SLEEPING GIANT REAL ESTATE MARKETS! PART 3 - A CASE STUDY!

In my last article, , I explained why Houston could be more recessionary resilient than other markets.  But, I didn’t mention the whole truth about Houston’s potential boom during the next cycle.  Like all roads led to Rome as the political capital of the world, all roads lead to Houston as the energy capital of the world.  There is a huge global market shift happening now that could act as a major tail wind to Houston as the US navigates through total energy independence.

Having one MAJOR technologically driven industry market shift coupled with strong supply & demand fundamentals can make a real estate market thrive.

US is to become a net energy exporter in 2020 for first time in nearly 70 years and NOW is the World’s leading oil producer, ahead of Russia and Saudi Arabia.  US Fracking technology has changed global market share and supply chains that benefit the US oil industry from drilling, to transportation and refining of petroleum products.  The energy industry continues to invest Billions in the US, and all those roads lead to Houston.  Whenever I search for a sleeping giant real estate market, I also look for an emerging presence of a major technical shift in industry such as the US oil shale revolution resulting in US energy independence and making US the dominant energy power in the world.

Now, let’s look at a tertiary market that has great supply & demand fundamentals and will benefit from a MAJOR technologically driven industry market shift that I will save until the end!

I truly believe Huntsville, Alabama is a Sleeping Giant with characteristics similar to Denver and Dallas in 2006.  This market might surprise you since it is not on most people’s radar; however, it could be one of the last markets to come down during the next national financial crisis and one of the first to ROCKET out, much like Dallas and Denver did during this past cycle.

Also known as, ROCKET City, Huntsville is Alabama’s third most populist city, and is home to key NASA facilities and military centers.  The city is forecast to be Alabama’s largest city by 2024.Livibility.com considers Huntsville the best place to pursue a STEM (Science, Technology, Engineering, Mathematics) career in America.  With 300% job growth in 2017, Huntsville was named the number one fastest-growing tech city by ZipRecruiter and with 16.7% of the total work force being tech-workers, Huntsville currently has the third most technical workforce in the country, according to Bloomberg.

"The tech industry is no longer bound to the coast," says ZipRecruiter's Chief Economic Adviser, Cathy Barrera. "As a result, we're seeing the tech industry expand out of the major metropolis areas, and into smaller regional cities that have since flown largely under the radar.  "Tech companies are attracted to these locations due to tax breaks and a low cost of living.

Remember, in , I stress real estate investors should be very interested in growing White-Collar markets, especially tech-hubs, since the job multiplier effect is much greater for higher paying jobs.  For every tech-job created, a multiple of three more blue-collar jobs are needed to service the higher disposable income of that white-collar job.  This creates a higher multiple demand for housing across all property types from the lifestyle-renter to the renter-by-necessity.  We have seen this insatiable demand for housing over the past decade in hot tech markets like San Francisco, Seattle, Denver and Austin.

Huntsville has amazing momentum to fuel the next decade.  The city has engineered the right public and private conditions for a rising Tech city with a business friendly environment, high quality lifestyle amenities, infrastructure and an educated workforce that will continue to expand the cities employment and population.  Job growth is strong averaging 2+% growth and outpacing the US since 2015.  Consistent 2+% job growth for more than 2 years is an encouraging indicator of a sleeping giant real estate market.

According to a Bloomberg report, Huntsville has the third largest favorable spread between STEM pay and cost of living among the top 100 US tech cities.  The ROCKET city ranks #9 for STEM pay at $92,380 and #68 in Cost of Living Index of 97.4. This favorable pay-to-cost spread coupled with Huntsville having the third most technical workforce in the country, only after San Jose, CA and Boston, MA, create a great environment for inflation.

STEM jobs are typically occupied by younger people, who are generally inflationary because they consume everything and take on more debt than older people.  However, young people making big tech bucks leads to even more inflation.  As more high paying jobs become available and a younger demographic moves to fill those jobs, expect the income-to-cost spread to squeeze as products, services and housing become more expensive.

This thinning spread between income and cost of living is a goldmine for real estate investors because it gives operators the ability to add value to properties or build better housing for which people are able and willing to pay more.  This is exactly what has happened over the past decade in cities like San Francisco, Boston, Austin and Denver.  I would expect to see this contracting pay-to-cost spread scenario play out over the next decade in Huntsville.

I once said the core job of a real estate investor is to uncover inequities between the demand for housing and how far along builders are at under or over suppling that market; however, equally important is the inequity of income to cost of living.  The bigger the spread, the bigger potential a sleeping giant real estate market can be.

There are currently about 27,000 multifamily units in Huntsville.  2019 supply is forecasted to grow by 1,026 units or about 3.8% stock growth; however, with land, building material costs, labor shortages and the economy slowing I would expect supply to grow much slower creating favorable absorption conditions for apartment owners.

 Finally, a MAJOR technologically driven industry market shift that will benefit Huntsville is the automobile industry’s transition from the combustible engine to electric power.  The US is the world’s second largest automobile market with over 17 million sales per year and by 2038, electric vehicles sales will surpass fossil fuel vehicles.  Electric vehicles is a key element of the joint venture between Toyota and Mazda to build a $1.6 billion manufacturing plant in Huntsville, operational in 2021.  The factory will create more than 4,000 jobs giving the joint venture a leading position of a disruptive technology that is poised to dramatically change the direction of a GLOBAL automobile industry.

That’s a wrap for my Sleeping Giant Real Estate Market series.  Healthy supply and demand fundamentals, steaks in a MAJOR industry market shift and a big spread between income and cost of living are some of the key elements to evaluate in market analysis.

By now, you can see that I really LOVE real estate.  Look out for my next article as I explain why everyone should be investing in real estate!

Live above the line,

Stevan Garcia