There is a lot of hype around blockchain technology, so it’s nothing new to see an article that plays on that hype. What is interesting, however, is when you see decentralized real estate predictions like the one made by Garratt Hasenstab, a real estate developer, in a recent Forbes article.
Hasenstab made this prediction in 2018, but he still stands by it. In his words, “by 2025, the majority of global real estate investments will be issued as tokenized asset offerings (TAOs) and held as cryptoassets, specifically security tokens, just like traditional securities but traded peer-to-peer without financial intermediaries.”
That’s a pretty bold statement. But could that happen?
Introduction to Decentralized Finance
There’s no doubt that blockchain technology, and distributed ledger technology, is changing the world of finance. Some big companies are investing billions of dollars into development in this nascent new field. According to PwC, blockchain technology is only of moderate importance to the real estate industry in 2019. Of 13 technologies identified as disruptors this year, it’s ranked 12th in terms of importance.
Still, six years is a long time. A lot can happen between now and 2025. And new technologies have a way of advancing rapidly once they catch on. For that reason, I’d say real estate investors and real estate developers alike should start performing some due diligence today on how blockchain technology can change the way they do business.
One area where there is huge potential is in what they call decentralized finance. It’s the buzzword of the year and simply refers to using blockchain technology to deliver peer-to-peer transactions more efficiently.
State of the Dapps (decentralized applications) lists more than 50 dapps in the property category. DeFi Rate states that the total locked value of assets in decentralized finance has gone from $0 to $513 million in the last year. That’s some stellar growth.
Decentralized Real Estate Investing
While there is good evidence to believe that the future of real estate investing will involve decentralized finance and blockchain technology, the future hasn’t arrived yet. At the heart of decentralized real estate investing is the peer-to-peer business model, or what has come to be called marketplace lending. It’s taken a decade to solidify the business model and maintain the respectability of the traditional investment sector, but online real estate investing has become its own asset class. If blockchain technology is the future, it will be because platforms like Sharestates formed the backbone that made it possible.
For developers, the benefit to marketplace lending is you can get access to much-needed capital from funding sources not traditionally available to you. When you can’t get a bank loan, equity or debt financing is available from accredited investors willing and able to move your project forward.
For investors, marketplace lending offers higher returns on short-term investments that have been fully vetted by the platform. You spend less time on due diligence and more time managing your investments.
Marketplace lending isn’t going anywhere any time soon. Blockchain technology may improve the efficiency of the markets, but until it fully takes root, you might as well spend your time pursuing the deals where the deals are being made. And right now, that’s on marketplace lending platforms like Sharestates.
PwC recently published a report that looks at emerging trends in real estate in the U.S. and Canada. Included in that report is a list of the top five markets to watch in 2020. Here they are in a nutshell:
- Austin, Texas
- Raleigh-Durham, North Carolina
- Nashville, Tennessee
- Charlotte, North Carolina
- Boston, Massachusetts
Nevermind that four of these five are in the south, and two of them are in North Carolina. What do these five markets reveal about real estate development going into 2020?
What to Real Estate Developers Should Know For Next Year
From Austin to Boston, real estate developers have a wide diversity of opportunities going into 2020.
High Investor Demand
Austin rose from sixth place in 2019 to first place for 2020. What’s so special about this Texas capital? Better yet, what can real estate developers learn about this potential hot market?
There is a lot of investor demand in Austin. What that means is, there is plenty of potential for development. But people in Austin are different than other places (what would you expect from the slogan “Keep Austin Weird”). There is a lot of expansion taking place in Austin and real estate developers should see it as a market rife with opportunity.
Suburban Office, Multifamily, and Technology
Raleigh-Durham is not what you think about when you think about the technology sector. However, there are now more than 89,000 tech jobs in this metro area. For that reason, developers should see it as the Eastern seaboard’s Silicon Valley. That spells opportunity.
The homebuilding trend seems to be multifamily. That could be because of the local colleges. It is home to Duke University, the University of North Carolina, and North Carolina State University. There is also a lot of suburban office opportunities as the business sector continues to grow.
The Slowing Pace of Homebuilding
While Nashville moved from first to fourth place in homebuilding outlook, it isn’t all bleak for this 18-hour city. The homebuilding market may be cooling, but it’s not dead. And, because the city moved up to third from fifth in overall real estate, there is still plenty of development taking place in other sectors. While home sales are slowing, real estate values are increasing. That’s an environment that offers a different kind of opportunity for investors as high-end homes could be the target.
Manufacturing, Technology, and Homebuilding
Charlotte is another city that has moved up in rankings. Up from ninth, the city is now fourth in overall real estate opportunities, and second in terms of homebuilding. But there are commercial opportunities, as well. The city is growing in terms of attracting technology and manufacturing companies. Real estate developers that specialize in those real estate sectors should have plenty of opportunities.
Unique Development Opportunities in Boston
Boston is a rich city with a lot of diversity. Real estate prices have increased in the past few years, as have median home sales. It’s a smaller market, but there are still a lot of development opportunities, and a lot of it is high-end development. That could be because the price of real estate in Boston is not cheap.
Another reality that drives this market is scarcity. There just isn’t a lot of inventory, and the raw land left for new development is scarce. What that means is a guarantee on appreciation, which spells a hot market for buy-and-hold investors.
There is also an interest in downtown Boston condos, apartments, and single-family homes. Real estate is more expensive in downtown, but it’s a lifestyle choice for many millennials and seniors who want to live closer to the amenities they enjoy. Each of these markets spells a ripe opportunity for real estate developers.
Real Estate Markets Conclusion
Each of the top 5 markets for 2020 offers different types of development opportunities for real estate developers. Those opportunities are tied to investor desires as well as homeowner interests. Developers looking for lucrative markets, whether in pure return on investment opportunities or in volume opportunities, should consider these markets.
REOs represent unique investment opportunities for serious real estate investors. An acronym for real estate owned (REO) foreclosure, REOs are properties owned by lenders whose borrowers defaulted on the loan. Due to the foreclosure process that allows the lender to retain ownership of the asset, REOs end up on the books of banks, mortgage companies, and other lenders–including some marketplace lending platforms like Sharestates.
Banks and REO Properties
No lender wants to end up with a portfolio of properties on their books. That defeats the purpose of their institution. A bank, for instance, would rather see the income from the loan product rather than a property that will simply sit without a resident or ongoing maintenance. The bank has no one on staff whose job is to provide upkeep for properties. Therefore, such real estate usually ends up falling into disrepair and the value declines.
The same can be said of other lending institutions such as mortgage companies and real estate investing platforms. They are in the lending and investing business, not the real estate upkeep business.
For that reason, REOs typically sell for much less than their actual retail value. They represent a loss to the lender, and the longer they sit, the more the lender will likely lose on the resell. One way to find such properties is to inquire at a bank or other lending institution to see if they have such properties available to investors right now. That can be hit or miss, but there is usually a good chance that a lending institution has at least one–especially if they are a large institution and the economy has taken a downturn. Following a large number of foreclosures in a particular geographical region, an investor will usually have an easy time finding such properties.
Many banks list their REOs online, which makes it easy. Here are a few banks’ REO listing web portals:
Where to Find Non-Banked Owned REOs
Of course, bank websites are not the only place to find suitable REOs for investment. There are some real estate websites that specialize in REOs, or that include REOs in their sales listings. Here are a few of those sites:
Why REOs Make Good Investments
REOs are usually good investments because they are discounted properties due to the fact that their institutional owners do not want them on their books. They represent liabilities, not assets. They are typically priced to recoup some or all of the lending institution’s investment rather than turn a profit.
While the properties themselves are discounted, investors should prepare to make further investment in repairing the properties, updating them, or providing some maintenance and upkeep before they are able to sell or rent them. Once the repair and maintenance costs are factored in, many REOs can turn their investor buyers a nice profit.
While Sharestates does not specialize in REO properties, and while we have a strict 34-point underwriting process to vet properties and borrowers, it does happen that a borrower will default on a property loan. Our REO rate is a very low 0.17 percent.
Investors looking for REO properties can check the property listings at Sharestates and see if there are currently any properties held by the platform.
Since taking office, President Trump has picked a fight with, well, just about every major U.S. trading partner, but he has shown particular hostility to China. We’re not saying China doesn’t deserve it. Their history of currency manipulation and intellectual property theft are beyond the pale.
But this isn’t the time for questions of moral hazard. We are on the brink of a trade war between the world’s two largest economies, and the corner offices of corporate headquarters around the world quake with trepidation.
Are we Making too Much of This?
Not so much the offices overlooking Wall Street. Each time an @realDonaldTrump tweet declares a new tariff, the stock market takes a small hit. Every time that Twitter account announces a resumption of trade talks, equities rise a tad. But those gains and losses net out over the course of a few trading days because there’s no real news there.
At this point, we’ve been on the precipice of a trade war longer than most trade wars actually last. The worst part of the situation is the uncertainty, right? Isn’t not knowing what’s going to happen next with trade far more toxic to the economy than actual trade barriers? One would think, but it’s not.
One thing that must be acknowledged, regardless of one’s political predispositions, is that the current administration is riding the longest economic expansion in history. There’s a question of causality, of course. Presidents always get far too much credit for economic growth and far too much blame for contraction. Plus, there are those who say that Trump is taking bows for benefits that ought to accrue to decisions made by President Obama. And for the first year or so of the Trump administration, that case could be made. But at some point, Trump has to be ceded ownership of the burgeoning growth of both payroll and gross domestic product.
And economics professors can cry in their beers over this all they want, but the Trump economy is roaring despite his making all the “wrong” decisions. He has shown disregard for sound fiscal policy by busting the budget. As for monetary policy, he has harangued the Federal Reserve into cutting target interest rates when lower-volume voices called for leaving them alone or actually raising them. And, of course, Trump has defied the conventional wisdom that trade barriers are harmful to the economy.
Even if the conventional wisdom turns out to be right and trade wars are bad, that doesn’t necessarily mean that they’re equally bad for everybody. Bisnow’s Matthew Rothstein wrote a compelling argument about how commercial real estate could be the closest thing the U.S. economy has to a safe haven during a full-scale trade war. He points to the strength in REITs as compared to securities mapped to other industrial sectors.
Predictions of recession tend to become self-fulfilling prophecies, so nobody wants to press the Big Red Button unnecessarily. Still, it’s hard to imagine that the current sweet spot will last forever.
Already, there are warning signs that investors are getting nervous about putting their money in capital-intensive projects that involve hardhats and shovels rather than code or arbitrage. According to CNBC reporter Diana Olick, architectural firms are not pulling in design contracts like they used to. She quotes the American Institute of Architects chief economist Kermit Baker as saying “the ongoing volatility in the trade situation” is one contributing factor.
And let’s remember that this brewing conflict isn’t a trade war against Mexico which, although it has an outsized effect on the U.S., is really a middling economy. And it’s not a trade war against the European Union, which can be relied upon to abide by the same rules of the road as the U.S. endeavors to. This is a trade war against China. (Actually, the U.S. is in low-level trade wars against both Mexico and the E.U., but that’s not the headline.)
The People’s Republic is in the middle of a massive expansion of its economic clout, a program known as the Belt and Road Initiative. As part of that effort — and in part as a hedge against the devalued yuan — Chinese investors poured scores of billions of dollars into American real estate over the course of 2015-2016. According to private lender Jeff Levin, all-new Chinese direct investment in the sector evaporated in an instant.
Trump’s aggressive posture “alarmed China’s central bank, and to contend with slowing growth, it put the brakes on international capital outflows,” Levin wrote in Forbes. “The trade war between the U.S. and China continues to fluctuate, but the pullback of Chinese investors endures. In the first half of 2018 alone, Chinese investment in the U.S. plunged 90%.”
Levin goes on to state the obvious: that the most immediate impact of a trade war on multifamily real estate is that the prices of steel, aluminum, and other construction materials go up. And while it’s true that tariffs punish Chinese companies by making their intermediate goods more expensive, it’s just as true that they punish American end-consumers who ultimately pay that higher price.
The good news there is that the impact might not be nearly as bad as one might think. According to the National Association of Homebuilders, tariffs should increase the average multifamily unit cost by only $478. That, reports Jacob Passy of MarketWatch, is in contrast to the $6,000 to $10,000 added to the cost of a single-family home due to a new levy on Canadian lumber.
Even so, the availability of materials could become a much bigger issue than the price. As supply routes are disrupted, the effects ripple along the chain. According to Levin, trade tensions with China are at least partially responsible for delays that builders are seeing already, which adds another five months to what should typically be a two-year project raising a multi-tenant building. That’s five more months of contractors who need to be paid, as well as five more months when the entire economy could enter a recession and the entire project go belly-up.
Mixed Signals for Multifamily
One interesting take on this whole topic comes from Robert R. Johnson, a Creighton University finance professor.
“The specter of tariffs and escalating trade wars between the US and China … has led to US Treasury rates falling, leading other interest rates—including mortgage rates—lower,” he told Erik J. Martin of The Mortgage Reports.
Lower mortgage costs should more than counterbalance — if the NAHB’s analysis is correct — the added expense of material and labor. If that turns out to be the case, the result should be net-neutral to multifamily housing. Investors tend to be indifferent if the structure they financed is rented out by the year or sold off as condos.
And yet, there’s one aspect of the mortgage market that makes this line of inquiry a little murky. A substantial number of American mortgages have recourse to such federally chartered programs as Fannie Mae or Freddie Mac. To ensure liquidity in these markets, these entities issue bonds. These bonds are bought up by investors, domestic and foreign. China is a huge player in this market.
As long as the current Sino-American tensions stay focused on trade, the U.S. multifamily market should ride it out with little trouble. But if it turns into an all-out economic war — that is, as soon as one side or the other begins to believe it’s losing — and notes get called in as direct investment dries up, then real estate might not be the safe haven it appears to be at the moment.
Earlier this year, we described how a housing shortage in Houston, exacerbated by the devastation of 2017’s Hurricane Harvey, is driving up occupancy rates. We also spent a few words outlining why Space City might not be the most livable place: heat, humidity, flooding, crime and a stark divide between rich and poor.
Yet people — especially young professionals — keep moving there, despite all that plus the rising rents. We really owe it to Houston to tell that side of the story as well.
Follow the jobs
There’s a lot more to Houston than oil and gas, and the unemployment figures bear out that assertion. The energy sector is highly correlated to the economic cycle so, when the national economy enters a contraction, the oil patch tends to go bust. But that’s not what happened in Houston over the past dozen-or-so years.
Credit: U.S. News & World Report. Source: U.S. Bureau of Labor Statistics
Even though today its unemployment rate is marginally higher than the national average, Houston was actually a good place to wait out the Great Recession. Historically speaking, that’s not the way things generally go in Texas. It should also be noted that having lower-than–national-average joblessness isn’t necessarily a good thing in 2019. The U.S. is at the point where unemployment is below the long-term “natural” rate, suggesting there’s currently a labor shortage.
Houston has hedged its bets in the job market. It is “home to more than two dozen Fortune 500 companies, including Sysco and FMC Technologies,” according to U.S. News & World Report. “The region was ranked the top manufacturing metro areas in the U.S. The Texas Medical Center, the world’s largest medical campus, is home to more than 50 health care, education, and research institutions. Houston is also an aerospace hub with NASA’s Johnson Space Center.”
And jobs in Houston can be high-paying. “The average annual income is higher than what residents of many other major metro areas make,” U.S. News continues. “Those with a specific skill set or advanced degrees, such as in health care, aerospace or oil, and gas, can earn as much as $200,000 a year.”
Town with no gown
According to City-Data.com, the average Houstonian is 33 years old, a year-and-a-half younger than the average Texan. You can’t assign a gender pronoun to that unspecified Houstonian because, like a flipped coin that landed on its rim, the split is exactly 50/50. Most Houston residents have not attained a college degree, and non-married people outnumber married people. A plurality of the city is Hispanic, with one-fifth of the population born in Latin America. Black and white residents each account for roughly a quarter of the city’s residents.
But how many are millennials who moved there from somewhere else? The answer is a little surprising. “The six cities which lost the most millennials are New York, San Diego, Miami, Houston, Las Vegas, and Chicago,” SmartAsset reported in 2017. So what’s a writer whose assignment is to discuss how Houston is attracting millennials to do?
Find a more recent — and more authoritative — source. “Seven metropolitan areas — Houston; Denver; Dallas; Seattle; Austin, Texas; Charlotte, N.C.; and Portland, Ore. — exhibited annual net migration gains for young adults that exceeded 7,000,” according to the Brookings Institution’s 2019 study. Houston, according to the study, more than doubles that number.
Isn’t it odd that so many surveys of millennials’ movements assume they all went to college? Sure, they’re more likely to have degrees than was the case with their parents’ generation but, according to CityLab, that just means that one out of three graduated instead of one out of four.
It’s exactly those non-collegian millennials that Houston attracts. According to Brookings, fewer than 40% of young adults completed college.
But it’s CityLab that puts the finest point on just how blue-collar Houston’s millennials are. “Miami and Houston have smaller shares of educated Millennials than Detroit and Allentown, Pennsylvania,” Richard Florida writes for the news outlet.
But how does one explain why one study of Houston demographics show a high net out-migration of millennials for Houston and, two years later, another shows a high net in-migration? Anyone who’s raised millennials can offer one possible explanation: They’re native Houstonians who moved back in with their parents.
Where they live
Of course, that’s just a theory. There are neighborhoods that are luring millennials from other cities and, to some extent, from the rooms where their Friday Night Lights cast posters still hang.
The Gridiron is Houston’s principal millennial magnet, according to the Houston Chronicle. “The area, best known for its proximity to the Astrodome, NRG Stadium, and Holocaust Museum in Houston, is estimated to be one of America’s zip code (77054) with the highest percentage of millennial residents,” according to reporter Francisco Ramirez, citing a RentCafe study.
Other real estate sites name Montrose, East Downtown (“EaDo”), Midtown, Fourth Ward and Museum Park as other sections that have attracted young Houstonians. Still, millennials are learning the lesson that the difference between what they want and what they get might involve a 40-minute Uber ride.
“In terms of sheer youngster population, the Addicks area (77084) in northwest Houston was found to have the largest millennial population in the city,” according to the Chronicle, which defines millennials as anyone born between 1977 and 1996. “Roughly 32,600 millennials reside in the area, although they make up a smaller share of residents in the area than Houstonians from other generations.”
In other words, maybe those Taylor Kitsch and Adrianne Palicki posters will be staying up for a while.
Houston at a glance
- Population: 2.3 million (2017), up 18.4% from 2000
- Unemployment rate: 4.3%, compared with a national average of 3.7%
- Average salary: $53,820, compared with a national average of $50,620
- Cost-of-living index: 93.5 (August 2019), compared with a national average of 100
Million Acres recently ran an article discussing the pros and cons of P2P lending in real estate investing. The advantages listed include easy borrowing, low-interest rates, and low origination and closing fees. These are certainly advantages to investing in real estate through P2P lending platforms, but the article fell short of listing some of the best benefits. One reason may be that it targeted borrowers and left the benefits to lenders untouched.
Let’s discuss a few more benefits to real estate investing through P2P lending, those for borrowers and lenders:
Pros to P2P Lending for Borrowers, Developers, and Real Estate Deal Sponsors
While deal sponsors, borrowers, and real estate developers can often get better deals through real estate P2P lending platforms, not to mention the convenience of applying for loans more easily, there are other benefits to using a P2P lending platform to obtain a loan or to finance a deal. Here are three more benefits:
- Financing a real estate project can be structured as either debt or equity, so flexibility is key. Instead of taking out a loan, which you have to pay back, you can offer equity to your funders in exchange for their capital. In this case, it isn’t P2P lending so much as equity crowdfunding;
- Whether your financing is structured as a loan or debt, you are not tied to a single entity as your funding source. These platforms exist to allow multiple parties, individuals and institutions, finance real estate projects they believe in;
- Another benefit of using a P2P lending platform, or marketplace lending platform, is the speed of delivery for the capital you seek. If you apply for a loan through a bank or traditional lender, the application process could take a couple of weeks, and it could be several more before you see your money. With platforms like Sharestates, you can get access to financing in days.
The Benefits to P2P Lending for Real Estate Investors
Developers and deal sponsors are not the only ones who benefit from P2P lending. Project funders also benefit. Here are three ways investors benefit from using real estate lending platforms:
- Portfolio diversification. If you’re a serious investor, you’re likely invested in several different asset classes. P2P lending can be another asset class to help you diversify your portfolio.
- Multiple deals to choose from. With P2P lending platforms, you can spread your investment across multiple properties on the same platform. You are also not limited to debt or equity capital structures. You can invest in both, further diversifying your portfolio.
- It saves you time. With P2P lending and real estate investing platforms, there’s no need to drive neighborhoods to find properties to invest in. You can find suitable properties at your fingertips already vetted by real estate investing experts. Sharestates’ 34-point underwriting process ensures that deals you are presented with meet the strictest standards including LTV, potential ROI, and deal sponsor experience and track record. That means you can fund more deals in a shorter period of time while increasing your return on investment.
P2P lending, marketplace lending, and real estate equity crowdfunding have been around long enough to have a track record. Investors are earning respectable returns on good properties across a spectrum of choices including deal structure, type of property, and geographical location. We have officially entered a new age of real estate investing.
Last-mile fulfillment centers represent a cultural shift in retailing. Retailers delivering products to their customers are moving these fulfillment centers to urban areas where they can be closer to their customers. To make that happen, they’re not building ground-up facilities. They’re repurposing old warehouses and parking garages being underused by a decline in automobile usage among millennials.
By repurposing old spaces, retailers can save on investment while moving their products closer to the consumer during the fulfillment process. Doing so relies on mixed-use properties. But that’s just one application of the mixed-use real estate paradigm.
Mixed-Use Residential Communities
The U.S. population is growing, largely due to immigration, but there is a stark difference in growth rates between rural communities, urban communities, and suburban communities. According to Pew Research, rural counties in the U.S. have grown 3 percent since the year 2000, but a smaller percentage of the overall population lives in rural areas due to higher growth rates in urban and suburban settings. Urban growth has been at 13 percent since 2000, and suburban growth has been at 16 percent.
Urban areas have gained 1.6 million net new migrants and 9.8 million more births than deaths. People are moving out of rural areas in large numbers, but because of 1.2 million more births than deaths, rural populations have a net growth rate.
With increased urbanization, less automobile usage among younger adults, and the different needs of aging populations, mixed-use residential communities are growing.
Mixed-use development can range from residential communities that include commercial spaces such as beauty salons, restaurants, and specialty retail shops to office complexes that also include townhomes, condominiums, or penthouse suites alongside a few specialty retail shops and restaurants. They provide developers a less risky approach to development as a shift from residential to commercial real estate investment can lead to gains in one to offset losses in the other. By the same token, investors can benefit by diversifying their portfolios.
Demand for Mixed-Use Spells Opportunity And Convenience
The two largest living generations are influencing the path of real estate development. Millennials are urbanizing and renting for longer than their parents and grandparents while driving less. Baby boomers are retiring and downsizing, seeking communities where all the necessary amenities are within walking or short driving distance. On top of that, Amazon is driving big-box retailers out of business.
All of this is driving up the demand for mixed-use real estate development. That means opportunities for ground-up developers to meet the needs of today’s home buyer, retail merchant, property manager, and investor. It also means opportunities for investors, retailers, and landlords to diversify their portfolios and meet the needs of the end consumer. Finally, it means that consumers are allowed to live, work, play, and shop in a more concentrated area utilizing amenities that are within walking distance, a bike ride, or a short drive.
As retailers set up their last-mile fulfillment centers to “move-in” closer to the consumer, and as consumers rearrange their lifestyles to move closer to their favorite shops and play areas, mixed-use properties are hot again. Ground-up developers can make more efficient use of real estate while property flippers can rehabilitate old spaces and turn them into properties that meet all the needs of retailers, home buyers, renters, and investors. Everyone can get a piece of this pie, and there’s plenty of pie to go around.
The demand outlook is imposing. “To meet growing demand, America needs to build at least 4.6 million new apartment homes at all price points by 2030,” the National Apartment Association trade group pronounced in 2017. “In addition, as many as 11.7 million older existing apartments could need renovation during the same period.”
The good news is that something like 700,000 units have opened up since that report came out, but even this frothy pace is still 30,000 less than what it needs to be to meet demand.
This might seem like a great problem to have, but why can’t we build apartments buildings as fast as we can sell them?
The Official Story
The first place we looked for the answer to this question was the NAA’s Barriers to Apartment Construction Index. It isn’t wrong, but let’s just say it’s saddled with a point of view.
The NAA summary of reasons “Why We Can’t Just Build More” boils down to one thing: It’s the government’s fault.
“Over the last three decades, regulatory barriers to apartment construction have increased significantly, most notably at the local level. Outdated zoning laws, unnecessary land-use restrictions, arbitrary permitting requirements, inflated parking requirements, environmental site assessments, and more, discourage housing construction and raise the cost of those properties that do get built,” according to the screed, which doesn’t explain how land-use laws that only went into effect in the past three decades became outdated so quickly.
The NAA is also quick to point to the permitting process, fees related to construction, rent controls, and all other government interference. It’s unclear if they’re saying that local governments shouldn’t be sending inspectors or if they’re saying that someone else should be paying for them. It’s also unclear if they understand that local governments have other business before them aside from greenlighting every project that involves a hardhat and a backhoe. City officials measure success in votes, not square footage, and people who already live in town want zoning laws to ensure that the character of their block doesn’t change too drastically. And then there’s the occasional voter who can’t afford rent on a new Class A building so relies on rent controls which, though inelegant from the economic modeling perspective, work in practice. That’s how you can find people to work in the building without a two-hour commute.
It always comes down to those pesky, inhospitable neighbors, doesn’t it? The NAA is particularly sour on an attitude called NIMBY which, as regular readers here are aware, stands for “Hey, We Were Here First.” In one recent, high-profile example, a grass-roots NIMBY movement kept Amazon out of Long Island City — not just without government intervention, but actually in opposition to state and municipal officeholders who were doing everything they could to seal the deal. The locals believed that this would price them out of their own neighborhoods.
Contravening this fact, the NAA makes the unsubstantiated claim — there’s actually a footnote attached to this assertion referring the reader to another tirade rather than an actual source — that NIMBY activism promotes the interests of high-income over low-income residents.
“While we do not yet have a measure for the impact of political activism on the process of adding new housing, especially the more affordable type, one might surmise it is correlated with income and wealth,” according to a 2019 report. But then again, one might just as easily not surmise that.
Wait, it gets sillier. Look at the relative weight the NAA gives to politics and profits, then compare that to your own experience of what drives any real-world business: “Specifically, political activism, along with profit margins on high-end housing, might explain why there appears to be a national trend towards approving only the larger high quality and higher-priced housing or rental units with the lowest densities.”
The NAA does actually get around to publishing words that actually pass the sniff test. It discusses land, labor and construction costs. It also notes that not all land is ideal for housing, whether due to geological factors or environmental considerations. And it acknowledges that some of the most desirable areas targeted by investors in new construction are already built out by existing high-end housing stock, retail access, offices, entertainment spots, and green spaces — but isn’t that the reason they want to build there in the first place?
One undeniable factor the NAA highlights is what it terms “lost apartments”.
“Adding to the apartment shortage is the fact that every year, the nation loses between 75,000 and 125,000 apartment units to obsolescence and other factors,” it credibly asserts. “Most lost units are likely at the lower end of the market, disproportionately hurting the affordable supply that exists. This situation is likely to worsen going forward since more than half (51 percent) of the nation’s apartment stock was built before 1980, and without resources dedicated to supporting rehabilitation efforts, more stock will continue to leave the available pool.”
Still, the real answer to what keeps America from building more apartments faster gets us back to that hardhat and backhoe. There simply aren’t enough of the former, although we still have enough of the latter for now.
The Real Answer
Anybody can shingle a roof. Anybody can put up drywall. But when you consider the legions of electricians, plumbers, ironworkers, HVAC installers, elevator installers and all the other people who have specialized skills and are willing to turn wrenches 800 feet in the air, good help suddenly becomes hard to find.
The NAA reports that “Following the [2007-2009] economic downturn, many workers left the construction industry and have yet to return.” Again, the report doesn’t cite a source for this assertion, but it can be verified. The Association of General Contractors doesn’t get into the history of the problem, but it does recognize a severe, nationwide labor shortage that will probably get much worse before it gets better. Labor Department projections back that up.
And someone whose opinion matter has gone on the record as saying that hundreds of thousands who dropped out of construction work during the last economic contraction never returned to it, and those jobs have proven hard to fill.
“Construction is not an attractive industry to millennials. In addition, 600,000 workers left the industry during the great recession and have not returned,” John Wagner, national construction director at global insurance brokerage firm Gallagher, tells GlobeSt.com.
The good news, though, is that there appears to be enough of the means of production to keep building up city skylines. A web search reveals that there are far more articles about shortages of crane operators rather than shortages of cranes.
But that could change. According to Construction Dive, Seattle and Los Angeles each have 49 tower cranes in operation on local sites. Eight other U.S. or Canadian cities have more than a dozen. And then there’s Toronto, with an astounding 120 temporary additions to its skyline. And let’s remember that cranes, just like the high-rises they enable, need to be built, and that’s neither cheap nor easy. According to the American National Standards Institute, there are only around 100,000 tower cranes in the entire world. So that’s inclusive of about 180 nations not in North America. And they also need to be shared with developers of office space, government buildings and anything else too big for fire escapes.
There could come a point when crane availability becomes a key constraint to the multifamily real estate industry’s ability to keep up with demand. In fact, we’ve seen those headlines before.
Not long after that, demand for new housing dried up. Crane operators very suddenly had bigger problems. Apparently, they left the business and never came back.
Last month, a historic home in Ponte Vedra Beach, California went up for sale. The Milam Residence, designed by architect Paul Rudolph and built-in 1961, is a beautiful real estate work of art. The asking price is $4.445 million.
The list price is the least of the problems for the seller. There are people who can afford it. The issue is the home design.
Featuring four bedrooms and four baths, it also has a guest house and a very spacious courtyard, a useful feature for entertaining. The building encompasses more than 10,000 square feet on a 2.11-acre lot and includes an in-ground swimming pool as well as a three-car garage.
While these are all great features, the problem with unique real estate designs like this is that such properties are difficult to sell. Just ask any real estate agent.
The reason this home may not sell quickly is that most home buyers want to be able to design their homes to suit themselves. If a house design is already so unique that adding a homeowner’s personality doesn’t make it any more unique or personable, then it’s likely to attract a lot of eyeballs but not as many wallets. Even architectural beauty is in the eye of the beholder.
Mesa Vista Ranch: $250 Million Worth of Beauty
If you’ve been keeping up with the news, you may have heard that legendary Texas oil tycoon T. Boones Pickens passed away last week, at 91. Pickens was known for his flare. He left behind a beautiful ranch in Pampa, Texas, on the block for $250 million. It’s been listed for almost two years.
The ranch sits on 100 miles of land and features an airport with a 25,000-square-foot hangar, a wedding chapel, 20 lakes, four houses, a 400-square-foot building just for guns, a tennis court, a golf course, and an 11,000-square-foot dog kennel. It’s an amazing piece of property, but will it ever sell?
The jury is still out on the Texas panhandle property, but I suspect it will remain listed for a few more years. There are only a handful of people who can afford a $250 million piece of real estate, to begin with. And, as stated before, the uniqueness of the property itself leaves little room for the next landowner to make it their own.
The Property Listing Reality: What’s Good for Traditional Real Estate is Good for RECF
Selling real estate follows the same general principles whether we’re talking about listing on the MLS or listing through a real estate crowdfunding portal. If a property is going to sell, it’s got to sell on the merits of what is in demand. For that reason, real estate developers should pay attention to the trends in real estate, what home buyers are interested in, and what the market will bear.
By the same token, investors looking for a good deal would do their portfolios a favor by studying the market. What are homebuyers buying? What are developers building? Where is the market headed? These are the questions you should be asking.
A real estate crowdfunding platform that isn’t asking the same questions of the market is probably one that you should steer yourself away from. It’s important that the platform offer deals that are in concert with the supply and demand wave of the market. A home may be beautiful by aesthetic standards, but if it’s too impractical for the average homeowner, it likely isn’t a good investment.
We Americans can get a little paranoid when it comes to foreign investors buying up our real estate. It seems that every time the market gets hot, overseas buyers exchange their more colorful currency for greenbacks and start buying properties in the U.S. During the dotcom bubble, it was the British and Germans. The boom before that, the Arabs. Before that, it was the Japanese. And yet our culture persists, and we still own the vast majority of the land in this country, even in the most welcoming — and highest-priced — port cities. It’s happening again now, though. Non-U.S. individuals, corporations and sovereign wealth funds are once again investing heavily in housing throughout the States.
“Foreign investment volumes increased [in U.S. multifamily properties] by 29.3% in 2018,” according to a Bisnow article citing a JLL research report. Not to worry, though. The new neighbors are reflexively polite. “Canadian investors alone deployed $9.8B over the year, 31.5% more than the previous high in 2015,” Dees Stribling writes for Bisnow. “Beginning early last year, for example, the Canadian Pension Plan Investment Board and GIC, an organization that manages Singapore’s foreign reserves, partnered with Atlanta-based Cortland to buy up to 10,000 Class-B apartment units across the U.S. and remake them into Class-A units.”
Canada might be the largest non-U.S. player in the market, but it is hardly the only one. Other names on the leaderboard might surprise you. According to the 2019 report itself, “Rising 23.8 percent from one year ago, annualized cross-border investment activity remains near record levels at $14.6 billion. Canada-, Bahrain- and Singapore-based investors drove continued investment, contributing 67.5 percent of quarterly foreign capital in Q1 2019.”
Bahrain and Singapore are not the names you might expect to see on the list. According to the National Association of Realtors, these are not the nations that are buying up general residential real estate, which is primarily single-family. On that list, Canada comes in second to China, followed by India, the United Kingdom, and Mexico.
Bahrain has a population of 1.6 million, while that of Singapore is 5.8 million. So why are these countries with as many residents as Idaho and Wisconsin respectively gaining such an outsized footprint Stateside? While it’s hard to say for certain, it might have a lot to do with investments made by their sovereign wealth funds. Two of the top 10 in the world are domiciled in Singapore, with combined assets of $815 billion. Next to Singapore, Bahrain pales in comparison, but a $15.4 billion valuation will keep them from having to drive Uber. With that much money to invest, anyone might consider buying into a gleaming new addition to the midtown Manhattan skyline.
There are reasons for non-U.S. institutions to acquire space in America even if they have mere millions to burn.
One invaluable source for this article is a 2017 CBRE report titled “U.S. Multifamily Housing: A Primer for Overseas Investors”. If there’s one criticism to be had of it, it’s that it often explains why multifamily can be viewed as a better investment than retail or office space, rather than why the American multifamily market is unique from the perspective of a cross-border backer. You can see the full report if you want CBRE’s “10 Reasons to Invest in U.S. Multifamily,” but really only four are relevant once you’ve considered that criticism.
No. 3: Favorable regulatory environment. “With respect to ‘social’ housing, the U.S. has a lower level of subsidized/low-income inventory than many other countries. These properties require additional expertise on the regulatory environment, but represent only a small portion of the total inventory (estimated 5% to 10%).”
No. 5: Liquidity. Real estate is not an inherently liquid asset but, it is far less illiquid in the U.S. than in other corners of the world. According to CBRE, this is due to the enviable degree of access to mortgage capital here: “The availability of debt capital is important for investment in any commercial real estate sector. Leverage is used for most transactions, with acquisition financing usually in the 50%-to-75% loan-to-value (LTV) range.” The article also cites the diversity of sources of multifamily real estate debt: banks of course, but also life insurance companies, commercial mortgage-backed securities, conduit lenders and particularly government-sponsored enterprises: Fannie Mae, Freddie Mac and the Federal Housing Administration, major sources of debt capital for existing assets in the U.S., don’t have analogs in many countries.
No. 8: Short-term leases allow immediate adjustment to market conditions. American renters are so conditioned to one-year leases that they can be forgiven for thinking that’s the global standard. It isn’t. It’s a factor of the “American dream” of homeownership; it is assumed that every renter is temporarily sojourning in their apartment rather than calling it their permanent home. In other countries, even fairly well-off people consider renting more common. In Singapore, for example, the typical lease is two years long. In Germany, it can last lifetimes or even generations. So imagine you were born and raised in Germany and grew up with the impression that landlording was a dicey financial proposition because of all the tenant protections. Then you discover that, in the U.S., your contract with your tenants expires on an annual basis. That means you’re not locked into the relationship for more than 12 months. You can raise their rent unless local ordinance intercedes. Given cause, you can evict them.
“In periods of high rent growth, the short-term leases provide owners the ability to adjust rents upward quickly,” according to CBRE. “More importantly, if the U.S. moves into a period of higher inflation, short-term leases provide owners with the ability to make upward adjustments to cover the increased costs of operations.”
No. 10: Third-party leasing and management options. In America, unlike in many other countries, owning multifamily real estate can be a passive, turnkey investment. “[T]he 50 largest multifamily management companies in the U.S. managed 3.2 million units,” CBRE reports, citing the National Multifamily Housing Council. “The largest 50 firms each managed at least 30,000 units; the top five are each responsible for more than 100,000 units.” These management companies not only provide tenant interface and local knowledge, but they also add a professional gloss to the process that most financial investors haven’t been steeped in. Whether the task is to coordinate vendor schedules or using pricing software to optimize revenue, sometimes it’s best to leave it to the pros, and an outsized number of those pros are focused on U.S. markets.
But let’s add one more reason why investors are looking at apartment buildings in the U.S.: immigration.
“A great deal of foreign investment is motivated by a desire to immigrate to the United States or to provide financial support to dependent students attending schools in the United States,” according to a 2018 Socotra Capital blog post by Adham Sbeih.
If deep-pocketed overseas investors are looking to reside permanently in the States, buying multifamily real estate can satisfy two requirements at once: making the case for EB-5 visas, and securing a place to live once they get here. We’ve seen this happen. We’ve also seen wealthy people from outside the U.S. buy up a block of apartments, assign one to a child studying at an American college, and collecting rent on the others. If the kid decides to stay in the States, she continues to have a roof over her head. If she decides to return to her home country, that’s one more unit available to rent.
Even with all these use cases and all these anecdotes, foreign investors ownership of U.S. real estate is far lower than you might guess. “Currently only about 4% of multifamily holdings are owned by non-U.S. companies,” according to CBRE. That said, the number might be rising, at least in the short term. “[I]nvestors from foreign countries accounted for $13.65 billion, or about 8%, of the $174.5 billion of apartment property sales that took place in the United States last year,” Orest Mandzy wrote for Trepp’s blog in April, citing another CBRE study.
And yet, that surge might end up being too short-lived to constitute a trend, if the NAR’s findings have any bearing. The Realtors look mainly at single-family properties, so their research presents a far-from-perfect leading indicator. That said, non-U.S. citizens’ purchase of American residential real estate has fallen off considerably in recent months.
“Foreign buyers purchased to $77.9 billion of U.S. existing-homes during April 2018–March 2019, a 36 percent decline from the level in the previous 12-month period ($121 billion),” according to the NAR. “The slowdown in global growth, tighter controls on the outward flow of capital from China, and a low inventory of homes for sale likely account for this huge drop.
A similar decline was seen among non-resident foreign investors. Combined, resident and non-resident foreign investors accounted for only 5% of the $1.6 trillion existing-home market over those twelve months, down from 8% in the year-earlier period.
So yes, the hot U.S. housing market has attracted capital from all around the world. And as long as the boom times continue, you can expect foreign investment to pour in. But cycles end and, when this one does, there’s every reason to expect a regression to the mean. But there are reasons why that mean isn’t 0%. There are reasons why overseas investors look favorably on U.S. real estate investment even in lean times. One reason is that it’s largely unrestricted. No matter how many tariffs Washington has placed on Chinese goods, it hasn’t told the Chinese — or the Russians, or the Europeans or anyone else not connected with state-sponsored terrorism — that they can’t buy up an entire time zone if they wanted. Just pay the taxes as if you were a U.S. citizen or, if you prefer, a 30% flat tax.
Now compare that with the byzantine real estate laws in effect elsewhere. “Changing rules and regulations in other countries are also effecting where global investors are choosing to put their capital,” according to UpNest. “France has levied new taxes on investors. London, which was long the international favorite has stumbled, and put new taxes on wealthy investors. Even Canada has begun penalizing foreign investors with new taxes, and fines for having a vacant property, in an effort to reduce foreign investment, and maintain affordability.”
In that case, as long as U.S. public policy remains friendly to foreign investors in real estate, there will be euros, pounds, yuan, Canadian dollars and whatever it is they use in Bahrain available for multifamily projects here.