anticipated Emerging Trends in Real Estate® (ETRE) report. ETRE is a highly regarded annual report that, now in its 41st year, presents trends and analysis covering real estate investment and development, finance, metropolitan areas, and property sectors in the United States and Canada.
This year, the research team surveyed more than 1,500 industry experts and then further interviewed more than 750 of those individuals in greater depth. These are the people who are most in the know about real estate. Therefore, the report can be a great resource for multifamily real estate investors looking for insights to help fuel their strategy during the coming year. Whether you are deeply experienced or just starting out, there is valuable information for everyone.
However, we know that you’re busy and may not get to reading the report right away. So, we’ve summarized some of the more salient points relevant to the US market and multifamily real estate, in particular. Read on to see the highlights.
Prognosis for the economy and real estate in general
Experts predict a relatively stable outlook for real estate in 2020
Survey respondents and focus groups participants indicated not seeing much change since last year. There was a general sense that things have been “static” or at least “on track” in terms of property development and investment.
The survey of expected Firm Profitability Prospects for 2020 also shows very little change from last year. Participants were asked about their firm’s profitability expectations for 2020 giving them the three options of: 1) Abysmal–poor, 2) Fair, or 3) Good–excellent. Since 2016 the percentage of those responding with Abysmal has remained close to zero. Those in the Good camp decreased by about 10% (from 85% to 75%) between 2016 and 2019. Lastly, those in the Fair camp increased by 10% (from 15% to 25%) between 2016 and 2019. So, there was a very slight trend towards a more pessimistic view, but the overall sense is still quite positive!
Another survey, Emerging Trends Barometer 2020, asked participants whether 2020 would be a good time to Sell, Hold, or Buy. Again, we see very little change since 2016 with a slight uptick in Buy and slight downtick in Sell and Hold.
The R-Word… Is it coming in 2020?
While the expert participants seem to be pointing towards continued optimism, or at least a continuation of their viewpoint for the last several years, the big question on everyone’s mind is—where are we in the economic cycle?
According to the National Bureau of Economic Research, the trough of the last cycle was June of 2009 and we have been in an expansion period since then (the longest in US history).
Although, as a comparison, consider that Australia hasn’t had a recession in 27 years! So, there’s no law of nature that will necessarily force the party to end.
Janet Yellen once remarked: “I don’t think expansions just die of old age.”
Ben Bernanke responded: “I like to say they get murdered.”
As the ETRE report points out, the murder will likely take the form of:
- excesses somewhere in the economy
- government action
- domestic and international political turmoil
- and/or action by the Federal Reserve itself
The Report also mentions some indicators that may foretell that the party is about to come to an end:
- “The yield-curve inversion that took hold and then deepened during the first half of 2019.”
- “Housing starts have been softening, and the 6.6 percent year-over-year decline in residential permits recorded in June is presaging a weakening period ahead.”
- “Auto sales also have been languid, with implications for the consumer economy as well as for the manufacturing sector heading into 2020.”
- “The decision of the Fed to ease interest rates at its July Federal Open Market Committee meeting could be viewed as a sign of concern over the confluence of these domestic signals as well as a hedge against international risks in both finance and trade.”
- The impact the government shutdown had on hundreds of thousands of workers with “secure” jobs may indicate “economic fragility”.
And then there’s the forecast from the nonpartisan Congressional Budget Office which predicts that real GDP to drop to less than 2% through the next decade.
The authors of the ETRE report are also concerned about the labor prediction—a shift from an average of 200,000 jobs/month gained during the current expansion to only 46,600/month for the next decade.
Surplus of capital with nowhere to go… but may go anyway
While respondents of the Real Estate Capital Market Balance Forecast, 2020 versus 2019 survey largely indicated that debt capital was in balance with respect to opportunity, equity capital was in oversupply.
Capital is sitting on the sidelines waiting to be deployed.
The authors of the report express a concern that, although there is plenty of capital and “excellent liquidity is letting the market function”, “more of that capital comes without the sophistication to sort out opportunities and to price risk keenly.”
Market knowledge, discipline, connections, and patience to wait for the right opportunities are going to be key going forward.
We remind our readers that this is one of the reasons why Birchstone Investments raises capital on a deal-by-deal basis rather than creating a fund—that way we are never forced to put money to work.
What does 2020 have in store for multifamily real estate in the US?
“California here I go, and Florida or bust”
Projected Net State Migration
As the ETRE report points out, size and growth are two key factors in determining suitable markets for investment. The map above showing five-year net migration projections for every US state. There is predicted to be a net increase in population in most of the states that Birchstone Investments focuses on (Southeastern and Mid-Atlantic states).
Are Californians moving to Florida? Maybe!
Jokes aside, however, this trend could pay major dividends for savvy multifamily investors who target the correct regions.
The housing crisis: “…housing is a mess and getting worse—not better—over time”
As the chart above points out, although there has been a slight uptick in household income relative to consumer prices, cost of construction and home prices have drastically outpaced income. Housing is therefore in short supply and affordable housing is at a crisis point.
Other factors that will affect housing demand
- Millennials; adapting to their financial reality; adults living with their parents, seeking dorm-style co-living spaces, doubling and tripling up in apartments; home ownership being less of a priority
- Boomers; aging population that drives a growing need for Senior Housing; the “Golden Girl” phenomenon, also co-living
- Affordability; if consumers can’t afford to buy, they will have to adapt to renting and cohabitating
- A trend towards “live/work/play” mixed use communities
- Government Policy; Rent Control. Below is a heat map illustrating which states have some sort of rent control. We’re NOT expressing an opinion on rent control as explicitly good or bad. However, we are concerned about rent control and the Law of Supply and Demand interacting to make real estate investing less predictable, as are the authors of the report. As a respite, Birchstone Investments’ target Southeast and Mid-Atlantic states are not currently affected by such policies.
What are the most favorable markets for multifamily real estate in the US?
Finally, survey participants were asked which multifamily real estate by markets they would recommend buying into. Here are their responses:
A fair number of the markets are in our Southeast and Mid-Atlantic States sweet spot. Maybe we’re on to something!
Participants were also asked about what types of assets would be most favorable to real estate investors in 2020. Here are the responses:
Mix it all up and what do you get?
Yes, we are late in the business cycle and there are indicators that point to you-know-what. Capital is being thrown at the real estate market that may lead to critical excess. However, housing has been and still is in short supply, particularly in the moderate-income and workforce housing segments. Government reaction will be a critical factor in the coming years. Home ownership affordability will play a part in maintaining the demand for rentals as Millennials form new households. The National Multifamily Housing Council and the National Apartment Association estimate that 325,000 new units will be needed annually to keep up with demand. Reducing development and operational cost will be vital, otherwise consumers will be forced to adapt in such a way as to reduce demand.
The key to successful multifamily investing will be market knowledge and strategic and judicious selection of opportunities. We at Birchstone Investments would love to partner with you to help you achieve your real estate investing and wealth building goals. If you would like to leverage our strategic investing experience and learn more about investing opportunities, contact us today!