Overview
How do 2016 predictions from a variety of sources impact you as a real estate investor. There is a LOT of uncertainty heading into 2016…
The stock market is off to its worst start since the Great Depression. Oil is tanking. China’s in a slump. Retail holiday sales were soft.
Yet the U.S. government reports a strong jobs market. Rents have been rising. Mortgage rates remain low in spite of the Fed’s decision to bump up the federal funds rate in December.
All this against the backdrop of one of the most unusual election years in U.S. history.
In this episode, we take a look into the crystal balls of a variety of pundits and industry observers…and toss in our two cents…as we try to decide if 2016 will be a bullish, bearish or boring year for real estate investors.
Discussing networking tips for real estate investors:
- Your entertaining and never predictable host, Robert Helms
- His crystal ball co-host, Russell Gray
- The Godfather of Real Estate, Bob Helms
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(Show Transcript)
Welcome
Robert Helms: Welcome to The Real Estate Guys radio program. I’m your host, Robert Helms. Joining me this week as usual, Co-Host Financial Strategist Russell Gray.
Russell Gray: Hey, Robert!
Robert Helms: And the man we call the Godfather of Real Estate, Bob Helms is with us.
Bob Helms: Always fun to be on The Real Estate Guys Show.
Robert Helms: A big hello and howdy and hugs to the folks that came out to Creating Your Future, the 2016 goals retreat. My goodness, what an amazing group of folks, and look out, because we’ve got goal achievers out there and great stuff’s going to happen.
It’s going to be a great year, but it’s also, at the beginning of the year, a great time to say, “Well, what is everybody thinking?” It takes a couple of weeks usually until the predictions start to come out.
All of the pundits, and all of the industry experts, and all of the economists for the various real estate boards, and all those folks come out and say, “Here’s what the year’s going to look like for real estate, and then for things that affect real estate.” We are taking a look today at all those 2016 predictions because there’s just a lot of folks who apparently have crystal balls out there.
2016 Will Be An Especially Interesting Year
Russell Gray: Yeah, it’s going to be an especially interesting year, 2016. We’ve got a lot of things going on.
We’ve got the Fed moved for the first time in 10 years on raising interest rates, and so we’re going to be sailing into that. Whether they’re going to follow up with some more increases or not remains to be seen. What is going to be the effect? We’ve got that we’re dealing with.
We’ve got an election year, which is always interesting. I would think that this is probably one of the more polarizing election years.
We’ve got a lot of things going on in the world geopolitically. We’re starting to really begin to realize the impact of China on the rest of the world. For a long time, it was China’s growth that was fueling; now it’s China’s decline that is impacting.
There’s a lot of dynamics we haven’t really had to deal with for a number of years that now people are beginning to look at. It’s going to be interesting to see what all of these market observers are thinking as they take a look out there through their crystal balls and try to decide how it’s going to impact real estate. We’re going to take a look at that and try to figure out how it’s going to impact real estate investors.
Robert Helms: For 10 years, we did our live Investor Mentoring Club events, where we had hundreds of people coming out once a month, and every January it was the same. We would take a look at the predictions from last year and what really happened, and then we would look forward to see the predictions of folks in the real estate space.
Always interesting, because it is that nobody has a crystal ball and we just take our best guess. The Real Estate Guys are journalists, really. It’s not our opinion that matters. Instead, we survey a lot of folks to see what they think, and so we’ll talk about some general predictions that may or may not affect real estate and how that might, and I think maybe start with some of the fun ones actually.
Then from there, we’ll break down by product type and some regional markets, at least of the U.S., what the outlook looks like.
2016 Predictions – Marijuana Becomes More Accepted
Top 5 predictions from MarketWatch came out. Here’s one that says basically in 2016, marijuana’s going to become legal. Now that’s a pretty broad thing. I’ll tell you what, here at this event we did last week, we had another group at the same hotel we were at, and they were a big medical marijuana group.
Russell Gray: Robert, you’ve been doing events longer than I’ve been with you, but for the last 14 years, we’ve been doing events together. I don’t think that we’ve ever been at an event where there was actually public condoned smoking going on. We would walk by this big tent outside the hotel venue, and every once in awhile somebody would go into, well in my case, the men’s room, and woo!
The thing that’s interesting about that, we’ve watched what’s happened to real estate in particular in Colorado when Colorado was leading the charge. That has had a profound effect on the pricing of real estate, and not just housing, because it’s affected the prosperity, but some of the retail.
Retail has been a sector that’s been under a lot of pressure, but they’re opening up these dispensaries. Then industrial because these guys are actually coming and growing, and now even agricultural land because now that they don’t have to hide their growing inside these industrial buildings, it’s a lot cheaper just to go out and buy a piece of land in a rural area and put together a farm.
There’s a lot of things that are going on in the real estate space that’s being directly affected through the growing acceptance in society of marijuana.
Robert Helms: That’s why I wanted to start with some of these fun things. I don’t want to dwell on any of them, but how does this affect real estate?
Like we first said, marijuana’s going to become legal. You’re like, “Well, that has nothing to do with real estate.” Actually, it has a lot to do with real estate.
2016 Predictions – Star Wars Mania Increases
Here’s another one. Star Wars mania will only intensify. The new Star Wars movie is out, and another one’s coming out in 18 months, another one after that, so great. What does that have to do with real estate? Think about it. People are going out to the movies. Theme parks are bringing in record numbers, especially those that are affiliated with these kind of folks.
When you stay at a theme park, you’re usually not staying in the park; you’re staying at a hotel. We’re going to talk about the hotel sector before we’re done because there’s some strong, strong indicators in hotel. You read a headline, and you’re like, “Well, that doesn’t really have anything to do with real estate,” and maybe it does.
2016 Predictions – Student Loans and Millennials
How about this one? Student loan forgiveness will be expanded. How can that possibly affect real estate?
Russell Gray: Anybody that’s been paying attention, everybody’s waiting for the first time buyer, those millennials, to step into the housing market and begin to push things up because that’s typically what drives the market.
The millennials have not been pushing on the front end of the market. Part of it is because they don’t have the same sense of urgency their predecessors had in terms of appreciation, because they were basically coming of age, if you will, in the downturn. It’s like, “Hey, it’s not that big of a deal.”
The other thing is it takes them longer to get their families started. Part of that is just socially because they’ve grown up in the era of social networking and a lot of exposure on the internet and much broader access to entertainment. They begin to realize there’s a lot of things to do in life that maybe they want to get out of the way before they settle down and get married.
I think I’m qualified to have a bit of an opinion, even though I’m long past being a millennial, but I’ve got a bunch of them in my life because my kids are all millennials.
The other big one is the student loan thing because that is a big debt burden that many, many young people are starting life with. They’re trying to figure out, “How do I deal with that in a soft job economy, while housing prices have actually been going up because of the big stimulus trying to push the housing market?” The fact that they may get some relief from that could really have an impact on real estate, especially in the starter housing market.
Robert Helms: It sure could, and that debt load, of course, happened at a very difficult time already. The whole student debt isn’t something you can’t just easily write off or make go away like other debt, and so there’s a whole bunch around that.
2016 Predictions – Commercial Drone Use Will Be Legalized
Here’s another fun one: commercial drone use will be legalized. It’s a prediction from MarketWatch, this year’s commercial drone use. Okay, well drones are out there. Now you have to register your drone if it’s of a certain size in the U.S. Other countries are thinking about this. How’s that going to affect real estate?
Russell Gray: We try to make sure that the commercials that we have here on the radio show don’t drone on and on and on.
Robert Helms: We try. That’s for sure. Think about what this does. There’s been talk about delivery via drone, and that’s going to cut down on maybe employment, maybe use of resources.
Then there’s all kinds of talk about and use of commercial drones in photography certainly, and in surveys, and weather. It’s a technological advance that maybe has some real estate connotations. Certainly we’re using a commercial drone in our development projects to get some of the greatest aerial footage we can, and that’s had a market effect.
Bob Helms: Yeah, and I have a grandson, 8 years old, who has been an airplane kid all his life. He’s got hundreds of models, but he flies helicopters. I don’t know how many drones he’s got, but it’s 7 or 8, and of course he can’t wait to get his hands on that big commercial drone in the real estate development project. Here’s a kid, he’s even thinking about opening a drone school so he can teach others how to do it. He’s 8.
Robert Helms: That’s his business, right? He wants to open a school where he can teach pilots how to fly drones. According to MarketWatch, that might be a good business to be in, so who knows, right?
Start with some fun ones to get the ball rolling, but let’s talk about what some of the predictions are for the year because there’s a lot of folks out there that have the right to have an opinion. Like Russ mentioned, “I’ve got millennials in my life, so I kind of know how they think, I talk to them about it,” so you’ve got a right. Someone who doesn’t, not so much. They know what they read.
2016 Predictions – Oil’s Impact on Real Estate
Forbes puts out an article every year where they quote different people, and they look for different predictions. There’s a lot of interesting specific predictions. Commodities are big in the news and certainly oil. When oil got below 30 this last week, well that’s news.
Russell Gray: Yeah, the oil story’s a huge story, and any long time listeners to The Real Estate Guys know for the last year we’ve really been paying attention to oil, primarily because we have been suspicious over this course of stimulus that somewhere, we call it the squish factor, it was going to come out in the economy.
Back when we lowered the standards for lending in order to make it easier for people to buy houses, the net result was a housing bubble and a bond market bust. There was the derivatives going on. It created a rapid expansion of credit.
In the area of oil, what’s happened is because of cheap money, oil drillers have been able to borrow huge sums of money based on financial models where their worst case scenario, maybe when oil was $90 or $100, worst case scenario, 40, 50% drop, $40 or $50. Fairly prudent, right?
Robert Helms: Right, yes sure.
Russell Gray: When I had my real estate portfolio, my models were all based on I could absorb a 30 or 40% decrease in my income, not a 95% decrease.
These guys that are sitting there looking at $30 a barrel oil, they’re hemorrhaging cash. This the thing that a lot of people don’t understand: they have to keep pumping to generate cash flow even though it’s negative profit.
Robert Helms: They’re pumping at a loss because the cash flow is what they need to service debt and pay employees.
Russell Gray: That’s right. It slows down how fast their balance sheet implodes. They’re hoping against hope maybe that the price will go up.
We’ve already got 30 companies with over $13 billion of debt, according to a Wall Street Journal article on January 11, that have declared bankruptcy.
These major oil companies have reduced their budgets by 50%: that’s employees, that’s exploration, that’s R&D. These are good high paying jobs, and so that has a big effect.
Then when you go back and you look at the history of the job recovery in the United States from 2008 to now, a big chunk of it has been oil-related.
If there’s one story that is probably the most likely to impact real estate directly in terms of employment, it’s oil, and in terms of the financial markets.
If those debts go bad and people start taking losses on bonds in the financial markets, just like they did with subprime, we don’t know, but there could be a bunch of derivatives stacked up beneath it, and it could start that ripple effect.
You look at the volatility in the markets, as they’ve started out the beginning of the year, I think oil is a big contributor to that lack of certainty and how skittish everybody is in the paper asset markets.
Robert Helms: Here’s the oil prediction from Forbes: “Oil shall crumble like the weak child it is as Iran starts pumping, Iraq stays calmish, and OPEC chaos continues. When prices fall into the 20’s, though, things will start to reverse. The most expensive U.S. and Canadian supplies begin to dry up, and eventually all the oil in storage and at sea gets sold. Then we’ll see a sharp reversal, and prices will end the year, 2016, north of $50 a barrel.”
Russell Gray: I wouldn’t think that that’s the consensus, because nobody is shutting down production. They’re not. They’re going to go bankrupt, and when they go bankrupt they’ll shut down production. There’s venture funds out there that have raised hundreds of millions of dollars that are getting ready to go buy these assets.
Robert Helms: Let’s step back because I didn’t want to dwell on oil or drill on oil, but some oil companies have the issues, and the big issue they have is debt. They’ve got a debt service.
We know some folks in the oil business who only have a single project that has any debt and the rest have no debt, so they really could shut it down if they needed to. The oil they are drilling, they’re delivering some return to investors.
Russell Gray: Right, and those are the guys that are in a position to weather a downturn. You can learn a lot from studying what those guys are doing in terms of managing their portfolios.
If it wasn’t oil, let’s say it was rents that were going down. If rents went down, is your portfolio structured in such a way that you could survive that? That’s a good question to ask.
One side note on oil, Canada has been a big driver of real estate in Phoenix, in Arizona for example, because the Canadian dollar, because of strong oil, was strong against the U.S. dollar, and so the Canadians were able to come down and buy U.S. real estate with their strong Canadian dollar.
Now that’s reversing, and so a lot of these things that have been driving the real estate market, in Arizona in particular, could, I’m not saying it will, and if I was invested there, that would be something I would be paying attention to, could begin to slow down the interest of the Canadians in coming into the Arizona market.
You have to deal with your own individual neighborhoods and talk to your real estate professionals that you work with that have the thumb on the pulse of that local market to find out what the real trends are, but it’s something that you can begin to see.
The ripple effect at what goes on at these higher levels, it pushes out and affects, not even just from country to country, but we’re talking Wall Street and we’re also talking all the way down to Main Street.
Predictions vs. Perceptions
Russell Gray: What we’re doing is talking about people’s predictions and then perhaps our thoughts about them, neither one of which is necessarily right or wrong.
Bob Helms: Perception’s an interesting thing. You said, Russ, “If I was invested, I’d be paying attention.” It’s so interesting. If you’re not invested, if you aren’t close to it someplace, you’re not necessarily paying attention, let alone saying, “What impact does it have on the things I am paying attention to?”
I have a little personal story. Simply, I’m a legatee. I had an aunt who was in an oil collective. She died in Oklahoma. She had a lot of brothers and sisters. She left all the kids a little share of that, so I’ve been getting a monthly check for 10 years or 12 years or something and not paying any attention to it because it was automatic.
I’m still getting that check; it’s just not monthly. It’s about every third or fourth month that I get a check of approximately the same amount. The difference, by the way, is that there’s a difference in the check that’s more than I spend on gas personally for my automobile altogether. I appreciate the low pump price. I’m sure people do, but there’s a lot more to it than the low pump price.
Robert Helms: It affects so many things, transportation and all that kind of stuff. We’re talking today about predictions in the New Year, lots of sharp folks are out there making their best guesses. We’re going to talk about some of our thoughts, and ultimately you’re going to decide what makes sense for you.
2016 Predictions – Currency Valuation & Bitcoin
Robert Helms: It’s a new year and we’re looking at some predictions that lots of folks from different industries are making and just trying to stimulate your thought as a real estate investor as to the things you hear in the news and what you should pay attention to.
One of the things that of course is on everyone’s mind is the value of their currency. With listeners in over 190 countries, we have buying power in our currency. Then compared to other currencies in the world, as they’re stronger or weaker, that affects imports and exports and ultimately what we pay for things, and that’s why currency’s important. The dollar was strong in 2015, stronger than every currency but one.
Russell Gray: Yeah, that’s interesting. Bitcoin crushed the dollar in 2015, and there’s a whole story behind that. Not to dwell on it, but as you’re looking out at trends, we pay attention to alternatives to the dollar.
Of course there’s other currencies. The yuan has been the one that we’ve been paying the most attention to in terms of currencies.
We’ve also been paying attention to gold and silver because those are used by a lot of people as a monetary metal, at least as terms of a store of value, you don’t trade in it, but you can see that certain countries are beginning to accumulate it. You can see record sales of gold and silver Eagles in the United States the last couple of years. We had a big kickoff to 2016, so that tells you something.
You see the growth of cryptocurrencies. Bitcoin is the biggest. It’s the Kleenex of the … It’s the brand name that everybody associates the product with, but there’s actually 3 gold-backed cryptocurriences now.
Bitcoin is not-gold backed, and there’s other cryptocurrencies. The fact that society is beginning to adopt these alternatives to the dollar, that sovereigns are beginning to look for alternatives to the dollar, if I denominate my wealth in dollars, that’s a trend I’ve got to pay attention to.
Real Assets in Unstable Times
Robert Helms: You bet. When we talk about some of the big predictors out there, folks like Fortune and Forbes and MarketWatch, that’s different than a lot of the more alternative sources and stuff that we look at, too, who are predicting that there’s going to be a need for alternative everything, alternative exchanges and currencies.
We’re big fans of real asset investing. We invest in things that are real. Real estate, obviously, that’s like the “Duh,” but there are other things like gold, silver, commodities, oil, that are real as opposed to some market equity that can go and come in no time at all.
One of the articles, that we won’t get into the details of for today, was about Apple’s 6000% increase since 15 years ago or whatever and how amazing that is, one of the few stocks to ever do that, and so forth. How do you know 15 years ago which of the myriad stocks to pick? Only in hindsight can we really learn some of these things, and really as real estate investors, we want to be focused forward.
Russell Gray: Just a little sidebar on that. One of the concerns I always have as an investor, when you’re looking at things that are real that are pretty straightforward to understand, that have intrinsic value because of what they are, that’s one thing. When you are looking at a financial statement for a company, and you’re trying to determine … You think about Enron, whose financial statements were completely fabricated, and you look at these companies that do accounting tricks.
To me things that are real, things that are essential, things that are tangible, that I can understand with simple business models where I can verify the essential data to determine the value, to me in an environment like we’re in right now, is a lot safer place to play.
2016 Predictions – Food Delivery & Distribution
Robert Helms: All right. Final predictions there from Forbes is that both gold and the dollar will end the year below where they started it, so we shall see.
Fortune has some interesting predictions which also may have something to do with real estate, but aren’t as directly related. Here’s an interesting one. The food delivery bubble will pop.
“Everybody eats,” they say, but we may not eat nearly enough to support the ballooning food delivery tech category. There’s a lot of these companies that today do and some companies that soon will be delivering food to us rather than us going to the grocery store.
This can be a wonderful service, but you probably remember more than 10 years ago, a couple of those services went belly up. Their prediction is all these new food delivery services, as great as that is, aren’t going to be able to sustain.
Russell Gray: Is that groceries or prepared food, do you know?
Robert Helms: It’s both. It’s both groceries, meal kits, meal delivery, and then some of the big warehouse type stores who are doing delivery.
Russell Gray: Okay. If that’s true, and I’m not convinced that it is, but if it were true, obviously the impact is going to be on the distribution workers and things like that.
Distribution’s such an interesting topic to start with because I started out my personal career as an adult as a material handler. That was a fancy title that meant that my job was to move to a box from point A to point B, so I operated forklifts and hand trucks, and I got to drive a little Bobtail truck, and learned how to back up to a loading dock, and all of that.
A lot of that was manual labor, and of course with technology, they’ve been able to eliminate a lot of those types of jobs. If that particular call is correct and there’s less packages going around, then there’s probably going to be less work in the distribution sector.
Robert Helms: Interesting enough, as we’re looking at 2015, overall shipping surprisingly was down. You would think as more people are buying stuff online, and realizing the convenience of having things shipped, and the inconsequential amount of shipping compared to the price of the goods, and yet shipping down. That’s a concern if you are in markets where shipping is part of the story.
Russell Gray: Yeah, we’ve talked a lot about that because to us those are the types of jobs that are difficult to outsource. At least you’re not going to lose them to China. You’re not going to ship something to China, or Mexico, or Asia, and then ship it back.
You do that when you’re manufacturing but not for distribution, so the distribution is going to happen in certain geographic regions. That’s been basically a pretty good call. I think it will probably continue to be a good call, but to your point earlier about drones, there’s some changes in the way trucking is going to work. I think we’re probably going to be covering that here shortly. You just got done talking about maybe the demand.
We’ve had Matt Kirchoff on the show a couple of times. He was on The Summit at Sea with us a couple years back. In fact, he’s the one that warned us that China … Everybody’s like, “Oh, China’s doing great,” and he’s like “Uh, guys, hey. Watch China. China’s not doing so great.” I was like, “Really? That doesn’t make any sense to me.” He called it.
Richard Russell, his whole thing with Dow Theory is looking into the Dow Transports. If people aren’t moving packages, if things aren’t shipping, then there’s an economic slowdown coming. This, what you’re talking about, Robert, is a slow down in shipments, is something that could indicate a broader economic weakness. People aren’t spending.
2016 Predictions – Robots Driving More
Robert Helms: Absolutely. That’s why you got to pay attention to this stuff early, leading indicators, trailing indicators. Speaking of drones, here’s our last prediction before we go to the break, and then lots of real estate predictions. Robots, according to Fortune, will be doing more of your driving.
As you know, there’s lots of companies that are looking at self-driving cars and all of that stuff, and interesting enough, in PriceWaterhouseCoopers Real Estate report and predictions for 2016, the question they pose is: should we be building fewer parking garages if in fact where the world is heading is to driverless cars?
Russell Gray: You’ve got the Uber factor-
Robert Helms: You do.
Russell Gray: … which is part of it. You look at these towns that really have grown up on shipping routes and their truck stops, and then things grow up around that because those are convenient points, and as they get a little bit of infrastructure. If you drive around, if you’ve ever driven cross country, you know what I’m talking about.
Imagine if all the sudden you don’t have as many people, those businesses will begin to fail, or they will begin to have to cut back because there will not be as many people. You’ll still get maybe the tourists and the people traveling, but that bread and butter trucking business, if there’s no drivers in those things … You think, “God, that’d be so weird to think about.”
Think about all the things that are in your life right now that are technology driven. For example, right now we had the big minimum wage increase in the food service, and there are major corporations like McDonald’s that are already beginning to experiment with fully automated robotic ordering.
I rent a lot of cars. I go in and I use kiosks. I go in, I swipe my drivers license, swipe my credit card, I print out my thing, and I don’t even talk to a human being, and then I walk down to the garage and pick up the car.
This is how technology, and robotics in particular, is beginning to replace the work that a lot of the entry level people were doing. Those are the kind of people that rent.
Now if those jobs are being eliminated, these are things that could have an impact on you as a landlord. Again, it goes back to this idea: wherever you’re invest in, whatever demographic you’re serving, pay attention to how these macro-trends are trickling down to the street level because they will end up on your PNL and your balance sheets.
Bob Helms: Certain parts of this whole idea of having a car that you don’t drive are pretty reasonable and easy to understand, particularly in urban areas, but think of sprawling Los Angeles. Why are there 12 zillion cars there?
Robert Helms: Right.
Bob Helms: Because people are not going to the same destination at the same time. What’s created, the great sprawl, the total infill of city to city to city, is all about people and where they’re going and what they choose to do. I’m having a problem projecting forward and seeing that applied to a place like LA.
Robert Helms: Here’s the thing. We’ve already seen what Uber has done in terms of disruption. All that has been is fewer taxis and people that are driving private cars.
That’s not as big of a disruption as what they’re doing in Japan, the Robot Taxi: the car you get in with no driver, never will have a driver. Doesn’t ever park anywhere except to let you out, is stored dozens of miles away from the town it services, and you don’t ever interact with anybody.
It used to be you had to get on a bus because all of us were going the same way, or a train because we’re all going to the same city. With Robot Taxi in Japan, doesn’t matter where you’re going.
Russell Gray: Johnny Cab.
Bob Helms: Johnny Cab. That’s right.
Russell Gray: Remember that from Total Recall?
Bob Helms: From Total Recall. Yes, exactly.
Russell Gray: I have a prediction regarding driverless cars.
Bob Helms: All right.
Russell Gray: More drunk people. How many people have said, “Hey, we’re going to go out drinking tonight. Let’s Uber.” If your car’s going to drive you, it’s like, “Hey, I can drink all the time.”
Robert Helms: Excellent!
Russell Gray: “I don’t need to worry about drunk driving.”
Robert Helms: All right, well let’s look for the stocks of those beverage companies to increase perhaps.
2016 Predictions – California Real Estate
Robert Helms: We’re talking about market predictions, what some of the experts are saying about what might happen in the new year. Of course we’re always interested in what people think, and then we’re going to find out how it works in the real world.
Let’s take a quick prediction now from Leslie Appleton-Young. She’s the Chief Economist for the California Association of Realtors, so just one of the U.S. states, but it’s a big one, and it’s been a strong market.
California was overall pretty strong real estate-wise in 2015. Here’s what she said, the end of November: “California home prices for 2016 and the number of sales will both edge up slightly in 2016.” She expects home prices to go up somewhere in the 3% range and number of sales to go up in the 5 to 6% range.
Russell Gray: Let’s say she’s right, and you see 3% appreciation. If you are out there looking to invest in a property, and you’re thinking to yourself, “Okay, I’m going to get into this property,” maybe even a homebuyer, you’re going to get into the property. You’re like, “I’m going to buy this property, and I’ll live there for 2, 3 years.”
If you’ve got a 6 to 8 or 10% cost of sales on the back end of that and you’re only getting 3% appreciation, you may want to think twice about that strategy.
You have to pay attention to the logic how she got there, and ask yourself, “Does this make sense to me? Does what she said at the macro affect where I’m at in the micro, in my particular market? Then how would that level of growth affect my exit and holding strategies?” Sometimes when you don’t get much appreciation …
We’ve been in markets where it’s been 20, 30, 40%. There are markets right now in the United States last year in 2015 that did 10, 15%.
You can get into a property, and you can get out of a property in a couple of years and break even or maybe at a profit when you have that kind of growth, but at 3%, not so much. I would say with that long history of maybe an average of 5 or 6%, what I’m really hearing her say is it’s a below average amount of appreciation.
Robert Helms: There’s a huge nuance there. You don’t just buy a property in California. That’s way too big of an area. If she’s saying as the Chief Economist for California Association of Realtors, number 1, she has a bent. She’s in the housing area, and that’s her bread and butter. She been at this game a long time.
California, even within her presentation, there are markets that will exceed and there are markets that won’t. She’s got a couple of California markets that she thinks are unhealthy. We can only look at big picture. Today, as a real estate investor, you have to look at the smaller picture.
Bob Helms: As a real estate investor, I’m looking for that equity growth if I can find it, but as a homeowner, that’s secondary to me, generally.
First of all, I may not know how long I’m going to be there, or I may know I’m going to be there a long time and the equity will be what it is. What am I looking for as a homeowner? The living conditions that I want, the neighborhood I want, what I can afford, best housing, best schools, whatever.
Point is, we think equity’s urgent. I think you guys wrote a book about that. Was it called “Equity Happens”? Yeah, I think so. Investors think that way; homeowners do not.
2016 Predictions – Housing Affordability On The Rise
Robert Helms: That’s a good segue into this report that comes out every year. One of the main resources I look to is the PWC Emerging Trends report. PriceWaterhouseCoopers put out this amazing report, very detailed.
Here’s what they do. They go out and they survey a whole bunch of folks who have earned the right to have an opinion. So leaders of industry and housing, development, management, asset management, all those folks, to say, “From sitting in your seat, what do you see?”
This is a huge report. You can Google around and find it. It’s 100 pages and it’s free.
Housing affordability concerns are on the rise. Why developers are building condominiums and mid-density products. There’s other products that are coming onto the market, and pricing is going up. We’ll talk in a little bit about the different markets and where. Housing affordability’s been pretty good, and as prices edge up, that’s a concern.
Russell Gray: Here’s the thing. I think going forward, at least in 2016, I don’t think you can count on lower interest rates to compensate for unaffordable housing. I don’t think the mortgage rates are going to save that part of the market.
The growth is going to have to come from stronger employment, stronger real wages. Certainly the low oil prices are helping, but you could make the argument that’s being offset by the rising healthcare costs for the average family, so that’s an issue.
You’ve got the issues with the interest rates, like I said, not really getting where they need to be, but the reverse of that is that now you’re beginning to see the lending standards loosen up a little bit. Loans are becoming more available.
The big picture with real estate always is that all the powers that be are definitely working to make housing affordable, whatever you call affordable. A lot of times the things they do to make things more affordable make it more expensive on a purchase basis, but they make it more affordable on a monthly payment basis.
2016 Predictions – Rise Of The Renters
Robert Helms: Let’s talk about what’s good for who. If affordability’s down, the next paragraph in this report is the rise of the renters. If housing affordability is down, is that a bad thing if you’re an investor?
Russell Gray: No!
Robert Helms: No, it’s a great thing.
Russell Gray: No, it’s a great thing. You’ve got more tenants, you’ve got a lower price to purchase, you’ve got a higher cap rate. It’s a more profitable scenario for you, so it’s actually a great thing.
Robert Helms: This report, this Emerging Trends in Real Estate, this is just within their housing sector, they’re saying another interesting thing about renters, and I quote, “Attitudes about renting have changed, respondents noted. Renting is no longer seen as only a temporary step on the road to home-ownership but as an alternative, and today we’re seeing the rise of permanent renters, a new demographic in Canadian markets as well as in the U.S. markets,” so more and more renters.
Let’s take a look at what some of these big picture trends are for this year. First of all, their summation of the year is this is going to be a year of coordinating offense and defense for real estate investors. There’s both, and they go through different product types and desirability of city locations, suburban locations, all those kinds of things.
Just some high notes. One is the decline in home ownership continues. We are at the lowest level of home-ownership we’ve been in basically ever.
What’s interesting in this report is they show that broken down by age group, so 10 years swaths: everyone under 35, everyone over 65, and then the 10 years in the middle. The group that’s been affected the most in decline of home-ownership is age 35 to 44.
Overall, we’re at 63.4% of households owning, and that’s down from in 20 years 69.2%, and that’s meaningful. It’s down in every age category. The least amount of change is 65 and older. Of course a lot of folks that are 65 and older bought those houses some time ago and still have them, so they’re homeowners.
Now I know you’re going to want to know where the top markets. Before we’re done, we’re going to make sure, probably the last thing we do today is share with you the number 1 market predicted by everybody.
What’s interesting is they’ve asked all of these respondents in this report, putting it together, the importance of what their issues are this year. The top issues probably don’t seem surprising.
Before I get to the top issues, let me share some of the things, the lower issues. Things they’re not all that concerned about. If we start there, you’re going to think, “Well, those are things people should be concerned about.”
They’re not very concerned about the rising cost of education. They’re not very concerned about immigration. They’re not too concerned about deleveraging. They’re not concerned about sustainable buildings or wellness and health features in buildings. Those are things you might think, “Well, no, people should be concerned.” Here’s what they’re concerned about. Number 1, job growth. Well, duh!
Russell Gray: Duh.
Robert Helms: Job growth affects almost every real estate asset. Income and wage growth, interest rates, and of course as Russ points out, interest rates aren’t likely to go lower. The Feds made the first increase, and there’s a lot of predictions that we left on the sidelines from different folks about how many times will the Fed raise and how much.
If you were to put that all on a spreadsheet, it’s going to come out like about 50 basis points at the end of the year. You had everyone up to 2 all the way down to .1, but somewhere between 40 and 50 basis points.
Russell Gray: You know what’s interesting about that is that I’m looking at an article from December 16 when they first raised the interest rate to 25 basis points. It’s talking about the Fed’s projection.
It says, “The economic projections that the Federal Reserve policymakers released on Wednesday anticipate U.S. economic growth at 2.4% next year and a rebound in inflation to 2% by 2018. The new projections came as the Fed carried out its first rate hike in almost a decade and set out a path for rate rises for 2016 that projected a 1.375 year end Federal funds rate,” so we’ll see. This was a Reuters article from December 16, 2015 if you care to look it up.
2016 Predictions – More Real Estate Emerging Trends
Robert Helms: Hey, here’s an interesting exhibit where they’ve asked all of these investors and fund managers where they’re looking to invest this year and the potential investment universe, they call this, by market classification. Where are people interested in investing?
Number 1 category within real estate is office followed by multi-family. Probably if you look back in the past few years, you’ll see multi-family was higher than office.
Office is strong and continues to be in certain markets, so we’ll talk about some of the particular market sectors here in just a minute. The big picture is that we’ve got a change in what people are looking to invest in in real estate. That may affect you, it may not.
We’re talking about some predictions the experts are making for 2016 and trying to stimulate your brain about stuff to think about.We’re looking at this PWC Emerging Trends report.
A couple interesting things, just quick high notes on a few things. Availability of capital for real estate in 2016. Number 1 equity source of all the sources? Foreign investors.
Number 1 lending source of all the lending sources? Securitized CMBS.
All right. Let’s look at investment prospects by asset class. Now again, we would argue that real estate isn’t necessarily an asset class, but we’re talking about within real estate, the different types of real estate, those could be asset classes. Where are the investors? Number 1 this year is private direct real estate investments.
That’s a bigger stack of capital than REITs, publicly listed homebuilders, publicly listed real estate companies, commercial mortgage backed securities. All that pales in comparison to private direct real estate investors.
Still you, and me, and those of us who invest in real estate are the horse when it comes to buying assets, all the way up to the Ken McElroys of the world and folks that buy huge, huge stuff.
What about REITs? REITS have performed pretty well, and right now, in the views of many of the folks interviewed for this, the outlook for the REITs sector is bullish.
“Business as good as it’s every been,” one of the REIT executives said. Well, okay. The market will be good for at least another 2 years at a very conservative estimate.
Reits are publicly traded vehicles to invest in real estate. I’m going to guess that most of our listeners, that’s not their primary focus, but that tells you kind of sentiment of the traditional Wall Street market and what they think about real estate.
Bob Helms: It’s an area in which it’s hands off. It’s passive investment. For a lot of people, that works really well, particularly people who have gone through and built an investment portfolio, and are at a point where they’re ready to back away from it.
They don’t want to be out of real estate. They just want to be out of management. REITs are huge, multi-national REITs, billions of dollars broke into 2 categories. Either I own property or I finance the loans for that property. It’s a narrow segment, although it can incorporate a lot of different kind of properties.
Robert Helms: Now they have a section in here about what foreign currency is coming into the U.S., and the number 1 source of capital from non-U.S. investors as a whole is the country of Canada, not China, not Japan, not Australia.
Canada has been number 1 in office, number 1 in multi-family, number 1 certainly in the industrial sector. Not number 1 in retail. Number 1 in retail investment into the U.S.: Australia. That’s interesting to look at.
Probably more interesting is what’s going to happen, according to these experts, in particular markets. Here’s a great quote from this report. “2016 is the year of the secondary tertiary markets. They continue to be more attractive on a relative opportunity basis than some of the gateway cities. Gateway cities, as we know, are places people might want to be, but we’re thinking of cities like Nashville, Charlotte, Indianapolis, Louisville, Portland, Austin, Raleigh-Durham.
These cities continue to attract hosts of people, and there are a lot of places that people love to live and work. They are manageable environments and have a better value proposition.” That’s a quote from one of the respondents. Looking at those markets, not surprised.
Russell Gray: No, not at all. What happens is the popular markets, if you will, get overbought, and now you’ve got to go find something else. That’s not just true from an investment perspective; that’s true from a living perspective in a business.
A business or a individual who’s looking for a place to live when they’re out their shopping, these markets that are the popular markets get very expensive. Then it’s like, “Okay, I’ve got to kind of … What’s number 2 on my list.” Hence secondary or tertiary.
These are all great markets with great infrastructure, transportation, shopping, education, all the things you look for. In fact, getting more familiar with a lot of those markets is one of our goals for 2016, and you’re going to be hearing more about that as the year progresses.
2016 Predictions – The U.S. Will Have A Housing Shortage
Robert Helms: Now one of the predictions that folks have been making for a long time is that eventually the U.S., and we’re just talking about the U.S. now because this report is there, obviously we look at a lot of other places, but the U.S. is going to have a housing shortage.
We’re going to need to build more houses. In certain places that’s not true. Right now here are the top 5 homebuilding markets, so the top 5 places where there’s demand for homebuilding.
Number 5 is Denver, Colorado, number 4 Seattle, Washington, number 3 is Charlotte. Charlotte you don’t think about necessarily. It’s more of a secondary market but pretty strong. Then number 2 and number 1, both Texas markets. Number 2 Austin, and number 1 Dallas-Fort Worth for homebuilding markets, so interesting.
In the office sector, office is an interesting trend because office is up right now. There is a lot of activity in office, and we’re seeing it emerge in the buy hold sell recommendations they do. That is they poll all of these folks and they say, “For your product type and these markets, are you a buy, are you a hold, are you a sell?” Then they put all that information to say where the strongest markets.
Office right now, strongest market, New York-Brooklyn, followed by Minneapolis-St. Paul.
Now you would think New York, well duh, but Minneapolis? I don’t know. How about number 3? Portland, Oregon. Number 4 Austin, Texas. Number 5 Atlanta, Georgia.
Those are the strong markets. Now that’s a culmination because even though Minneapolis-St. Paul is number 2, it’s got a higher percentage of people saying sell than hold compared to some of these other markets, but a lot on the buy side. Office, interesting, interesting sector to watch.
Retail. Now retail has, as you said, been hit. Right now the outlet for retail looks fairly bullish in some of the top 20 markets.
Top markets are: number 1 New York-Brooklyn, number 2 Miami, followed by Austin, Portland, and Los Angeles.
Now again, when we talk about retail today, there’s categories of retail. We’re not going to break it down into that, but if there’s opportunity you think of the retail sector, go check that out.
Hotels an interesting sector right now. Hotels pretty bullish in some areas and bearish in others. The kinds of properties, there’s business hotels, there’s resort hotels.
Right now the top markets for hotel: number 1 San Diego, California, number 2 Tampa and St. Petersburg in Florida, then in 3 and 4 are the Bay Area, San Francisco and San Jose of California for hotel.
We were talking off mic about the fact that if you look at that, San Diego is more of a destination, vacation, maybe conference city, whereas San Jose more business oriented. Not that people don’t certainly go to San Francisco to visit, but not that many people vacation in San Jose. That’s more of a business or that a lot of companies, Silicon Valley and all that, need for hotels.
Russell Gray: Yeah, as native San Joseans, we can tell you that, no insult, but we know the market well. I’m guessing there’s just not a lot of people that on their short list of places they want to go for vacation, it’s San Jose.
Robert Helms: Absolutely.
Russell Gray: This year with the Super Bowl, they’re going to be coming to Santa Clara, so that’s exciting.
Robert Helms: Last year, with the last Grateful Dead shows, so there you go.
All right, multi-family. Everyone knows about multi-family prospects look pretty good.
Here are the top markets according to the research for multi-family: number 1 Orlando. Orlando needs apartments, followed by Minneapolis-St. Paul. Put that on the list out in 2 of the categories in the top 5. San Diego, Los Angeles, San Francisco, so good markets.
Now overall, what about overall markets? Of all the markets and all the respondents, what is the top market to watch in the United States of America? Dallas-Fort Worth. That’s the market. That’s the MSA people have their eyes on for lots of reasons. This could be a 5 hour show, because we’ve got all kinds of predictions we didn’t even get to.
Get a 360 Perspective
The point is a prediction is only somebody’s opinion. It may be an educated opinion because they’ve done research.
A lot of folks, like PWC here, they poll a lot of people. That’s kind of what we’ve done. We’ve colored it with some of our nuances and context and understanding, but we don’t have a crystal ball. They might; we don’t. We just look at what all these folks are saying, and that gives us the ideas of what we should be watching.
Russell Gray: Yeah, absolutely. The thing is you have to keep your head in the game, and you’ve got to listen to a lot of different opinions. You have to ask yourself, “What makes sense, and what makes sense in my market?”
Then the other part, whenever you’re reading anybody or listening to anything anybody has to say, including us, you have to ask yourself, “What’s their agenda? Do they have a paradigm?”
They may not mean to misled. They may not be trying to spin any way. It’s just the way they see things. It’s how they filter things.
Think about all that, and then ask yourself the same question. “How do I filter things? What am I not seeing that I need to see?” I call it getting a 360.
I love doing these kind of shows. I love especially when we can go to networking events and conferences where a lot of these people are, and we can go from session to session to session, and then end up on the trade show floor and the cocktail hour at night, beginning to have these conversations and say, “Hey, how is it you see this? What did you mean by that?”
It’s one of the things I love best about The Investor Summit at Sea. We have that opportunity to get the 360.
You got people from all different disciplines. You’ve got people who are coming from different product types and investment backgrounds, different geographies, different occupations.
You have these lively, lively conversations. Then you have a lot of time to just consider it, and think about it, and then go back and clarify.
When you come out of an event, whether it’s a 1 day conference, or a 2 day conference, or 9 days, or 8 days like The Summit at Sea is, you have so much more clarity about what you see in the marketplace, and how to interpret it, and then what moves you’re going to make to either make more money or protect what you’ve already got.
Robert Helms: There is only one huge, giant problem with The Investor Summit at Sea, and that is there’s 4 cabins left. If you’re not yet signed up to join The Real Estate Guys, G. Edward Griffin, Tom Hopkins, and Robert Kiyosaki, live on The Investor Summit at Sea, then get to the website and do that, realestateguysradio.com, and click Summit at Sea.
Big thanks to all the folks who have made these predictions, and we’ll know next year whether or not they were true. Happy investing to you. Next week, we have an amazing real estate investor and a trainer of real estate agents. Brian Buffini will be with us. You’re going to want to catch next week’s show.
Until then, go out and make some equity happen.
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