Rent Sense: Where are we headed?
By Neil Fjellestad and Chris De Marco
FBS Property Management
If you’re keeping up with local real estate news you could believe that the San Diego general economy must be doing well. Home sale prices are going up while the availability of resale homes has dried up. New home subdivisions are experiencing more activity than during the last several years; both in terms of supply and demand from pent-up buyers.
On the rental side of the real estate market rents rates are still increasing though slowed somewhat in apartments. The vacancy has tamped down and mortgage money for investment real estate is loosening up.
Actually, real estate entrepreneurial sectors are leading in this recovery just as in previous recoveries going back to the early seventies even though many economists swore that this was not going to happen this time. Also, take a closer look at the seventies for an example of long sustained real estate investment growth to keep up with the need to combat higher taxes and rising inflation all during a time when individuals were coming out of school and the military to disappointing employment gains. Again, this time it is going to be slow transformation versus quick transition. Amid this reality are the current fears echoing throughout the local market that there is another bubble coming, interest rates could go way up, and there is still shadow inventory lurking to spoil the buzz.
Though popular, these fears appear to be as short-sighted as the optimism of 6-7 years ago that local real estate prices could do nothing but go up forever. The underlying facts tell the real estate story and like any real story there are good parts for some characters and issues to be resolved; some known and others will be a surprise.
Let’s look at some of these underlying factors and explore the implications to local real estate sales and rentals-
• The long recession has crippled the supply line of constructing new housing in the local development environment. Multifamily apartments and condos will move to market faster but still it always takes longer than intended with resistance at each stage of approval.
• Future housing development will need to be smarter; more re-development, more urban in-fill, less suburban spread, more mixed-use, less traditional bedroom neighborhoods, more public transit, less time behind the wheel.
• On the demand side the millennial generations (ages 18-34) have been on the sideline during the recession though this huge demographic fuels rental demand and eventually they become mature real estate buyers. Locally, this group is enjoying relatively the best improvements in employment and wants to create households. They are also the most flexible when it comes to what these households look like. Adult roommates (coming out of school and the military) with their continued incomes can be interested in apartments, rental condos and individual homes. Renters will continue to need about half the housing stock in San Diego.
• In addition, this region is a magnet for a variety of first and second generation immigrants (39 native languages spoken locally). With comprehensive immigration reform in view and health care reform moving forward San Diego will grow dramatically.
• Future and economic growth will cluster within mega regions described in a study 5 years ago as being composed of closely linked cities creating populations of (10-50 million) producing hundreds of billions of dollars in economic output. These mega regions can cross state and U.S. borders and harness human creativity on a massive scale. There are 10 of these regions in the U.S. and are becoming the source of the lion’s share of the world’s scientific achievement and technological innovations. San Diego is the geographical coastal center of the So Cal mega region stretching from Los Angeles to the north and into Tijuana, Mexico to the south. (Population 21.4 million with economy of $711 billion) These mega regions are also attractive to an active older population than want to stay involved and perhaps employed.
These are the large brush strokes that support our contention that our local real estate market is becoming far more dynamic than in past generations. Patience and expertise are at a premium. The real estate investment potential is robust but requires innovation. Rental ownership survives as the leading vehicle of building real wealth and producing tax favored cash flow but must be managed as a business in a demanding world of preferred renters and consumer protection. For the prepared and informed this next 6-8 years will be a welcomed, sustained, positive investment cycle.
Rent Sense: Where are we headed?