5 Real Estate Trends You Should Be Watching
The last decade has been a wild time for real estate. Since the bubble burst and the housing market brought the nation’s economy to its knees, we’ve seen steady growth and historic price increases. For the past three years, people have been waiting for the market to plateau, but buyers and sellers have had other ideas.
Things can’t continue at the current pace. You don’t have to be a real estate insider to see that development, pricing and national median income aren’t matching up in a way that’s sustainable. Because something has to give, we’ve reached the point where everyone with a mouth has cooked up a theory on what will happen to the housing market next. But, like I said, people have been guessing wrong for quite a while already.
I’m not in the prediction business, so don’t ask me what’s going to happen or when. Instead of dealing in big, vague questions, I prefer to look at the smaller, easily defined details. I can’t pinpoint when the market will surge and exactly what the catalyst will be, but I can look at changing numbers to get a better idea of which factors have the biggest impact on real estate. If you want to buy or sell, start studying the data and stop trying to guess when the next catastrophic market shift will come.
Of the many housing trends, I’m keeping a close watch on these five. In 2019 and the subsequent years, I think these issues will play a big part in whatever ends up happening with the real estate market.
1. Different Demographics, Different Needs
We can argue all day about the causes of demographic shifts and why the housing market seems different with millennials at the helm. Whether it’s an uninspired workforce or an economy that has left young people in the lurch, the fact remains that Americans rent more and house hunt differently than they used to.
It’s sort of a chicken versus the egg situation: there’s more money to be made on multi-unit rental properties because that stands as a bigger need, and yet more people have to rent because housing prices have soared in response to more owners using properties as rentals. Are we to blame the renters or the rentees, and does placing blame actually help? This situation becomes even more pronounced when you factor in city growth, shifting job markets and prospects for development.
All of this puts us in a position of needing extra rental properties while worrying about the price of single-family homes and trying to figure out when today’s tenants will become tomorrow’s homeowners. For the past few years, the economics of this situation has been fine; home prices continue to rise, consumers continue to rent, and the market surge has outlasted what many predicted. Meanwhile, an affordability crisis has loomed large for quite some time and won’t go away until something changes.
This doesn’t really affect the incentive to invest in real estate. You’re in great shape if you own property and, if you have the money, you should be looking to buy. What does change is how you think about the future of that investment.
While some people flock to rented homes and apartments because of cost issues, it also has a lot to do with lifestyle. People travel more for work, bounce between jobs with more frequency, and seek increased flexibility. Saving up for a house - even if it’s a beautiful home in a great area - won’t get prioritized over the freedom that so many people are currently seeking. This is partially because of the soaring cost of housing, but it’s also partly to blame for the changing market.
Because of these factors, investors have to think long and hard about who they might sell or rent to. In urban areas, condos and lofts have a chance of drawing younger buyers, whereas a little place on the outskirts of town probably won’t be as appealing as a central rental. Meanwhile, rural real estate makes a lot of sense for the right investor. The property can cost much less and the return can be much higher - you just have to have access to people you can rent or sell to, and the local markets and economy will have a lot to say about that.
The best investment isn’t simply the best house in the best area. You can pay a premium for a place that will be hard to rent and even harder to resell. As important as it may be to buy a good property, you have to put just as much thought into who might live there and what motivates that person to buy or rent. Don’t treat real estate as a zero-sum game.
2. Slowing Growth
There are two big problems facing large housing markets across the U.S.:
These problems have arisen in the past, but not with as direct a connection as we see today. With a population over 300 million and an average population increase close to 3.5 million annually, the availability of land presents a conundrum with no easy solution. Normal price increases are exaggerated by this issue, prompting higher demand and sometimes egregious markups.
When you consider these issues, it’s no wonder that development has plummeted in a few places. Builders also contend with an endless permitting process and all sorts committees and city council members that try to slow projects for any number of reasons. In short, a newly built home, especially near cities and in suburbs, is a hard thing to find.
A slowdown in building does nothing to change need in the housing market. Population growth ebbs and flows, but it doesn’t taper off just because fewer homes are being built. If people want single-family homes and they aren’t readily available, the market will find ways to compensate. How you incorporate that into your investing depends on where you are and what you’re looking for.
For example, loads of commercial properties formerly used for retail are being converted into housing in urban areas. As the old American mall gradually becomes extinct, city planners see opportunities to salvage some of the storefronts by adding apartments and condos to the already developed acreage. I imagine you don’t have the funds to buy an entire mall, but that doesn’t mean you can’t follow a similar model for creating a multi-unit rental out of an existing commercial space.
We also know that new homes are being marketed to higher bidders and those with cash on hand. If you’re looking at real estate as an investment vehicle, flipping houses remains a very solid option – but only if you know who your potential buyers are. The current climate doesn’t leave much room for an affordable flip, as much as you might want to create a nice middle-class living space. Until we see a rise in development, new homes in urban areas and suburbs will continue to cost a pretty penny.
3. The Suburban Shift
Speaking of suburbs, those neighborhoods are in the midst of a vast overhaul. What once served as family living outside the city limits now functions, more or less, as an entirely new city. These changes affect retail, transportation and housing substantially.
Our on-demand economy, with delivery everything, has altered which amenities suburbanites find most important. Items from the old suburban checklist included:
● School district
● Freeway access
● Shopping centers
While those priorities haven’t disappeared, they’ve been joined and occasionally replaced by different conveniences, such as:
● Outdoor recreation
● Local industry
Whether neighborhoods become absorbed by nearby cities or transform into self-sustaining towns, it’s clear that people living in these areas have greater needs than houses with yards and 2-car garages. This presents all sorts of opportunities and challenges on the real estate end.
On the plus side, people from all walks of life become potential shoppers in the suburban market. Business owners are also more drawn to these locations than they used to be, with a more diverse clientele walking the suburban streets. The need for rental properties, residential and commercial, has led to a variety of options for anyone interested in providing a space for tenants. People who could never afford to buy in a suburban market can now consider renting there, which adds to the diversification of local business.
Less positive is what this does for those with a modest income looking to buy a house. Once upon a time, people could get a nice home at a fair cost and then head into the city for work. The jobs have started moving closer to the suburbs, but the affordable houses have started moving further away.
Suburban housing is adapting the way urban development had to in the past, but without an existing commercial infrastructure to work around. In order to make good on a real estate investment in the suburbs, you might have to update your thinking about who lives in these neighborhoods and what those people want and need from their properties.
4. Pressure on Landlords to Deliver
We’ve all seen property listings that don’t seem to merit the high price tags they come with. Apartments and houses get by on location alone, forcing people to pay top dollar for a place in need of serious work. As the buyers change and the locations become harder to find, the pressure to deliver a good rental has ticked up as well.
I’m not saying landlords are having trouble finding tenants; the market is tight enough that many property owners have no motivation to clean up a rental before putting it on the market and watching applications pour in. However, because more millennials and empty nesters are entering the renters market, more complexes - like the aforementioned converted shopping malls - keep popping up. As state-of-the-art facilities open their doors in suburban areas, people renting out fourplexes have to take steps to remain competitive.
In some cases, landlords can just take on more of the cost and hope cheaper rent keeps residents in place. When it comes to high-end rentals looking for high-end renters, location and price might not be enough. Parking, utilities and on-site amenities become much bigger deals than they were when apartments were just temporary lodging for people planning to buy a house.
We’re starting to see upgrades in security systems, connectivity and utility efficiency. Some rentals have solar panels, others come with smart thermostats, others have water-saving attachments in every room with plumbing. Does it cost a lot to make these improvements? It most certainly does, but that’s the name of the game. You can’t really expect to make good money in real estate if you’re trying to cut corners.
Even if you don’t intend to handle the day-to-day maintenance and upgrades of a building, you have to consider those factors when making a purchase. Work with a contractor who can help you envision upgrades and changes, then do a little research to see what features local tenants seem to be most taken with. You might maximize capital in the early going by offering the bare minimum, but focusing on renter needs will make a big difference in the long term.
5. Effects of the Commercial Shift
We’re seeing a huge shift in the buying and selling of goods. If it can be bought, it can be delivered directly to your home, and that’s having a monumental impact on how we use commercial space.
For starters, the warehouse has essentially become the new storefront. Since you do your shopping online, you don’t need access to as many boutiques along the main drag in your town. As long as you can get on your computer, see a picture of what you want and the words “in stock,” you’ve had a successful, modern shopping experience.
In addition to driving up the value of large lots and big storage facilities (a very worthy real estate investment if you have the cash), this new trend has a far-reaching effect on both residential and small commercial properties. As more retail stores close, small offices move closer to residential areas due to the decline in foot traffic. We’ve also seen an increase in versatile commercial spaces, providing adaptable facilities that offer more than just cubicle-friendly square footage.
Most of all, more people can choose to live in an area they like without worrying about the distance from home to the office. The remote workforce continues to pick up steam, and with retail giants consolidating into larger warehouses with fewer stores, the web of employees across the country has shriveled a bit. This causes a downturn in some real estate markets as stores and factories close; in other cities and states, rural properties are selling a little more quickly. Some states, like Vermont, have experimented with tax incentives for remote workers willing to move and establish residency.
Industry will forever play a deciding role in the housing availability and prices within a given area, but that role has changed noticeably over the last decade. While employment opportunities might dictate the type of person likely to move to a certain city, the type of home they’ll choose is a bigger question mark than in years past, as is the permanence of their stay. As we watch automation and innovation mold the labor force, it’s important to recognize the consequences that will have on housing and commercial properties.
Parts of this post may sound bleak or dire, so I want to stress that I feel very positive about real estate in general. Times and property values are changing, but that has always been the case. Investments that might have made you rich a decade ago could fall flat today, but that only means a different opportunity awaits.
Prices and availability could have you hesitant to buy, and I won’t try to talk you out of being patient and smart with your money. However, as long as you take the current climate into account and look to meet the modern buyer’s needs, you should be able to put your money to good use.