With all the talk about a looming recession — inverted yield curves, slowing factory orders and so on — it’s easy to believe that everybody’s next residence is going to be a highway underpass. But if you’re looking for a real-world indicator of continued economic expansion — and thus a continued real estate boom — look no further than Tampa Bay.
The Gulf Coast of Florida –in fact the entire state — is the canary in the economic coal mine. As early as 2006, unemployment was creeping up in Tampa Bay and by 2007 housing starts all but evaporated. The region was swamped with foreclosures and houses were cheap enough to put on your credit card a year before the rest of the country knew it was in the Great Recession.
But that’s not happening now. Far from it.
Housing Starts … and Doesn’t Stop
Between Tampa, St. Petersburg, Clearwater and the surrounding Census-designated places, there are more than 3.1 million residents, and the demographics are a little surprising.
We tend to think of this area having a huge Cuban influence, but it turns out not to be the case. Certainly, there is a strong Cuban-American community in the area and in the city of Tampa in particular, but there are more families from either Puerto Rico or Mexico. Taken altogether, though, Latinos make up only 11% of the region’s population, just a fraction more than the African-American population. Tampa Bay is a predominantly Caucasian region, but even that apparent lack of diversity is not what it seems. When you think of white Southerners, you might just assume that they’re mainly Republicans and evangelical Christians, but that also turns out not to be the case. The area is roughly split between Republicans and Democrats and, although those who express a religious preference tend to be evangelical, they are far outnumbered by those who decline religious affiliation.
What we do know for a fact about the Tampa Bay population is that it has far more people moving in than it has people moving out. According to City-Data.com, for every two moving vans pulling out of Hillsborough County, three others are pulling in. “Multifamily transaction volume exceeded $2.5 billion in 2018, marking a new cycle peak, as investors are drawn by the region’s solid fundamentals,” according to a recent Yardi Matrix report. “Developers completed 5,187 units in 2018, with an additional 3,660 units expected to come online this year.”
As is the case through much of Florida, tourism has an outsized effect on the local economy. This sector added 5,600 new Tampa Bay jobs, but these are often seasonal, temporary, part-time or just plain dead-end. It’s been said that, to Floridians, the word “ambitious” means working four bartending shifts a week.
In the realm of rental property development, though, this is not bad news. Sure, the churn is high, but that just means that residents have to rent instead of buy, and there is a premium to be had.
“Rents in the working-class Renter-by-Necessity segment rose 4.6% …, while Lifestyle rates were up 2.6%,” Yardi Matrix continues. “Rents have grown rapidly for years due to a combination of below-average rates and above-average economic growth, and that could extend well into the future.”
The new Neighbors
You wouldn’t think of Tampa Bay as a destination for Millennials, and it doesn’t fit the profile. In other posts in this space, you’ll read about the big companies that have headquarters or regional offices in a particular urban area. The biggest corporation based in Tampa is The Mosaic Company. Yes, it sounds high-tech to those of us old enough to use the Mosaic web browser in the mid-1990s, but this Mosaic isn’t that. It mines phosphates and potash to make fertilizer. And that does require a certain amount of technical and creative brainpower, but hardly enough to pack the local Starbucks.
And, while the region’s unemployment rate is slowly notching up, it’s still below 4% while employment — which is measured differently — is also increasing. Even so, the mix of occupations available doesn’t exactly scream for Ph.D.’s in data science. There are indeed computer jobs in Tampa Bay, but not more than the restaurant, retail or customer service jobs. Far more jobs are to be had by landscaping and cleaning crews.
The area, however, is home to the three main campuses of the University of South Florida. USF doesn’t jump out at you as a bastion of technological erudition the way MIT or Stanford or CalTech does, but it’s not that far behind. It’s in the Top 10 among universities worldwide in the number of U.S. patents granted and in the Top 50 among all American universities in terms of research spending. That $1.5 billion lab budget is bound to attract more than a token few of the best and brightest.
And some of them will be entrepreneurs who’d rather form their own startup than wear a corporate ID badge. The biggest success story out of Tampa’s tech community is that it lured WebstaurantStore’s headquarters away from Pennsylvania. By the way, Mosaic wasn’t born in Florida either — Tampa bay poached it from Minnesota. Don’t be surprised if other rustbelt companies follow the sun down to Florida’s Gulf Coast — and bring management, marketing, research and creative jobs with them. It already seems to be happening, as professional and business services comprise the fastest-growing job segments, albeit from a low baseline.
Already, there’s a clear distinction between Tampa Bay’s youthfulness and the prevailing demographic that has earned Florida the nickname “God’s Waiting Room”. The average resident in the metro area is six years younger than the average Floridian. There is just as great a distinction when it comes to academic attainment; locals are far more likely to have a college or graduate degree than others in the Sunshine State.
So Millennials are, coming to Tampa Bay but, candidly, not yet in droves. They have formed several young-professional enclaves which the next wave of arrivals might find attractive.
Youth, but no Fountain
Here’s the true story of Juan Ponce de Leon. He was a Spanish nobleman who chose a life of adventure and served under Christopher Columbus under the famed explorer’s second voyage. Starting in 1508, Ponce de Leon served as Puerto Rico’s first governor, establishing the tradition of corruption and over-the-top drama that persists to this day. But the Columbus family, which resented how much money Ponce de Leon was able to make off this new continent compared to their own more humble fortune, kicked him off the island. He shrugged it off and set sail again. After all, he had a whole new world to explore.
He continued his journey, making landfall in 1513 in a place he named La Florida, where he sought gold and plantation land. His explorations took him very likely from St. Augustine, down around the Keys and up the Gulf Coast perhaps as far as Pensacola. In 1521 he picked a fight with a local tribe known as the Calusa and was killed by a poison-tipped arrow.
Everything else you’ve likely heard about Ponce de Leon is probably garbage. All that stuff about searching for the fountain of youth is not to be found in his expedition’s charter or ship’s logs. It was first recorded more than a decade after Ponce de Leon died and mainly forgotten until somebody decided to fabricate a tourist trap in St. Augustine.
Besides, even the most casual visitor to the Sunshine State knows that, if there is a fountain of youth anywhere in the world, it’s nowhere in Florida. That’s not to say there is no youth there. There are bastions of recent graduates throughout Florida, and around Tampa Bay particularly. But there’s no fountain. The supply of youth needs to be constantly replenished by new transplants.
Upon consulting an array of sources, it appears that these are the most Millennial-friendly neighborhoods in the region:
- Downtown Tampa and the adjacent Channel District, a.k.a. Channelside, are part of Tampa’s urban core, sandwiched between the more established neighborhoods — Hyde Park to the west and Ybor City to the east. These neighborhoods are pricey by local standards, whether for high-rises in Downtown or loft apartments in Channelside, but are close to nightlife and such attractions as the Florida Aquarium.
- Courier City/Oscawana, on the other side of Hyde Park from Downtown, features Howard Avenue, which is packed thick with bars and restaurants.
- Carver City/Lincoln Gardens, in the west end of Tampa, is convenient to — but not on — the beach, and is convenient to Tampa International Airport and Raymond James Stadium, or what Buccaneers fans call “Ray Jay”.
- Historic Ybor, adjacent to Channelside, is considered one of the trendiest neighborhoods in Tampa. It is not to be confused with the three other neighborhoods with “Ybor” in the name.
- Hunter’s Green, a community in the New Tampa area northwest of the urban core, presents a more affordable alternative. It caters to people who want to get in a round of tennis or a few laps in the pool after work.
- Downtown St. Petersburg is just as viable an option as any neighborhood in the more urbane city to the east. It’s right on the beach, has a major arts vibe and is a short jaunt to Tropicana Field for a Rays game. More than 1,200 units are currently under construction there.
All That and More
Of course, these aren’t the only neighborhoods around Tampa Bay that are attracting new residents.
Gandy and Ballast Point are often considered in tandem, despite being separated by a bridge spanning three miles of bay water. Gandy is part of St. Pete and Ballast Point is part of Tampa. Taken together, though, rents rose 7.7% year-over-year, according to Yardi Matrix, the sharpest increase around Tampa Bay. This tends to explain why these two communities also have more units currently under construction than any other submarket.
The Gulfside communities of Palm Harbor and Tarpon Springs, meanwhile, saw 7.5% year-over-year rent rises, despite being tucked away in the northwest corner of the metro area.
The good times for Tampa Bay’s multifamily real estate market won’t last forever, but there doesn’t appear to be any imminent cause for concern.
Tampa Bay at a Glance
- Construction (projected, 2019): 3,660 units, down from 5,187 in 2018; 7,200 units were under construction in March 2019 with another 37,133 in planning or permitting
- Occupancy rate (March 2019): 94.9%, down 40 basis points year-over-year
- Annual rent (March 2019): $1,239, up 3.6% year-over-year with 3.3% growth projected through year-end 2019
Sources: Yardi Matrix
Sharestates Recently Funded Projects in Tampa
Sharestates has been forging new relationships with borrowers in the Tampa metro area and recently funded a few noteworthy projects there. Click the button below to view some recently funded Sharestates projects in the Tampa area!
When you thought of Texas, you didn’t use to think of Austin. If you thought of any city — and you probably didn’t because the most evocative image of Texas is probably an endless, untamed prairie — you thought of Dallas, with its “Big Rich” lords and ladies ruling over thousand-acre ranches. Or maybe you thought of industrious Houston, where West Texas Intermediate crude oil is refined into gasoline, and a control room full of earnest young men in short-sleeved white shirts and horn-rimmed glasses send Apollo spacecraft to the moon. Or maybe you thought of San Antonio, that in the heart of Texas cowtown where Davy Crockett, Jim Bowie and a handful of other bravos held off the entire Mexican army and sacrificed themselves at the Alamo for the cause of Texian independence.
Maybe in fifth grade, you had to remember — just long enough to pass a test — that Austin is the state’s capital. You might have caught a live music show called Austin City Limits, where you might hear Willie Nelson, and Run the Jewels play on the same night. Or more likely not unless you’re a passionate music festival goer. This long-running music festival also aired on television for longer than American Bandstand, but it aired on PBS.
Austin is still the capital. It still has an eclectic music scene. And it still has some of that university-town charm reminiscent of Boulder, Colorado, or Madison, Wisconsin thanks to the University of Texas and its passionate college football fan base. But Austin has outgrown all those convenient labels, and it keeps growing. No wonder the multifamily real estate market is so hot there, and why young out-of-towners are flocking there to find their little corner of this burgeoning city.
From Silicon to Citizen
U.S. News & World Report named Austin the No. 1 place in the U.S. to live two years running. So the secret is out.
Young people often come to town for education — the University of Texas at Austin is considered one of the top IT schools in the country and is certainly one of the greatest educational bargains to be had — but stay because Austin is also where the jobs are.
Many Fortune 500 companies — tech firms, in particular, have regional offices in Austin: Amazon, Cisco, eBay, Google, IBM, Intel, Oracle and PayPal leading the list. General Motors is also a major employer. Two homegrown companies — Whole Foods and Dell — still have worldwide headquarters in the area. Now that Whole Foods is owned by Amazon, maybe we should be including it as just another tech company that found a home in Silicon Hills, as the cluster of high-tech companies in the city is commonly known.
“[T]echnology companies have announced expansions in the metro,” according to Yardi Matrix. “Among them is Apple’s $1 billion, 133-acre development that’s slated to house 15,000 employees once fully operational, as well as WeWork’s rumored $1 billion mixed-use development that’s likely to encompass 3 million square feet of office, residential, hotel, shops and restaurant space.”
The New Neighbors
Millennials are a big part of the story when it comes to Austin’s growing population, but they are not the only drivers. Surprisingly, there’s less than a two-year age difference between the average resident of Texas and the average resident of the state’s capital, according to City-Data.com, which pegs an Austinite as 32.7 years old on average. The much bigger difference is in household income: $66,696 in town compared to a $56,565 statewide median. Austinites are more likely than most other Texans to be employed in management or sales and are twice as likely to be in information technology. They’re also more than twice as likely to have finished four years of college or to have attained a graduate degree. That would go a long way toward explaining why their home prices are also double those of the average Lone Star State tract.
There are other quirks of Austin’s demography. First, its residents are particularly non-religious. Unaffiliated residents far outnumber all denominations combined; this is one of the few cities in the south where there are more Catholics than Evangelicals, and where mainline Protestants have been able to maintain their relatively small numbers. And, for whatever it’s worth, the plurality of Austin residents have never been married. Also, compared to other large American cities, Austin displays a fairly low degree of ethnic diversity. There are relatively few black households; in fact, African-Americans barely exceed Asian-Americans in Austin — not what one might expect from an area that was dotted with thriving, predominantly black “freedom towns” during Reconstruction. Today, though, almost half of all Austin households are white, while roughly one-third are Hispanic.
But there are other kinds of diversity — musical tastes for one. It would be hyperbolic to say the live music scene in Austin is beyond compare, but you’d have to drive 12 hours to find such a talent-heavy and genre-spanning performance space elsewhere. Just follow the signs to Nashville. It should also be noted that Austin has probably the liveliest LGBTQ scene in the mid-South.
Austin does indeed have something for everyone — at least for everyone who defines themselves by their biography rather than their history. During the late 19th century, Austin promoted itself as “the City of the Violet Crown,” at once a commentary on the glowing colors of the hills right after sunset, and a classical reference to the Greek epic poet Pindar’s description of ancient Athens. But these days, the town’s unofficial but universally recognized slogan is “Keep Austin Weird.”
Let’s start with Austin’s biggest draw: its bars. This is no joke: the 78701 ZIP code — comprised of Downtown, North Side, the Medical District, Rainey Street Historic District, the Seaholm District and the eastern portion of the Market District — tops City-Data’s list of ZIP codes with the most alcohol-serving establishments. The post office that serves Austin’s urban core delivers mail to more watering holes than the one that serves New York’s East Village (10003) or New Orleans’s French Quarter (70130) or the next three down the list — which are all in Chicago. This is even more amazing when you consider that Austin’s Downtown — aside from a couple of 700-foot condo towers — is much more commercially zoned than those other neighborhoods, so the resident-to-bar ratio is truly astonishing.
Austin is home to roughly 1 million people — more like 2.2 million if you include the entire Austin-Round Rock metropolitan area. That’s big enough to make it the 11th-largest city in the U.S. Unlike most big cities, though, the current wave of development has more to do with filling in the gaps in the landscape than with changing the center-city skyline.
In 2017, Forbes gave the South River City neighborhood a second-place ranking for “Best Cities and Neighborhoods for Millennials,” which raises the question: Where exactly are they moving in and around Austin?
Neighborhoods.com lists what it considers to be Austin’s five top Millennial magnets:
- East Austin only looks low-rent. It’s one of the pricier neighborhoods, given its proximity to the offices, government buildings, sports arenas and aforementioned bars of the Downtown area. Small, independent businesses — a touchstone of life in Austin — abound in this hipster redoubt.
- Hyde Park, three miles up I-35 from Downtown, maintains a slower pace but shares the city’s penchant for quirky, homegrown businesses.
- South Congress, or SoCo, has developed its own nightlife a half hour’s drive south of downtown. It’s also a bit pricier than some neighborhoods closer to the urban core.
- South Lamar, a less developed, more open neighborhood on the way from Downtown to SoCo, might be the best place to find a bargain apartment.
- Old West is, as the name implies, west of the urban core, just past the UT main campus. Because of some very strict zoning laws, multifamily development is very limited and thus high-occupancy unit rents are sky-high by local standards.
That’s Not All
These neighborhoods, though, are more on the wishlist for new Austin residents than on their realistic home-hunting tours. “The three most active submarkets had a combined confirmed sales volume of $422 million in 2018,” Yardi Matrix reports. “East Central Austin ($182 million), San Marcos/Kyle ($133 million) and Sunset Valley ($107 million).”
Still, growth remains impressive, even if it might be slowing down at this point in the cycle. “Steady hiring in Austin since 2009 has resulted in the creation of more than 300,000 jobs, attracting thousands of new residents over the past several years,” Marcus & Millichap reports”. The positive net in-migration of an average 40,000 individuals during each of the past five years has placed additional strain on the housing market as single-family and multifamily developers have struggled to keep pace with rising demand… New home construction and multifamily deliveries are anticipated to dip during 2019, while strong demand factors remain in place. As a result, vacancy will stay below 6% this year, marking a decade below this threshold.”
Austin at a Glance
- Construction (projected, 2019): 7,500 units, down from a steady 9,000 per year from 2014 to 2018
- Occupancy rate (January 2019): 94.5%, up 60 basis points year-over-year.
- Annual rent (year-end 2018): $1,353, up 4.5% year-over-year; another 2.0% increase projected over the course of 2019
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Sharestates has been forging new relationships with borrowers in the Austin metro area and recently funded a few noteworthy projects there. Click the button below to view some recently funded Sharestates projects in the Austin area!
Dallas might not appear to be the kind of town younger adults would flock to. While there are jobs aplenty, they aren’t always the kind of jobs that appeal to people trying to optimize their career choices. While the cost of living is fairly low, the same could be said, and more strenuously, for Houston or Austin or pretty much anywhere else in Texas.
But appearances deceive. The building boom goes on, the jobs flood in, and the younger workers flood in after them. The art and nightlife scenes surge from one end of the Dallas-Fort Worth metropolitan area to the other, and the construction is literally non-stop.
This town has known booms and busts and, at this moment, the boom is definitely on.
Good place to start
Last year, RealPage reports, Dallas eclipsed its cross-state rival Houston for the distinction of hosting the most new-home construction in America over the course of the current cycle. (You can’t say “nearby rival”. Texas is unbelievably big. In terms of landmass, it’s France with a side of Switzerland.)
Dallas, the financial capital of the Southwest, also hosts major headquarters operations for State Farm, Liberty Mutual, Toyota, JPMorgan Chase, and Fannie Mae.
“The metro remained a national leader in job creation last year, with the addition of 102,500 positions for a 2.6% expansion, 90 basis points above the U.S. figure,” according to Yardi Matrix. “Charles Schwab broke ground on a 70-acre office campus estimated to house some 8,600 employees once completed, while Infosys Ltd.’s tech innovation hub in Richardson is set to hire 500 people by 2020.”
Dallas’ economy continues to expand. As job growth increases, Dallas will benefit from strong (positive) net migration trends. Improvement in the single-family market is a viable threat to the rental market, however, the metro has one of the highest proportions of residents in the prime renter cohort (aged 20-34), which should keep renter demand strong as new residents come to the area.
Over the long term, apartment supply should remain on pace with demand due to favorable demographics driven by Dallas’ healthy economy, strong in-migration trends, and healthy amounts of new supply. Affordable housing and potential oversupply are things to keep track of as they could hinder the metro’s expansion.
Turn of the Millennials
Millennials — and now Generation Z — have picked up the scent. The prime renter cohort population in the Dallas-Fort Worth metro, those ages 20 to 34, is expected to expand by 1.7% through 2023, according to Fannie Mae. A survey reported by the Dallas Morning News names the Dallas-Fort Worth area the third-best American metro — trailing only Houston and Atlanta — by overall value to Millennials.
“Anecdotally, it seems to me that many [of Dallas’s Millennials] would actually rather live in Austin than Big D, if given the choice,” then-28-year-old Eric Webb wrote for the Statesman, Austin’s local paper a couple years back. “There’s something a bit cooler about the land of South by Southwest and breakfast tacos than the home of a highway knot called the ‘mixmaster.’ However, something has drawn a not insignificant number of my fellow twentysomethings up to the northern hinterlands of Interstate 35, and I don’t think it’s Six Flags.” Webb didn’t come up with an answer, just an observation. Perhaps in the time since that story appeared, he read the Moody’s report stating that Dallas offers twice as many technology jobs as Austin, which is a far better-reputed tech hub.
But that only goes so far toward understanding Dallas’s Millennial appeal. There really is a lot going on around Dallas that attracts younger residents. Northwood Hills is known for its Belt Line restaurant row, which is long on good eating and short on pretension, according to Move Matcher. And of course, there’s the walkable hub of Intown, or the nearby artsy bastions of Bryan Place and Deep Ellum. Over in Fort Worth, Magnolia Avenue offers much the same vibe. Still, many Millennials eventually end up in such traditionally suburban areas as Lake Highlands to start families.
Room to the North and West
Dallas was the only market in the nation to land three submarkets in the top 15 for apartment completions during the current cycle,” Kim O’Brien writes in RealPage. “Additionally, two of those submarkets were in the suburbs, quite the feat on a list featuring mostly downtown, urban core areas.” Kim referred specifically to Frisco and Allen/McKinney, which are north of Plano, in addition to Intown. Actually, Intown is starting to lag in comparison with its exurbs, if not in comparison with other urban cores.
Builders are also paying close attention to the so-called Mid-Cities, the population clusters that fill the gap between Dallas and its nearest neighbor (again, Texas is huge) Fort Worth, 30 miles to the west. Mid-Cities submarkets of note for new residents include North Arlington, North Irving, South Irving, Haltom City/Meacham, Hurst/Euless/Bedford, Central Arlington and Northeast Fort Worth/North Richland Hills. While still within the Dallas city limits Bishop Arts District, a major Millennial hub, serves as the gateway to the Mid-Cities.
Wide, Deep Market
“The “value-add” product remains the most sought-after. Because of this hunger and the lack of available properties, deals in the Class B and C sectors have achieved record pricing levels,” according to ARA Newmark’s Brian O’Boyle. “In the last four quarters, the metro basically absorbed all the units that were delivered, but over the next four quarters, I am expecting absorptions to lag slightly behind the deliveries”.
This isn’t necessarily bad news long-term for the multifamily market. Dallas remains one of those towns where it is still measurably cheaper to rent than to pay a mortgage. According to Yardi Matrix, mortgage payments currently account for 20% of aggregate income, while rents account for 17%. So it looks like it will be a long time before the Dallas multifamily market finds itself in retreat. It will, eventually. Boom-bust-boom-bust-boom is just how the Lone Star State rolls. But all indications suggest that Big D is a long way from that tipping point today.
Dallas at a Glance
- Construction (spring 2019 estimate): 28,000 units underway, 33,000 more planned
- Vacancy rate (year-end 2018): 6.5%, rising steadily since 2015 and now exceeding the national average
- Annual rent (year-end 2018): $1,180, up 1.0% year-over-year
Source: Fannie Mae
Sharestates Recently Funded Projects in Dallas
Sharestates has been forging new relationships with borrowers in the Dallas metro area and recently funded a few noteworthy projects there. Click the button below to view some recently funded Sharestates projects in the Dallas area!
The conventional wisdom is that when the Federal Reserve, America’s central bank, cuts its target interest rate, mortgage applications go up. When it raises them, mortgage applications go down.
This makes intuitive sense. Like we all learned on the first day of Economics class, the demand for anything goes up when the price of it goes down, and interest is just the price we pay for money.
But we at Sharestates did a little homework and found that it’s more complicated than that. The fed funds rate is not just a dial to turn up or down the amount of money American households spend on home buying. So if you’re expecting a flood of new demand just because the Fed changed direction recently, you might be underwhelmed by the response.
“Previously, on ‘Squawk Box’ …”
The Fed — specifically the decision-making group of system governors and regional presidents known as the Federal Open Market Committee — decided at the end of July to lower the fed funds rate by 0.25%. What makes that boring little nugget of monetary policy newsworthy is that this followed nine straight rate increases over three years.
The FOMC usually raises — and rarely lowers — interest rates during economic expansions. A slow rise in these rates has the effect of limiting how much money companies and households can borrow. This, in turn, keeps companies and households from spending money they don’t have. That, in turn, keeps a lid on inflation because the fewer dollars that are in circulation, the more each dollar is worth.
But what if the opposite is happening in the economy? What if there’s panic on Wall Street, companies are going bankrupt, millions are losing their jobs and unsold inventory is just sitting on loading docks? Then the FOMC would tend to lower rates so that the money companies and households still have is worth more and, as they spend it, the economy is stimulated and eventually recovers.
That’s exactly what the central bank did in the autumn of 2007 when it got its first hint that something was wrong with the economy, i.e., when sketchy mortgages started to lapse into default. The FOMC announced one rate cut after another until mid-2009 when there was nothing left to cut. The monetary authority took the unprecedented step — unprecedented by Washington, at least, although it’s been done elsewhere — of lowering the fed funds target rate to a range below 0.25%. That is, the rate was essentially zero. It stayed there for around seven years until the FOMC took the hesitant step of raising the target range’s upward limit to 0.5%.
So why now?
The central bankers inched that limit up, a quarter percent at a time until it reached 2.5% early this year. That was a testament to both the strength of this economic cycle and its unprecedented length. We are in the midst — let’s hope it’s the middle and not the end, but who knows? — of the first decade-long economic expansion ever. But it’s still going strong despite its age.
The Fed has two jobs: keep unemployment low and keep inflation low. It’s been doing the first part perhaps too well. The unemployment rate is below what economists call the “natural” rate — that is, the proportion of workers you’d expect to be between jobs even under the best conditions. You could say the U.S. is in a state of labor shortage. Inflation is holding to a narrow band around 2% per year; any less and it would cause a disincentive to invest in anything because you might not be able to get back more money than you paid in.
So why, if everything is going so well, do we need a lower fed funds rate? There are a couple of ways of answering that, but they both come back to the same root cause: politics.
President Donald Trump has publicly scolded Fed Chairman Jay Powell for not making this move earlier, but his reasons are open to interpretation. We’ve heard a lot of theories, from electioneering under the banner of “Dow 30,000” to the positive effects lower rates would have on Trump Organization cash flows. Or it could just be that Mr. Trump believes that, at the present moment, lower interest rates are what’s best for the U.S. economy. Considering the man holds a bachelor’s degree in economics from Wharton, he must know that rate cuts aren’t always indicated, so maybe there’s another, more likely reason.
That reason would have to do with the trade war with China. Lower fed funds rates mean more dollars in the economy, and more dollars means that each dollar loses a little value and thus leads to inflation. A less valuable dollar makes U.S. goods more affordable as exports to other countries.
This trade war was one of the reasons the FOMC cited for making their move in July, suggesting it was a threat to the economy’s continued growth. To be fair, it’s not the only one — the messy divorce between the United Kingdom and the European Union has recession written all over it — but the tensions with China are impossible to ignore.
So you can say that Powell & Co. flat-out caved to pressure from the Oval Office, or you can say that it reacted to an economic reality caused by the administration’s trade policy — a campaign issue that earned Mr. Trump just enough Rust Belt votes to put him over the top in 2016 and which he needs again in 2020 — with a prudent macroeconomic fix. But either way, we have to concede that the root cause of the rate cut was indeed politics.
Still, that doesn’t mean it’s a bad idea. During the expansion of the 1990s — the dot-com boom — the Fed zigzagged three times, cutting the target rate before resuming incremental increases. A lot of people made a lot of money in those years, and the recession that followed was fairly shallow and short-lived. If the Fed is zigging and zagging again, then everything is pretty much as it should be.
If the central bank continues hacking away at the fed funds rate indiscriminately, though, that might make equity investors happy while the good times last but it would call into question the independence of the Fed. All FOMC members are political appointees, and now and then an ideologue or party apparatchik has been nominated and confirmed in the role. But they’ve mostly been tweedy, academic types less comfortable with playing to their bases than with playing with databases. If today’s Fed governors continue to lower rates from here, they might be seen — correctly or not — as having given up the independence from presidential politics that their staggered, 14-year terms provide. Should that happen, then America’s monetary policy could be determined solely by one person whose incentive is to make sure a recession doesn’t happen until after an election, rather than that it comes when it may but do as little damage as possible.
What does this mean for mortgages? Not as much as many think
But we are where we are, and the media is full of commentary about how great this move is for mortgages and, presumably, builders. But we’re not so sure.
Much of this stems from the Mortgage Bankers Association August 7 report that says mortgage application volume rose 5.3% in the week immediately following the Fed action. And we’re not saying that’s not good news. It’s just not overwhelmingly great news either, for several reasons.
The first of those reasons is, it’s only one week. Buying a primary residence is the biggest decision most heads of households make, they tend to be very careful about it and there’s bound to be a flash-to-bang lag. And sure, home buying tends to slow down in August, but not dramatically, not in the first week. According to the Census Bureau, August new home sales actually exceeded those of July in five of the past 18 years.
But while we’re on the topic of seasonality, what we at Sharestates were surprised to learn is that interest rate changes have much less to do with mortgage applications than the annual ritual of summer house-hunting. But we pulled some data together and that’s what it tells us:
Target fed fund rates are precise percentages prior to 2009 and subsequently the upper limit of a range. Sources: Mortgage Bankers Association, Federal Reserve Bank of St. Louis
Careful observers will notice that this chart doesn’t present actual fed funds rates or mortgage originations, but rather the quarter-over-quarter changes in these metrics. They’ll also notice that, with the exception of 2009, when the fed fund rate plunged to near-zero, its quarter-over-quarter change hasn’t provided a significant, observable stimulus to quarter-over-quarter changes in home-buyers’ mortgage apps. And that spike probably had more to do with home prices collapsing after the financial crisis rather than interest rates cratering. Since 2013 — and from 1997 through 2007 — mortgage apps simply went up by a predictable margin every summer and went down by a predictable margin every winter.
Let’s go there for a moment. Those careful observers will also notice that the data only include mortgages taken out to actually buy homes, not to refinance. It’s telling that the MBA’s data saw re-fis rise more than double home-buying mortgage app volumes in that first week of August. Also, let’s remember that the rate cut was rumored for some time, and it’s to be expected that home buyers might have been sitting on the sidelines waiting for the Fed to take action. That the MBA had reported three straight weeks of mortgage app declines in July 2019 — again, during peak home-buying season — supports this interpretation.
One more point to make about why lenders and builders ought not to rely on the Fed for market support: There’s a huge disconnect between the fed funds target rate and what home buyers get charged for their 30-year fixed.
The fed funds rate is what the largest banks charge each other for overnight deposits. It’s a fraction of the prime rate, which is the best rate banks will lend to anyone who isn’t a bank. Mortgages, even though they’re usually the lowest rates individuals will ever see, will still be higher than that, and changes won’t ever be one-to-one proportional. When the fed fund target dropped 0.25%, the conforming mortgage rate dipped only 0.07%. So the incentive for homebuyers to wait on the fed is pretty minimal, especially considering that re-fi is an option, and living in a 700-square-foot condo with three kids is not.
Also, let’s be clear what the MBA is counting in terms of volume: It’s how many billions of dollars worth of mortgages are approved, not how many units are sold. Our analysis for this post didn’t go so far as to determine how changes in fed funds correlate with changes in the number of mortgages as opposed to their aggregate value, but that might be a study for another day.
It’s clear though that if you’re looking for an economic indicator to let you know whether you should be building more multifamily buildings or how many units you should be dividing them into, fed funds really won’t give you those answers.
If you’re looking for good news, though, we’ll leave you with two hopeful notes. First, real wages — hourly pay minus inflation — have been growing since 2015 and seems to be picking up steam. Second, the University of Michigan’s consumer sentiment index has been trending up — not shooting up, but trending up — and it’s in a healthy place. That is, consumers are about as happy now as they were in the mid-1980s, or during Ronald Reagan’s second term or when Nokia began selling the first mass-market cell phone in early 1997.
Also in early 1997: The fed funds target was raised a quarter percent to 5.5%, compared to today’s 2.00-2.25% range. Just sayin’.
From the outside, Charlotte, N.C., might look like a “typical” American city. It tapers out from a central district into neighborhoods, suburbs, exurbs, and countryside. The racial and economic mixes are pretty consistent with the country at large.
But there’s something unique about this city. Once a tiny village with just a half dozen houses, it became the crossroads of the slow-moving traffic across the Piedmont plain and eventually a major industrial city. But the pace was always consistent with the rest of the bucolic South.
And yet, unlike most the rest of Appalachia, it never got left behind for long. While their cousins up in the hills might blame their problems on “elites” along the coasts, Charlotteans went about the hard slog of becoming elite while remaining true to who they are.
When you peel away the layers, then, it becomes clear that Charlotte is not what America is today. If we’re lucky, though, Charlotte is what America someday will be.
And a new generation is betting their future that Charlotte is where the next economic boom will find a home. There are reasons for that.
Charlotte has a lot to build on
Charlotte’s old settlers are — and this isn’t a pejorative — rednecks. It’s what Appalachian-Americans, whose Scots-Irish ancestors arrived in the 1600s and 1700s, often call themselves. At the time their families came over, many Scottish Protestants wore red collars to signify their religious allegiance. When they arrived in America and went about the hard, outdoorsy work of building new communities, the image of a sunburned neck was conflated with the symbol of their choice of church and the American redneck tradition began. The group has had its struggles with poverty, ignorance, and intolerance, but equating all of today’s rednecks with these stereotypes is misguided and unfair.
Charlotte has been a transportation hub almost since its establishment in the mid-1700s. During the Civil War, it was one of the Confederacy’s principal railheads. In the 1960s, it became the birthplace of Henson Airlines which, after a few name changes and rebrandings and mergers and acquisitions, became a part of American Airlines. Charlotte is the carrier’s major southeast U.S. hub to this day.
But what really gave Charlotte an economic head start was an accident of geology. In 1799 — 50 years before the California gold rush — the area around Charlotte was the site of the first major gold find in the United States. Mining companies were formed, business types moved in and the new U.S. Mint opened up a branch office there.
Eventually, the Civil War disrupted the mining and minting businesses and, by the turn of the 20th century, the vein had been nearly tapped out. Still, there was enough of a financial community established there that Charlotte maintained its status as a banking center. Today, Charlotte hosts the world headquarters of Bank of America as well as the East Coast headquarters of California-based Wells Fargo. As such, it is the second-most important banking hub in the United States, surpassed only by New York.
Finance isn’t the only industry to make its home in Charlotte, though. Hardware and building supplies retailer Lowe’s is based there, as are electronics manufacturer Honeywell, steelmaker Nucor, Duke Energy, and many other sizable companies.
Work brings workers, and greater Charlotte’s population keeps growing. Currently, around 860,000 live inside the city limits, and almost one out of every five moved there since 2010. Since 1850, not a decade has gone by without the U.S. Census reporting double-digit growth. If you include the surrounding areas, Mecklenberg County, which contains Charlotte, has well over 1 million residents and the combined statistical area has more than 2 million.
So who are these people who keep moving into town? Where do they come from, and what are their prospects in this ever-expanding metropolis?
Turn of the Millennials
To start with, they’re young.
According to City-Data.com, the average North Carolinian in 38.7 years old but the average Charlottean just turned 34. She — the city is 52% female — manages a household income of $61,017, compared to the statewide median of $50,584. She makes her money in management or sales, and very likely in the finance or insurance industries. She has at least an associate’s degree and probably a bachelor’s. If she expresses a religious preference, it’s evangelical Protestant, but she’s twice as likely to express no persuasion at all. Ethnically, it’s difficult to generalize about a typical Charlottean. White people still comprise the plurality of the population, but black people will soon exceed their numbers if current trends hold. Her marital status is also anyone’s guess. She is slightly more likely to be single, separated, widowed or divorced than she is to be married, so just go up and ask her.
And there is little doubt that, if she moved to Charlotte from out of town, she falls into that generation known to marketers as Millennials. There’s no firm definition of what a Millennial — or “Gen Y’er” or “Echo Boomer” — is, but those born in the years from 1981 to 1996 are generally considered as such. Some of us just refer to them as “grown men and women who’ve been out of school for years and are creeping up on middle age.” Sorry to be so cynical, but the data suggest that Millennials are both more narcissistic and less narcissistic than previous generations and that they are simultaneously less politically engaged and more likely to vote. So, let’s just call them what they are: individuals. Adults. Workers. Earners. People minding their own business, which involves building a career and a family in a town of other people building careers and families.
But there do seem to be a lot of them and, according to a SmartAsset study, many are finding new homes in Charlotte. In one recent year, the city saw a net gain of 11,000 Millennials. That’s more than relocated to any other second-tier city including Seattle, Austin or any other youth-vibe town you can name. According to mortgage processing service Ellie Mae, they account for 38% of new mortgages in Charlotte. That’s not all that big a number, which suggests that maybe they’re choosing to rent. Maybe they owe so much on student loans they have to rent.
So where are they choosing to live?
Pittsburgh-based research firm Niche conducted a study of the top neighborhoods for young professionals in the Charlotte area. They were judged, according to the Charlotte Business Journal, on “access to coffee shops, bars and restaurants, diversity, crime and safety, walkability and cost-of-living grades”.
Top honors went to the Fourth Ward, toward the north end of the urban core, which is a trendy neighborhood known for its pulsating nightlife and mediocre schools. Two out of three residents are in rental units, paying a median $1,454/month in rent. That said, there are actual houses to buy in the Fourth Ward, unlike the rest of the city center. It’s followed by First Ward, a mixed-income zone with rents $300 a month less but, somehow, with better schools.
Those wards are often considered part of the Uptown central business district. The Second Ward is the historic black neighborhood, portions of which have been revitalized with the construction of city and county offices. Its old name was Brooklyn but, for reasons best not to contemplate, Niche just refers to this area as “Uptown,” to distinguish it from the other wards. It’s still on the best-for-Millennials list, though. So is the Third Ward, which is probably what people think about when they say “Uptown”. It’s the core of the Charlotte skyline, where the major hotels and restaurant rows are, as well as the convention center, and Bank of America Stadium is where the Carolina Panthers play.
The rest of the list winds around the outside of the John Belk Freeway. Such communities as Wilmore to the west, Dilworth to the south, Optimist Park to the north and Cherry to the east are also competing for early- to mid-career professionals. Farther east along the Independence Freeway Elizabeth beckons, and Sedgefield waits to be discovered off Interstate 77 to the south.
That’s not all
One need not be a Millennial, though, to have a reason to move to greater Charlotte. But whatever the new arrival’s demography, renting is almost certainly their first step, and quite possibly their next.
“The metro’s addition of 52,000 new residents this year will result in household growth that doubles the national pace,” according to a recent Marcus & Millichap study. “Robust demand will also come from fewer tenants being able to transition to homeownership due to a lack of entry-level homes for sale amid rising interest rates and values. Even as the need for apartments expands, deliveries will ease from last year’s pace, tightening vacancy to its lowest point of this cycle, supporting rent growth.”
What’s bringing them is jobs. “Over the past year, employers in Charlotte added 29,200 positions across the metro,” according to Institutional Property Advisors. “The unemployment rate has continued to compress, falling into the low 3-percent range.” That’s not just below the national average, it’s below what’s healthy. That’s a labor shortage, so people who are looking for work and don’t want to head up north are going to seriously consider the Carolina climate.
The market for rentals in Charlotte is tight now and keeps getting tighter.
Charlotte at a glance
- Construction (projected, 2019): 7,700 units, down from 8,500 units last year but consistent with the five-year trend
- Vacancy rate (projected, year-end 2019): 4.2%, down 50 bps year-over-year
- Annual rent (projected, 2019): $1,166, up 4.7% year-over-year, following up 2018’s 6.9% surge
Sources: Marcus & Millichap
In every country, they make fun of one city; in the U.S. you make fun of Cleveland; in Russia, we make fun of Cleveland. — Yakov Smirnoff
“Want to hear a joke about the construction on I-77?” “Sure.” “Sorry, it’s not finished yet.”
How do you know you if the cell phone you found belongs to one of the Cleveland Browns? It receives texts, takes voicemail and vibrates, but there’s no ring.
Clevelanders have heard it all, but those who call “the Mistake by the Lake” home might be getting the last laugh.
Success is a Habit
It’s often said that success is a habit, but so is failure. So when one takes a look at where Cleveland’s economy has been in years past, it’s easy but lazy to assume that failure is just Cleveland’s default position. Nothing, though, could be further from the truth.
At the turn of the 20th century, Cleveland was at least as important to the toddling automotive industry as Detroit was. A generation earlier, the company that would eventually be split into ExxonMobil and Chevron was founded there by local boy John D. Rockefeller.
The post-World War Two era was especially kind to the city, which at that point had come to measure its civic pride by the thickness of The Plain Dealer’s sports section. Between the Indians’ 1948 World Series victory and the Browns’ glory years of the mid-1940s through mid-1950s, Cleveland became widely known as “the City of Champions”. These were formative years for Don Shula and George Steinbrenner, two native Clevelanders born exactly six months apart in 1930 who grew up to learn a thing or two about winning it all. Don King, who’s met a champ or two, was born in Cleveland the following year. And, for whatever it’s worth, John Heisman — after whom the trophy was named — was at that time the city’s elder statesman of athletic competition.
Getting Back in Successful Habits
Still, there’s no denying that Cleveland has faded more than a little. Over the course of a hundred years, it dropped from the fifth-largest city in the United States to the 52nd-largest — 32nd-largest if you go by metro area. While not the highest-crime indexed American city, the concierge at your Downtown hotel will insist that you take a cab or shuttle van to your restaurant after dark, even if it’s only three blocks away.
The story of Cleveland — at least through the 19th and 20th centuries — is really the story of non-coastal urban America. It rode the tide of industrialization up, then rode it down. In 1978, in the wake of the oil price shocks and the loss of factory work to overseas competitors, Cleveland became the first major city to default on federal loans. By 1983, unemployment there peaked at 13.8%.
That was then. Nobody would ever accuse this city of lunchpails and hardhats of gentrification, but “revitalization” is an often-heard word. In addition to new arenas and stadiums demanded by sports-crazed Clevelanders, the Rock and Roll Hall of Fame opened up there in 1995, adding I.M. Pei’s Modernist flourish to Lake Erie’s shore.
With this renewed sense of energy, Cleveland managed to muddle through the Great Recession of 2007-2009 better than most. Such employers as the Cleveland Clinic, Sherman Williams, KeyCorp and Case Western Reserve University provided a great deal of insulation against the worst of it. Unemployment has been more or less in line with the national average, while roughly one in four jobs there remains within the manufacturing sector. That’s quite a trick.
And it is a trick, not happenstance. Cleveland’s civic leaders have proven to be somewhat better planners than those of many other Midwestern cities. Although data is hard to come by, there’s some anecdotal evidence that Cleveland’s steady-state population of around 380,000 isn’t just in contrast to Detroit’s sharp decline. It’s in part due to it. Cleveland has the reputation of being the city where other Midwesterners move to when their own Rust Belt town goes bust.
Urban vs. Suburban
As noted above, post-war Cleveland’s engine hummed — literally and figuratively — with economic vigor. That led to a mass migration of African Americans to the city and, as was all too common at the time, this led in turn to a mass migration of European Americans out of it. This led to the growth of the suburbs, particularly the towns now known as the “inner ring”.
The dynamic playing out right now in Cleveland is similar to that in other metro areas: The children of the suburbs are finding their way back to the urban core, finding mixed-use zones both more affordable and more naturally liveable.
“The construction of new units and the repurposing of underperforming commercial real estate assets into apartments is helping fulfill tenant demand in the city center,” according to a 2019 Marcus & Millichap report. “Subsequently, some employers like Nationwide Insurance are choosing to transition their suburban locations to downtown spaces.”
The report predicts that, with all this attention on the city center, vacancy rates will creep up there. Meantime, though, suburbs and exurbs can expect occupancy to tighten. Part of the reason is that what’s going on within city limits is mostly rehabbing of Class B and Class C units. If you want a Class A home you can afford, you might have to consider a long commute. According to a Crain’s Business Cleveland article, Orange Village, Shaker Heights and Beachwood have all attracted multifamily and mixed-use development and, subsequently, renters. YardiMatrix notes that Solon is the suburb that seems to be attracting the most multifamily real estate attention today.
Cleveland itself is divided into an east side and a west side by the Cuyahoga River. Long ago, these were two distinct cities: Cleaveland — original spelling — to the east and Ohio City to the west. In 1836, the construction of the Columbus Street Bridge allowed turnpike travelers to bypass Ohio City, essentially windjamming that town’s economic development. This led to riots, gunplay and at least one powder keg explosion, according to historians at Case Western Reserve University. Eventually, Cleveland absorbed Ohio City like a vanishing twin.
The old Ohio City mob would marvel at how little has changed. Most of the new development within the city today is solidly on the east side of the river. Downtown neighborhoods such as Public Square, the Flats and the Warehouse District are attracting investment, as is East 4th Street with its proximity to the Indians’ Progressive Field and the Cavaliers’ Rocket Mortgage Fieldhouse. The Euclid Avenue Corridor is a four-mile-long redevelopment program that extends four miles from the downtown district eastward into University Circle. Between University and Lake Erie lie Cleveland Heights and Glenville, establishing the east rim of the city line as some of the most desirable real estate submarkets in town.
These areas tend to attract more affluent knowledge or creative workers. Even so, both sides of the river are seeing the reemergence of middle-class communities. In fact, Tremont, adjacent to Ohio City, is emerging as one of the most desirable neighborhoods inside the city limits.
But it’s the lakefront that is developing the fastest. The Lake and Shoreway submarkets are looking at year-over-year rent increases of 6.5% to 7%, according to YardiMatrix, boosted by the rehabilitation of waterfront infrastructure.
But with all that building and rebuilding going on, Cleveland remains on whole a particularly affordable place to live. It is so affordable, in fact, that it’s dramatically less expensive to pay a mortgage than to pay rent. And yet people who move to — or move back to — Cleveland gladly pay that premium to a landlord. How long that lasts, though, is a factor of how successful the city proves to be in converting just-passing-through young careerists into multigenerational families.
“Renting is significantly more expensive than owning,” according to Yardi. “Homes in the metro remain among the most affordable in the country. However, the cost of living is escalating, while wage growth remains flat. Cleveland residents are increasingly challenged to find affordable housing, especially since roughly two-thirds of incoming stock is targeting professionals relocating to high-end properties in the area.”
And while it’s true that Cleveland has done a better job than most cities at attracting college graduates, most longtime residents would eagerly trade them all to get LeBron James back.
Cleveland at a Glance
- Construction (projected, 2019): 1,600 units; while a decline from 2018’s 2,000, this would the first time since in the 21st century that more than 1,500 units were delivered in two consecutive years
- Vacancy rate (projected, year-end 2019): 5.8% metro-wide, down 20 bps year-over-year
- Annual rent (projected, 2019): $940, up 3.1% year-over-year
Sources: Marcus & Millichap
To many people along the coasts, Detroit is a bust. One in three Detroiters lives in poverty. Entire blocks are abandoned, and whole neighborhoods go with minimal police protection or even street lighting — the so-called “grayfield”. The only reason you don’t hear more about corruption in Detroit’s City Hall is because of its proximity to Chicago’s. There are only a hundred feet of difference between Detroit’s highest point and it’s lowest, providing the kind of unbounded plain you’d expect tumbleweed to roll across. And to top it off, the weather is awful.
But maybe Detroit has hit its inflection point. True, it’s still losing population, but not like it once was. Almost one out of every four Detroiters left town as a result of the Great Recession; that’s an even higher proportion than moved out during the oil shocks and economic turmoil of the 1970s. But jobs are coming back, despite ongoing restructuring in the city’s emblematic auto industry. While some areas have gone fallow and might just return to nature, the Downtown, Midtown, Corktown, and Lafayette Park sections are just as packed with hipsters as anywhere in Brooklyn or San Jose. And the weather — well, believe what you will about global warming.
Out With The Old
Viewed from the outside, Detroit looks like a fix and flipper’s dream. In 2016, the mean price for an apartment in a five-unit-or-larger building was $304,380. A single-family, detached home went for $68,701 on average. In some Detroit neighborhoods, most of us could buy a house and put it on a credit card.
But things could be worse. And recently had been. In 2012, when the economic recovery proved slow to spread to the upper Rust Belt, something like 1,300 Detroit homes a month were sold, while the average price plunged from around $70,000 to around $56,000. Meanwhile, the city issued just four residential building permits. Not four per month. Four over the entire course of 2012. Construction has come back since — at least permits are in the double digits now. But Detroit still has the lowest ratio of housing starts-to-population of anywhere in America.
Of course, housing price collapses don’t happen in a vacuum. They’re a symptom of a larger economic catastrophe and not the symptom which the population experiences almost immediately. Detroit’s falling residential real estate market stemmed from a rise in both unemployment and crime. Motown’s jobless rate climbed as high as 14%, and its incidence of violent crimes renders it No. 2 to Camden, N.J., on City-Data.com’s least-safe cities list.
The fair question to ask is, “Why would anybody live there?” Originally, it was a key port connecting the Great Lakes with the St. Lawrence Seaway. To this day, it’s the most voluminous point of entry into the United States — yes, that’s right, more traffic comes into Detroit from Windsor, Ontario, in a day than crosses into the States from anywhere along the Mexican border. And as the ancestral home of the American auto industry, the Detroit metropolitan area claims the third-largest local economy in the Midwest, behind Chicago and Minneapolis-St. Paul. There’s plenty of money to be made there, but the time when a shift worker could expect lifetime employment at a middle-class wage is gone, and there are still hundreds of thousands of people who haven’t figured out a Plan B yet. If you do have a job, though, your paycheck goes farther in Detroit than in any other city in the U.S., according to Forbes.
And of course, there’s the cultural scene. It’s famous as a magnet for visual artists and even more famous as a magnet for musicians. While widely associated with Berry Gordy’s studio that produced the Supremes, the Temptations and much of the rest of the 1960s’ soundtrack, Detroit is also an important spot on the rap, jazz, blues, techno and rock maps. Architecturally, there are few cities that compare and UNESCO named Detroit a City of Design, a designation that has so far eluded every other U.S. city.
In With The New
And yet Detroit never cried “uncle”. Yes, the city famously became the largest municipality in America ever to declare bankruptcy; that made headlines in 2013, but less noise was made when it emerged from protection in 2014. While crime remains pervasive in the city as a whole, the urban core is emerging as a safe space. And unemployment, while not quite at the labor-shortage level that has become the national average, has dropped to around 4.7%, seemingly in record time.
That employment isn’t coming from the traditional — that is, automotive — sector. Manufacturing is down to about 12.6% of the city’s jobs. There are more opportunities in education and human services; trade, transportation and utilities; and professional and business services. Construction, while accounting for less than 4% of Detroit jobs, is the fastest-growing segment of the local economy by far at 6.1% year-over-year employment growth.
While Chrysler and General Motors remain major employers in Detroit — Ford not so much — these aren’t where the growth is occurring. Government, health providers, schools, utilities, and the hospitality and gaming industries make up much of the rest of the workforce. The boost in white-collar jobs has come courtesy of Quicken Loans, Compuware, Comerica, Deloitte and the headquarters of Little Caesar’s.
The population is growing — slowly, but at least the needle is pointing the right direction now. More than 7,000 people moved into Detroit in 2017. While this represents a population growth slower than that of the U.S. as a whole, it also represents a reversal of direction for a city that has seen a consistent decline since the 1950s.
“Drawn by the market’s low entry costs and attractive yields, multifamily investors primarily targeted Class B and C assets with a value-add component,” according to Adriana Pop writing in a Yardi Matrix report for winter 2019. “Following the completion of only 306 units last year, deliveries are bound to hit a cycle high in 2019, with 2,730 units expected to come online.”
Right Time, Right Place
As can be claimed by any city, each of Detroit’s neighborhoods has its own distinct personality and its own distinct destiny. While the city is overwhelmingly African-American, there is an enclave of Indians and Pakistanis in Hamtramck, for example, and a recent influx of Mexicans gave rise to the rather hastily named Mexicantown. The Hmong population of the Osborn section was featured in Clint Eastwood’s 2008 film Gran Torino.
“Submarkets recording the strongest rent hikes included Dearborn (up 7.3% to $1,346), which now commands the metro’s highest rents, as well as Detroit–West (up 7.2% to $641) and Holly/White Lake (up 7.0% to $797). Following Dearborn, Bloomfield Hills/Birmingham ($1,306), Detroit–Downtown ($1,297) and Detroit–Midtown ($1,232) also posted some of the highest rates across the metro,” Pop writes for Yardi. “The resurgence of Detroit’s core is bound to prompt developers to bring more multifamily units to the market.”
Downtown and New Center are getting the most attention, but that’s hardly surprising in this age of urban gentrification. We told pretty much the same story about Chicago, Houston and most recently Los Angeles. Even so, it’s important to remember that the Detroit metropolitan area has 4.3 million residents, and the city accounts for only around 700,000 of them. At the moment, the biggest single project in the pipeline is a 613-unit mixed-use community in Clinton Township, referred to by the locals as “up I-94 past the Walmart.” Dearborn, Canton/Plymouth, and Waterford are also active submarkets.
But even the more shopworn areas of Detroit have not been forgotten by policymakers, so ought not to be completely dismissed by investors. Fannie Mae supported two communities with a total of $47 million in refinanced loans for green initiatives, and Detroit is more active than most cities when it comes to subsidizing affordable units.
“To avoid the massive displacement of renters as low-income housing tax credits expire through 2023,” according to the Yardi study, “the city council has approved nonprofit Detroit Local Initiatives Support Corp. as manager of its $250 million Affordable Housing Leverage Fund, set up with the purpose of preserving 10,000 existing affordable housing units and creating an additional 2,000 units.”
A lot of the action, then, is at the low end. The Yardi report, which tends to focus on Class A, B, and C stock, makes note of Detroit’s C- and even D units. Even so, there is a high end emerging in both the city core and the exurbs. The draw for investors is that Detroit’s high end has as low a barrier for entry as you can find in a major American city.
Detroit at a Glance
- Average monthly rent (projected, year-end 2019): $1,015, up 3.8% year-over-year
- Vacancy rate (projected, year-end 2019): 3.6%, up 30 bps year-over-year
- Annual multifamily transaction value (10-year average): $328.1 million
- Homeownership rate: 70.0%
Los Angeles County is a trapezoidal expanse of arid land stretching from an ocean of salt water to an ocean of sand and rock, punctuated by unscalable mountain peaks and towering canopies of ancient woods. Water has always been precious there, and the land is becoming just as scarce. It’s absurd that more than 10 million people live in Los Angeles County, but the weather is just so nice!
As big as this county is — and it’s bigger than the two smallest states combined — only a portion of it has places where people actually want to live, and those communities are rapidly getting built out. (In case you’re wondering, the combined population of Rhode Island and Delaware is 2 million.)
“Buying a home has become out-of-reach for three-quarters of LA County residents,” according to YardiMatrix, citing the California Association of Realtors. “As home values climb faster than wages, many would-be homeowners turn into long-term renters.”
So that leaves builders struggling to keep up with demand. They were winning the race for a couple of years, and the rental market did soften for a while. But it might be heating up again, as the 10,000-unit-per-year construction sprint proved not only sustainable but actually insufficient. According to Marcus & Millichap, 2019 deliveries could beat 2018’s by over 50%.
The winter 2019 Yardi report points to what it calls a “landlord’s market” triggered by the county’s job growth causing new residents to flood in. “Despite a surge in rental construction, the average occupancy rate has remained high, at 96.6% as of October,” the study says.
If that’s true, it’s bound to get even tighter from here. When compared to the U.S. economy as a whole, Los Angeles County is actually something of a laggard. In good times or bad, any region would brag about having 1.4% more jobs than it had a year ago, but LA’s figure stands far below the national average of 2.0%. Similarly, a 4.8% unemployment rate is not in the least unhealthy, but the American norm comes in at 3.7%. So it would appear that the Angeleno job market still has room to grow and, thus, so do Angeleno rents.
Even though L.A. job growth is slower than the U.S. average, the rents are significantly higher: $2,178 versus $1,419. The county is so choked with potential tenants that Yardi subdivides them into two classes: “lifestyle” renters as opposed to “renters-by-necessity”. The former, comprised mainly of retirees, have the wherewithal to buy a house but choose not to. The rest — young professionals, blue-collar workers, the military — don’t have much of a choice financially.
These correspond, more or less, to the distinction in housing stock between Class A and Classes B and C. It’s telling, then, that the deeper you go into the alphabet, the more rapidly rents are rising. This is reflected in acquisition yields, which start at 4% for Class A and rise to 6% for Class C.
Los Angeles has famously been called “72 suburbs in search of a city.” That barb has stung Angelenos for almost a century now, but it only hurts because it’s true. Further, each of these communities has got its own housing market dynamics. Average rents range from Lancaster’s $1,294 to Century City’s $6,611.
We won’t go all the way through the list, but some high points jump out. First, L.A. seems to have found the city it’s been searching for. More than 5,000 units are under construction in Downtown Los Angeles, making it the hub for residential development in the area. It’s followed by East Hollywood and Hyde Park, then the communities along its 70 miles of oceanfront.
Much of that oceanfront development is toward the southern end of the county. “Expansions by defense and aerospace-related firms enhance the appeal of cities south of LAX Airport,” Marcus & Millichap report. “To the north of the airport, smaller Class C assets trading at high-2 to low-3 percent initial yields steer deal flow.”
Such neighborhoods as Hyde Park and Ladera are seeing some of the highest rent increases, approaching 10% in both of those submarkets — stretching the definition of what passes for affordable living in L.A. Canoga Park, tucked away in the San Fernando Valley to the north, saw more than $500 million in transaction value in 2018, more than any other L.A. County community outside Downtown L.A.
Beyond the Valley sits Santa Clarita, a community of 200,000 that really has very little to do with the mega-city to the south. This edge city has its own identity and its own economy, which includes $434 million in 2018 real estate transaction value.
Children of the early 1990s might be wondering about the nation’s most famous ZIP code: Beverly Hills 90210. Turns out, almost half of Beverly Hills rents — funny how we never saw an apartment building on the show. Along with neighboring Westwood and Bel Air, it continues to see higher rents every year.
The Other Half
All the neighborhoods mentioned so far have one thing in common: They’re all on the same side of a very real line that bisects the county into a desirable western section and a struggling eastern section. The line starts at the northern county limit, following Interstate 5 around the eastern edge of Downtown L.A., then following Interstate 110 to the southern county limit.
But just because Hollywood’s rich and famous ignore that half of the county doesn’t mean multifamily housing developers do — or that they’re not finding investors to back these plays. Certainly far more money is being poured into the luxury markets west of the interstates — perhaps too much, considering how occupancy rates are declining — but there are still plenty of opportunities in places that few others are focused on.
In addition to opportunities in the aforementioned San Fernando Valley, “buyers seeking upside-producing opportunities in areas of tight vacancy eye listings in … cities north of Route 60,” according to a Marcus & Millichap report. “Here, the 1960s- to 1980s-built Class C properties provide investors with low-3 to mid-4 percent first-year yields.”
Route 60 starts in the economically disadvantaged neighborhoods of East Los Angeles and runs east into San Bernardino County. These communities include Monterey Park, West Covina and the university town of Pasadena.
But east, west, north or south, there is more nuance to Los Angeles County than there is to most states. From the beachfront to the mountains to the forests beyond, this is the most populous non-state municipality in America, and it defies easy pigeonholing. It could easily spin off a Santa Clarita County, a Palmdale-Lancaster County and a Long Beach County, each of which would be a major population center. So even in the worst of times, there’s bound to be some interesting investment case in this multifamily real estate market. And these are anything but the worst of times.
Los Angeles at a Glance
- Average monthly rent: $2,350/month, up 4.0% year-over-year
- Vacancy rate: 3.9% and rising
- New units (projection): 14,800 in 2019, compared with 9,700 in 2018
Regular readers of this space are already aware of opportunity zones — the specific tracts of land throughout the United States in which the federal government offers tax incentives to invest. But it’s worth taking another moment to understand exactly where these tracts are, which benefits the tax man is offering and what the potential downside could be.
As for where they are, they’re all over. They’re urban and rural, in states and territories. There are more than 8,700 separate opportunity zones, and they comprise roughly 11% of the U.S. land mass.
Opportunity zones were created as part of the Tax Cuts and Jobs Act of 2017, and their establishment was the one part of the tax reform package which garnered the most bipartisan support.
By definition OZs are, according to the Internal Revenue Service, “economically-distressed”. But there’s distressed and there’s distressed. You’ll find blighted inner-city neighborhoods as well as underdeveloped swaths of isolated Rustbelt towns. You’ll also find plenty of Indian reservations, which are among the poorest ZIP codes in America. But you’ll also find a slice of midtown Manhattan. It’s in the 50s west of 10th Avenue. Sure, that area is still referred to as “Hell’s Kitchen,” but now it’s more well known as the neighborhood southwest of the Trump International Hotel and Tower. I don’t know how many other opportunity zones have both BMW and Mercedes-Benz dealerships, but that one has them both — plus Audi. But regardless of what legislative alchemy went into defining “economically-distressed,” the Community Development Financial Institutions Fund now administers the Opportunity zone program as a fully constituted agency of the U.S. Treasury Department, and savvy investors are looking for ways to leverage the tax breaks afforded by this new initiative.
Pluses and Minuses
To start with, all investments must be made through a qualified opportunity fund — you can’t just pour money into a project located in an opportunity zone and expect to realize any tax advantage. Also, the tax benefit isn’t for everyone, but rather it’s geared to those reporting capital gains. You have 180 days from the time you realize those gains to find a QOF in which to invest. While individuals and businesses realize capital gains every day of the year, in some cases you don’t know if you’re reporting a net capital gain or net capital loss until you do your taxes. In those cases, you have 180 days from December 31 of the filing year, so don’t be surprised if there’s a gold rush to park money in QOFs in June.
There are three main benefits of deploying your capital gains toward QOFs. The first is that you can defer paying those taxes for seven years. Next, there’s an opportunity to reduce the taxable amount of the capital gain. Say you came into a net $100,000 from the sale of stock and you funnel it into a QOF. If you keep it there for those seven years, then you won’t be taxed on 15% of the gain. So, when the tax bill finally comes due, you’ll have to pay taxes on $85,000 rather than $100,000. If you can only keep your money there for five years, then the taxable amount is reduced by just 10% and you’ll be taxed on the other $90,000.
Lastly, as an incentive to lock your money into the project, any gains you make from selling your interest in the QOF are tax-exempt providing you stay in it for at least 10 years. But there are potential downsides. First, there is the opportunity cost. Money invested in QOFs is money that could be invested in other tax shields, such as the New Markets Tax Credit, which might sunset at the end of this year — or be renewed indefinitely; nobody really knows.
And let’s be real: Tax treatment is only one element of what constitutes a good investment, and it’s usually not the only one. Presuming you would still want to invest your capital gains in multifamily real estate, you might prefer to go with some Class A high-rise that doesn’t need tax incentives to make it an attractive project.
Another consideration to weigh is liquidity. You can’t, generally speaking, have both the tax deferral and periodic cash distributions. The QOF can get around this by refinancing the underlying investment and sending that freed-up cash the investors’ way, but it might be best to only put in money that you don’t need to see for 10 years.
Some investors might have been sitting on the sidelines the past few months, wondering which would come first: Treasury’s long-awaited update to its guidance governing OZ investing, or the 180th day after December 31, 2018, when the window will close for finding homes for a lot of net capital gains. The guidelines won the race April 17, so we’ll see what happens now.
It specifies that a QOF could own multiple assets and sell off individual properties in its portfolio. Additionally, “the guidance makes it easier for funds to ensure compliance with the requirement that a fund has 90 percent of its assets invested in Opportunity Zones and expands the working capital safe harbors,” according to a Treasury press release. “The proposed regulations also provide clarity on treatment of gains on long-term investments, ownership and operation of the business, and what constitutes Qualified Opportunity Zone Business Property.”
Facts About the new Opportunity Zone Guidelines
- Investments can only be made via qualified opportunity funds, partnerships or corporations set up specifically for investing in eligible properties located in OZs. LLCs are permitted.
- The bar to establishing a QOF is not high. It involves self-certifying by filing Form 8996 with the IRS.
- A taxpayer can transfer property other than cash as an investment to a QOF, but might not be able to take advantage of all tax incentives.
- A list of qualified opportunity zones can be found here.
- A map of qualified OZs can be found here. (Go to the Layers icon on the menu along the right side of the screen, select “Qualified Opportunity Zone Tract,” deselect all other options and zoom in to your region of interest. Opportunity zones will be shaded in blue.)
If there’s one borough of New York City that is often associated with urban blight, it’s probably the Bronx. In recent years, however, it’s become another striking example of urban renewal in the United Stands. Real estate prices continue to rise, albeit with slowing velocity, throughout the city, and throughout the country, for that matter. But the Bronx, starting from a lower baseline than the other boroughs, seems to be maintaining its stride. There’s a lot going on up there in the only borough on the U.S. mainland, and there’s a lot more likely to happen in its multifamily real estate market in the years to come.
Proximity and Paradox
A combination of four East River bridges and tunnels connect Manhattan to Brooklyn, and another five connect to Queens. But there are 11 spans over the Harlem River that cross between Manhattan and the Bronx, and some of them are shorter than a football field. And yet it’s a world away. The two counties separated by such a thin ribbon of water have almost the same population, yet the Bronx’s average household income is literally half that of Manhattan, and average monthly rents are little more than one-third.
When most people think of the Bronx, they think of the South Bronx. That’s the area closest to Manhattan, it’s where the Yankees play and it’s where local TV crime reporters have become part of the streetscape. Its grittiness has been showcased by film makers and authors including Spike Lee and Tom Wolfe to name a few. But reality is less clearly delineated than film or literature, and the South Bronx is far more complex. The “South Bronx” has become a metonym for “the blighted areas of the Bronx” rather than a specific geographic region — like “Wall Street” refers to the New York financial industry more often that it refers to a specific stretch of pavement in lower Manhattan. It’s hard to name a part of the South Bronx that isn’t dealing with some form of socio-economic issues. Nonetheless, it is exactly those issues that make the region ripe for renewal, and builders have not been shy about moving their equipment along the riverfront. In fact, 27% of New York City’s approved permits for the first half of 2018, the latest statistics available, were in the Bronx, and mainly in exactly those neighborhoods that the 21st century economy — and about half the 20th century economy — left behind.
“The building boom is especially prevalent along the South Bronx waterfront,” according to reporter Devin Gannon at 6sqft. “The neighborhood of Melrose ranked third, just under Long Island City and East New York, for the most authorized permits” from July 2017 to July 2018. The New York Post concurs. “The southwestern edge of the Bronx is getting ready for a skyline-shifting series of commercial redevelopments,” according to real estate writer Lois Weiss. “Dotting the bottom of the borough — along the narrow Bronx Kill channel between the Bronx and Randall’s Island and running east into the Port Morris area — are notable conversions.”
Beyond the 6 o’clock News
When people say “the South Bronx,” they really ignore much of the area east of the Bronx River. True, Parkchester, Clason Point and adjacent areas face the same struggles as their neighbors to the west and are little better off financially. Still, such perfectly viable communities as Pelham Bay, Throgs Neck, Schuylerville and Country Club thrive as middle or mixed-income neighborhoods.
Meanwhile, prosperous neighborhoods spread out north of Pelham Parkway. East of the river, City Island stands out as a redoubt of marinas and antique shops. Nearby Co-Op City is hard to miss: Its 35 high-rise multifamily structures rise above surrounding Baychester and comprise the largest single residential development in the country. Deliberately middle-class, Co-Op City residents must have no felony convictions, a credit score of at least 650 and an annual household income in the range of $25,000 to $156,000.
West of the river, the North Bronx has neighborhoods which skew even further upscale. Kingsbridge and Riverdale offer particularly attractive addresses, as does Marble Hill, which is technically part of Manhattan. It used to be unquestionably part of Manhattan, but then public works projects in 1895 and 1914 disconnected it from the rest of the island and reconnected it to the mainland, respectively. So it’s more or less part of the Bronx, but falls under the authority of New York County rather than Bronx County.
Room to Rent
Of all the places in the United States with populations exceeding 50,000, the Bronx has the highest percentage of renters. And yet, the Bronx continues to fly under a lot of radars. A recent Marcus & Millichap brief on the New York multifamily market doesn’t even mention the borough. The New York-centric Ariel Property Advisors, though, takes a more locals-only view. According to its January 2019 report, more than $2 billion were invested in new development in the Bronx last year, more than half of it in those South Bronx neighborhoods that are in the most desperate need. “The multifamily asset class once again served as the driving force for the Bronx investment sales market, totaling 59% of the borough’s dollar volume and 56% of the transaction volume in 2018,” according to the Ariel report.”[T]he Bronx multifamily market posted 176 transactions that took place in 2018, representing a 19% increase year-over-year. Property volume followed the upward trend due to multiple portfolios trading hands, for a total of 288 buildings sold, which correlates to a 33% increase since the prior year.”
The report notes that much of this new construction is concentrated in the South Bronx neighborhoods of Mott Haven and Longwood, as well as the less well-heeled sections of the Northwest Bronx: Fordham, Norwood and Belmont. Much of this is directed at providing affordable housing, which we discussed in our article on Queens. While Ariel strikes a tentative note that the City Hall’s emphasis on this market could represent “headwinds” for real estate investors, their report concedes that almost 35,000 new affordable units were built in the Bronx between 2014 and 2018, and that this is on track with Mayor Bill De Blasio’s goals.
Bronx at a Glance
- Average monthly rent: $1,694 and steady
- Average multifamily unit sales price: $185,436, up 5.6% year-over-year
- Multifamily cap rate: 4.94% and steady
- Multifamily gross rent multiplier: 12.08, up 1.6% year-over-year