I recently attended Arizona 2011 - Real Estate and Business forecast seminar which had a number of excellent featured speakers including Elliott Pollack, renowned economist from the Phoenix area. I'd like to share with you the overall sentiment as well as the analysis of various real estate and business sectors.
First Elliott started of the show with his signature analysis of the local, state and national economy. The overall consensus was that we're looking at another year of stagnation in 2011. In other words, 2011 will resemble 2010 in most ways - abysmal. The year of year improvement will be minuscule. As we move forward, 2012 will be better than 2011 and so forth but we won't see an marked improvement and substantial growth until 2013-14 when things should start to return to normal. Everything is predicated on the national economy improving and while there are signs that things are improving ever so slightly, we are still a few years away on that front as well. Of course, so much is dependent on what happens nationally and even more so, globally with the economy. Elliott went on to point out that Phoenix has historically suffered from emphatic boom-bust cycles and that we are poised for another boom cycle. All the indicators point towards to future population and employment growth as we move forward which will support our housing market.
Moving on to some of the other speakers and specific real estate market segments, the consensus was that residential housing is near or at bottom. Will probably get slightly worse next year as more foreclosures hit the market and must be absorbed. But we are already at rock bottom pricing so can't go much lower. This means another year of tremendous housing affordability and ability to find incredible value for housing and investment.
Apartments are the first real estate product type in the investment sector to show improvement and signs of upwards movement. We are pretty much at the bottom for apartments. Class 'A' and 'B' apartments didn't really suffer too badly in this recession and there are signs that they are improving. Rents are up and concessions are down in these asset categories which positively affect cash flow and market value. There are simply more potential buyers for the nicer product than there are buildings for sale. I can personally vouch for this as I have been involved in numerous bidding wars for quality assets in good locations. This invariably means someone is willing to overpay, usually.
Class 'C' is being neglected in a big way right now and that's where the sales inventory is located. Too much inventory and not enough buyers means downward pressure on value and pricing. It is getting to the point where some lenders are willing to dump properties to get out from under them. This is also the sector affected by the highest vacancy rates in the 20-25% range because they are invariably in the areas affected by the SB1070 legislation that scared a lot of Hispanics out of the city and across the border. Some of those areas in Glendale, West and central Phoenix have been decimated by vacancies as the rental pool has shrunk. What this means is that there is now an opportunity to purchase real estate assets for cents on the dollar and benefit from the end of this temporary crisis. This is probably where some of the best deals are located but they need experienced investors that understand how to turn a property around.
Apartment financing is available and getting better.
Industrial is the next real estate asset class that is set to recover. Still a couple of years away, but there are signs that it is bottoming out and positive absorption is starting to edge down vacancy rates. Retail and office are still light years away from recovery and should only be touched by the most experienced and knowledgeable investors.
We also had a speaker that talked specifically about the residential rental market. Single family homes and condos as investments. He stated that he is managing more homes than ever and vacancy rates are lower than he has ever seen and rents are moving up. He manages over 900 homes and has a 4% overall vacancy. What's driving this sector is the number of homeowners losing their homes in short sale and foreclosure and in need of rental housing until they can repair their credit. The best residential housing markets for investments are where the newer subdivisions were built from 2003-2007 on the fringes of the Valley. Even as far out as Buckeye. So, where we are positioned and selling a lot of homes as investment is ideal - Avondale, Goodyear and surrounding areas.
As it stands with any type of investment, if you hang around and wait for the indicators to show a turnaround, you are already late. You have to be able to anticipate what's happening with the leading indicators and jump in before everyone else. It's really not that risky if you make sure to stick to buying properties that have positive cash flow.
So when are we going to see an upswing of housing values? My thoughts are 2-3 years and once it starts, it will accelerate fairly quickly (NOT as quickly as the last boom). Why? because we will have A LOT of homeowners that lost their homes and have repaired their credit so they are ready to re-enter the housing market. Couple this with an improving economy and more people moving into town and our oversupply of housing should be gobbled up pretty quickly. Prices will have to escalate enough to motivate the investors to sell their inventory so I think you could see a run-up of values in the 20-30% range within a 2 year period when this market segment re-opens(or until cash flows turn from positive to negative on single family housing). Once it is tapped out, I expect values to appreciate a more normalized level of 2-5% per annum. That's just my opinion.
Now lets briefly examine the last few months of sales activity for residential housing. After monthly inventory increases in Aug and Sept, the market showed signs or restabilizing in Oct and leveled off and improved slightly in November (speaking about overall inventory levels). Prices have softened a bit further in the third and fourth quarter of this year, but not significantly. I expect a slow improvement beginning in January when everyone gets back into the swing of things.
The bottom line is there has never been a better time to buy residential housing in Metro Phoenix (being selective). Astounding affordability and positive cash flow on single family homes in a major US metro market makes now the time to get involved and snap up properties to reap the benefits over the next 5-10 years. Don't wait until it's too late. Let us help you acquire a portfolio of real estate that will make you money now and appreciate well into the future.