SLEEPING GIANT REAL ESTATE MARKETS! PART 2 - A CASE STUDY!

In my last article, , I took you through many of the characteristics that create the environment for a potentially explosive real estate market. The kind of market that gives opportunity to bank on the best of both worlds: Cash Flow & Appreciation!

Now let’s put these principals to the test in real time!

Remember, as real estate investors our core job is looking for market inequities between supply and demand. It is simply the imbalance between the demand for housing and how far along the builders are at oversupplying the market with new product.For the most part, Denver and Dallas were off the builders’ radar before the 2008 financial meltdown as these two real estate markets skyrocketed out the crisis with strong demand from population and job growth that outpaced the country. Phoenix also had job and population growth but the builders drove Arizona’s urban heart into a deep housing depression with too much supply.

Now, almost 10 years into this current economic expansion, real estate investors must be nimble with their market selections.Many indicators point towards another downturn looming as I wrote about in .

Our job today is to find the next Dallas or Denver! There may be 20 to 30 Sleeping Giant Real Estate Markets across the U.S. at any one time......so let’s evaluate a couple in today’s environment.

Houston, Texas is a unique real estate market because it usually runs at its own pace as the energy capital of the world. In other words, the US’ fourth largest city is it’s own economic engine that independently fuels booms and busts. While most of the country went through one economic bust over the past 10 years, Houston has gone through three!

Every real estate market busted when credit froze during the sub-prime mortgage meltdown and financial crisis of 2008.But, Houston quickly bounced back because a strong energy market, specifically oil. Crude oil peaked at $150/barrel mid-2008 then bottomed out at about $50/barrel at the end of 2008 before skyrocketing again just a year later to over $100/barrel, holding steady as Houston Boomed again. High crude prices created over 100,000 jobs in the Houston area over a very short time period until crude bottomed at about $35/barrel in the beginning of 2016 with most of those job gains lost, handing Houston its second bust in under 8 years. In 2017, the third bust came through means of natural disaster when Hurricane Harvey dumped 25 trillion gallons of rain on Houston, which is like having Niagara’s biggest waterfall pour into Texas for 12 months.

If you have been a real estate investor in Houston the past decade has been volatile with a string of Booms & Busts. But, Houston’s future looks bright because this past decade of excess capacities from financial, oil and natural disasters have cradled the real estate market to sleep in the right conditions to boom once again.

Today, it appears the inequities between supply and demand will awaken Houston’s real estate Giant within for years to come. Job Growth has averaged 2%+ since January 2018.2019 should grow by 2.3% with 3.2 million payroll jobs, a net increase of more than 600,000 over the past 10 years. Only New York, Los Angeles and Dallas have created more jobs over the same period.According to the Perryman Group, Houston’s compound annual job growth rate is expected to be 2.05% through 2023.Job Growth puts money in peoples’ bank accounts and allows them to form their own households and this surge creates renters and buyers of real estate.

Houston has been one of the fastest growing metros in the US with percentage growth averaging about 1.9% since 2010 and the second largest number of net in-migration with 533,390 just behind Dallas. According to the Perryman Group, Houston’s compound annual population growth rate is expected to be 1.55% through 2023, which is double the US’s 0.71% and higher than Texas at 1.44%.So move over Chicago, as Houston inches closer to becoming the nation’s 3rd largest city!

Historically, Houston’s Multifamily demand has been relatively stable and shows signs of strong momentum. The opportunity I see as a real estate investor is on the supply side of the Multifamily equation. Houston’s builders have always built a glut of inventory during good times when oil prices are high and job growth steadies above 2%.Well, since 2018 these good times are here again with oil averaging over $60/barrel and job growth hovering over 2%.So where are the builders?

The builders are there but they aren’t building the way they used to for 2 reasons. The first reason: they got carried away from 2013 to 2017 delivering almost 80,000 multifamily units averaging about 2.5% annual supply growth. They were forced to put their foot on the breaks when they realized demand was weak reflected in apartment occupancy and rent declines.

Building always lags relative to the local economy. The builders show up when they realize demand is there but that could be up to two years after the economy triggers upside in demand. Then its takes the builders anywhere from 12-24 months to complete their projects. So, it could take 3-4 years until a market sees the first major glut of supply after the economy first shows signs of strength. Inversely, it could also take up to two years after an economy slows down for builders to realize that they built too much!

Take a look at the job growth and supply charts. Houston started to show 2% job growth in 2011 and oil prices were above $100.Builders started to increase supply two years later in 2013 and didn’t stop until 2017, which is 2 years after oil prices dramatically dropped and job growth waned in 2015.

Sorry for the tangent, but after too much building there is a second reason that is preventing builders from grabbing their tools out of the shed even as Houston enters 18 months of elevated oil prices and 2%+ job growth, COST! Land, building material costs and labor shortages are making it more difficult for construction projects to pencil out across the country. But when you add the aftermath of Hurricane Harvey and talks of national recession, it creates a perfect storm of cost/fear pressures that will keep Houston’s builders at bay for many years.

New Houston flood plain regulations went into effect beginning 2018.Stricter ordinances are in place on properties within the regions floodplains following Hurricane Harvey’s devastation. Many developers and contractors throughout Houston say their burden- higher construction costs, fewer favorable sites and increased time to permit and build- is too steep.

Even if there is a recession, this current favorable imbalance between strong demand (>2+% Job Growth & >1.5+% Populations growth) and constrained supply (<1% Multifamily units) will support Houston from falling to deep and boost it faster out of any national crisis, just like Denver and Dallas almost a decade ago. For a real estate investor this allows for the best of both worlds: Cash Flow & Appreciation!

Look out for part 3 of this Sleeping Giant Real Estate Markets series. This next case study city pick will surprise you!

Live above the line,

Stevan Garcia