Real Estate Investment and Development: “Secondary” Cities Offering First-Rate Growth Potential in 2018

Shrewd real estate investors are looking to 2018 as a year in which several so-called “secondary” cities feature minimal risk as well as exceptional return potential, an ideal combination in any investment opportunity.

While major cities across the United States — such as New York on the East Coast and San Francisco on the West Coast — continue to post record numbers while drawing increased interest from international and domestic investors alike, there is ample evidence suggesting investments in a secondary city will yield a greater return along with minimal risk.

As secondary cities continue to attract new residents with booming job markets and exceptional living costs, expert analyses continue to identify cities that top out around 3 million total residents as featuring the conditions necessary for a robust return on an investment in real estate. These cities appeal to a broad section of the population, particularly those seeking a tangible sense of community as well as all the benefits of big-city living.

In rankings of the best real estate investment markets nationwide, major markets like Los Angeles and Boston are now being joined by secondary cities such as Austin and Salt Lake City. Of course, the performance of any real estate investment is conditional on a wide range of factors that go well beyond population density.

When it comes to a real estate investment in a secondary city, the success of the investment hinges on several key issues: cost of living and quality of life; indicators of economic strength such as job creation and growth; a quality education system; and sound local infrastructure. As it stands now, a growing number of secondary cities feature the conditions necessary to yield a substantial return on investment.

In addition to cities like Austin and Salt Lake City, several cities from the Carolinas to the Pacific Northwest are poised to perform exceptionally well for real estate investors. In North Carolina, investors are expected to yield substantial returns on properties in Charlotte and Raleigh/Durham. Farther south, Charleston, South Carolina, and Orlando, Florida, provide the kind of opportunities shrewd investors typically seek.

In Texas, the Dallas-Forth Worth area joins Austin among secondary cities expected to perform well for real estate investors, but it is Seattle that has piqued the greatest amount of interest from real estate experts. In fact, in an annual survey published in Emerging Trends in Real Estate, it was Seattle that earned the top ranking for providing the best prospects for investment and development in the year that follows.

An Objective Look at the Potential Impact of Incremental Changes Planned by Federal Reserve

Circumstances in which the Federal Reserve announces a planned increase in short-term interest rates along with the reduction of mortgage-backed securities and Treasury bonds typically serve as an indication of a tighter approach to monetary policy. Even so, the recent announcement from Fed chairwoman Janet Yellen –- which featured the usual conditions associated with a tightening of the monetary policy –- outlined changes so incremental that the typical policy classification cannot be credibly applied in this instance.

Approximately nine years of monetary policy marked by the process of quantitative easing enabled the lower interest rates aligned with a period of sustained economic expansion across the globe. This period of expansion, of course, was preceded by a financial crisis that emerged out of the housing bubble and a relatively loose monetary policy. Arguments over the influence of the monetary policy tend to vary rather widely, but there are many who firmly believe that an earlier tightening of the monetary policy would have discouraged the borrowing that ultimately led to the housing bubble.

Nearly a decade later, those same arguments are being made in favor of a tightened monetary policy intended to ensure sustained economic growth rather than another downturn. Since many economic opinions closely align with one’s place on the political spectrum — which does not mean that the opinion is thus invalid or based on anything but sound reasoning — it’s important to remember the importance of objective economic analyses that take a wide range of issues into account to determine whether a particular action concerning the monetary policy will ultimately achieve its intended outcome.

The current state of the economy features businesses and households with fairly significant debt. An increase in the short-term interest rate, however incremental, might have a far greater impact on borrowers nationwide. With such widespread debt among American businesses and households, an interest rate hike could leave the Federal Reserve relatively helpless if the economy is suddenly dealing with another downturn. Legislators would likewise encounter difficulties in attempting to mitigate the consequences of another recession.

This is not to say that the Fed’s decision to change course — however slowly the change occurs — toward a tightened monetary policy will trigger a downturn; instead, it is important that policymakers take actions based on well-reasoned analyses that take into account the full breadth of factors that influence economic strength.

Thankfully, a reasoned approach to monetary policy is one of the areas in which ideology does not prevail over logic and reason. In fact, both The Roosevelt Institute and The National Review, bastions of liberal and conservative thought, have expressed a clear preference for a looser approach to monetary policy.

Even several prominent far-right politicians (including Ted Cruz, for instance) have gone on the record to say that the Fed’s recent approach, despite being regarded as loose by the majority of economists, inhibited economic growth in the aftermath of the recession because — in almost diametric opposition to conservative orthodoxy – the Fed’s monetary policy was not loose enough.

Keen observers of the decisions and debates surrounding economic policymaking should be heartened by the fact that the mistakes of the past are being heeded as the Fed takes steps toward tightening the monetary policy. That fact alone bodes well for a sustained period of economic growth.

How Will Labor Market and Job Creation Rate Influence Commercial Real Estate Projections?

Despite widespread job openings now totaling well in excess of 6 million, a lack of skilled labor possessing the qualifications needed to fulfill the responsibilities required of those openings is likely to have a far-reaching impact on the health of the labor market as well as job creation — not to mention the potential effect on the commercial real estate sector’s outlook.

With unemployment reaching its lowest percentage (4.3 percent) in more than 16 years, along with more than 80 consecutive months of positive economic gains — and an economy close to, if not already at, full employment — it is clear that the outlook for the commercial real estate sector will continue to be linked to the overall economic growth rate as well as the rate of job creation.

The positive economic indicators have inspired a greater level of confidence from members of the workforce, including those previously wary — whether warranted or not — of the potential for a sudden backslide into economic instability. Since this newfound confidence is especially apparent among the demographic of young workers still likely to be living at home with their parents, the sustained strength of the labor market is expected to have a positive influence on apartment absorption.

Due to a strong sense of confidence and stability in the economy, the youngest generation of workers is increasingly looking to rent an apartment for the first time. Although the workforce is showing indications pointing to greater levels of confidence in the strength and stability of economy, the lack of skilled workers has still had a limiting effect on new job creation.

Even though job creation numbers may be experiencing the adverse effects of a tight labor market, there is reason to believe that, despite the adverse impact, the commercial real estate market will benefit nonetheless. This optimism can be attributed to the fact that despite a substantial shortage of skilled workers to fill open positions, demand for commercial real estate currently exceeds the pace of construction.

Of course, it is fair to wonder why commercial real estate demand is still on the rise in the midst of a labor shortage in which 6 million open positions remain unfilled. This is because certain companies, including those in the professional, business, and financial services employment sectors, have adopted a recruiting strategy revolving around recent graduates for positions requiring the use of office space. Even in an economy currently enduring a significant labor shortage, the jobs created by these companies alone have spurred increases in demand for commercial office space.

It’s worth noting that the economy has not entirely avoided the drawbacks that typically accompany a labor shortage of 6 million or more, as top-line growth has undoubtedly been limited by the inability of American businesses to fill open positions with skilled workers. As it stands now, however, the labor shortage might not necessarily hinder the current rate of economic momentum. After all, the income gains associated with a 4.3 percent unemployment rate and an 8.4 percent underemployment rate — which is the lowest in the past decade — should continue to have a positive impact on economic consumption for the foreseeable future.

Strong Job Creation Numbers Inspiring Young Workers to Enter Housing Market for First Time

For an entire generation of young people, growing up during a time of economic uncertainty has had an undeniable impact on way they approach all manner of financial decisions. Members of this generation have exercised great caution while adopting a risk-averse financial philosophy, and this philosophy has in turn limited their willingness to consider entering the housing market for the first time.

The limited interest among members of this youthful demographic has had a measurable effect on the real estate industry, but it appears that the strength of current economic conditions might finally be enough to convince these young people to test the housing market. It appears that the recent reports of strong job creation numbers — along with a wealth of job openings representing a record high — have inspired a sense of confidence among the group of people least likely to act hastily based on a report of the most recently available economic statistics.

Of course, this does not mean that this youthful generation has not faced difficulties upon entering the housing market for the first time, particularly since the inventory of single-family homes available for purchase is currently at an all-time low. Combined with the fact that apartment vacancies presently stand at just under four percent (3.8 percent, to be precise), it is clear that the sudden increase in demand cannot be met given the currently available supply even when one considers that 371,000 new units are expected for delivery in the next 12 months — not to mention the fact that new apartment construction has never been higher in the past 30 years.

It is not only the residential real estate market that is experiencing the influence of the continued return of strong economic indicators, as the commercial real estate market is also dealing with a level of demand that cannot be met by the current pace of new commercial real estate construction.

This is especially true as it relates to financial services employment as well as professional and business services employment, all of which have outperformed the labor market as a whole. Since companies within these fast-growing categories have primarily targeted recent college graduates for recruitment to new, office-based positions, the demand for new commercial real estate has increased at a rapid rate greatly exceeding the current pace of commercial sector construction.

With the expectation that 2 million new jobs will be added by the close of 2017, there is some concern that a large percentage of these positions will nonetheless go unfilled due to a shortage of skilled workers available for what is now a total of 6 million job openings currently available in the United States. Keeping these and other economic figures in mind, the Fed has continued to favor a moderate monetary policy in an economy lacking any sign that it may be prone to overheating.

Chinese Real Estate Investors Increasingly Targeting Big Cities With Strong Education Programs

Over the past few years, the United States real estate market has experienced an influx of foreign investment, with Chinese buyers continuing to outpace all other foreign real estate investors. While there has already been a great deal of discussion and analyses regarding the multitude of factors driving Chinese investors to put their money in U.S. real estate, until recently much less was known about why these investors ultimately prefer one particular geographic location over another.

Recognizing the inherent value associated with developing a clear understanding of the various factors at play during the decision-making processes employed by foreign real estate investors, a number of recent studies have identified several key reasons behind regional real estate demand. As a result, the data collected through these studies has made it possible to create a projection system delineating the specific U.S. cities Chinese real estate investors are most likely to target over the course of the next year: Los Angeles, San Francisco, Boston, New York, and Miami.

The projection is quite revealing for a number of reasons, including the fact that even a cursory review of the characteristics common among the five cities highlights the factors Chinese real estate investors find most appealing. In addition to featuring the nation’s most prominent cultural centers and strongest local economies, each of the five cities listed in the projection is also known for offering outstanding educational opportunities to its residents.

Whether it is the proximity to so many of the elite colleges and universities located in the city of Boston or access to one of the many outstanding public campuses associated with the University of California, Chinese investors clearly value educational opportunities when selecting real estate properties (obviously, New York and Miami are also home to outstanding academic institutions as well).

Of course, there are other factors to consider beyond access to exceptional academic opportunities, as Chinese investors also weigh the value of U.S. investment properties relative to international properties. The combination of its excellent public school system and comparatively low — in terms of both national and international prices — property costs are among the primary reasons that Los Angeles is expected to be the top housing market targeted by Chinese investors over the next year or so.

Weather also plays an important role as Chinese investors attempt to identify the ideal region for a real estate investment, so it should not come as much of a surprise that warm-weather climates like Miami and Los Angeles are among the top options in the United States. A lack of year-round sunshine is not necessarily a deterrent, however, as each city’s economic outlook as well as its unique cultural makeup also figure prominently among Chinese investors seeking U.S. real estate.

With all else being equal, Chinese investors appear most interested in properties that range in cost from $300,000 to $700,000. Even though property values vary widely among the five cities most likely to appeal to Chinese real estate investors during the year that follows, a price range of $300,000 to $700,000 still ensures access to a broad array of options in the part of the country that each individual investor ultimately concludes as most appealing according to their own personal preferences.