SLEEPING GIANT REAL ESTATE MARKETS!

In my last article, SET YOURSELF UP FOR CASH FLOW & APPRECIATION, I suggested that real estate markets are created unequally and there is always opportunities to get the best of both worlds between cash flow and appreciation.

What does Denver have in common with Dallas? Well it is definitely NOT their geography or their economies since those are both very different.Denver is the mile high city buried deep in the beautiful Rocky Mountains where many people like to travel for leisure and hospitality while a younger demographic is drawn to its lifestyle status and tech heavy eco-system.Dallas’s central US Sunbelt location is ideal as a trade and logistics hub supporting a strong manufacturing and financial infrastructure. People and businesses of all types are drawn to Dallas’s attractive cost of living, amenities and ease of doing business. These two cities have very different DNAs; however, the one thing in common was their extremely fast rebound from the 2008 sub-prime mortgage meltdown hitting new, all-time highs, easily surpassing their 2006 peaks. Dallas and Denver were both Sleeping Giant Real Estate Markets!

According to Case-Shiller 20-City Index, by October 2015 Denver and Dallas had surpassed their 2006 highs by over 23%, while the Index average was down almost 12%!

I bought my first income property in Dallas Forth-Worth, Texas at the worst possible time when the market peaked at the end of 2006...but even heavily levered with a $2,128 investment on new construction I was cash flowing and 10 years later I sold that property for 278% annualized returns. I learned through experience that cash flow and appreciation are possible at any time within Sleeping Giant Real Estate Markets!

There may be 20 to 30 Sleeping Giant Real Estate markets across the U.S. at any one time.

Now I know you are asking yourself what made Dallas and Denver different from other cities in the index! The simple answer is Jobs!!!!!!!!!!!!!!!

The DFW Metroplex attracted over 327,000 new jobs from 2004 to 2008, which was an increase of 12%.Denver, a much smaller market, added almost 100,000 jobs over the same time for an 8% increase....and then the financial crisis hit and almost every city across the US lost jobs from 2009-2010, Denver and Dallas being no exception. The only difference was that Dallas and Denver had pre-crisis momentum and rebounded quickly. Both cities posted job growth from 2011 to 2015 increasing by 16%.

However, here is the kicker...Phoenix, also had pre-crisis momentum with job growth of 15% from 2004 to 2008.However, the recession hit Phoenix hard from 2009-2010 with job declines of 10%, which is double the losses of Denver and Dallas. From 2011- 2015 Phoenix rebounded strong with job growth of 13%.So, with net job growth between Phoenix, Dallas and Denver being very similar between 2004-2015, why the big disparity in the post-peak price change index where Dallas and Denver were both up 24%, while Phoenix lagged behind their peak by 31%?

To understand the answer we must SUPPLY the other side of the equation. We talked about housing demand fueled by job growth.Where there are jobs people move to and start households. But, if there is limited construction not keeping up with the demand, you have rising competition for limited housing and that pushes rents and valuations up. Supply and construction was the difference between Phoenix’s fall and Dallas-Denver’s rise. Pre-crisis, Phoenix was on every builder’s radar and boy did they build new homes and apartments before the 2008 meltdown. Dallas and Denver were still sleeping Giants and had not as much supply growth so it was much easier for these cities to fill their limited housing stock with their huge demand causing rents and values to surpass their 2006 peaks. Phoenix had so much construction that it was reflected in their 10% job losses from 2009-2010.Most of these were construction jobs! The equation is simple SUPPLY and DEMAND!

Job, population, household growth and the pipeline of new housing supply is black and white and explains the science of why Sleeping Giant Real estate markets exist. Now let us talk about the art of choosing Sleeping Giants.

The grey area is in the details of the markets. All market DNAs are different and those characteristics could propel one Sleeping Giant to wake faster than another. The art relates to business and landlord friendly climates, and demographic and economic composition.

Since jobs and households fuel potential property rent and valuation gains, you want to choose the places that would be most favorable for businesses to move and where laws are in favor of the landlord. For example, California treats businesses poorly with high regulations and taxes. Thousands of business have left for greener pastures. One recent example is Toyota relocating their corporate headquarters from Torrance, CA to Plano, TX. Texas has low regulations, no corporate and no personal income tax! Additionally, Texas laws are favorable to the landlord where it can take less than a month to evict a non-paying tenant. On the other hand, California can take up to 6 months. That could really hurt your cash flow and put your investment at a higher risk of default! If you want to mitigate risk from real estate investments, choose states that are business and landlord friendly.

Finally, to further curb risky real estate investments choose markets that have favorable economic and demographic characteristics. Places where 20% of the population is between the ages 24-35 are strong rental markets since this is prime renting ages. A market that is minimum 30% non-owner occupied provides a good pool of renters. A larger female demographic is positive since females have a higher propensity to rent. A market that has no one-employment sector greater than 20% of the total economy is considered stable. High-tech, engineering, white collar, Biotech and medical employment sectors have a higher job growth multiplier effect than manufacturing or blue-collar job sectors. For example, for every one high-paying engineering job, three lower-paying service jobs are created such as butchers, bakers or barbers. Blue-collar jobs do not have as strong a job multiplier effect.

Now you have a better understanding on how to pick a Sleeping Giant real estate market. Look out for my next article as we put these criteria to the test to evaluate some living, breathing Sleeping Giants.

Stevan Garcia