Economic Predictions for Real Estate in Houston
REjournals has been hosting some amazing, free webinars to help inform professionals in various sectors of real estate about various topics, all specifically aimed at answering new questions that this sudden pandemic has created.
A couple of weeks ago I attended one of these webinars titled Economic Rollercoaster – Finding Opportunity During a Bumpy Ride featuring guest speaker Dr. Mark G. Dotzour, real estate economist who served for 18 years as Chief Economist of the Real Estate Center at Texas A&M University in College Station. You can learn more about his expertise here, but it'clear he knows his stuff! There is so much ground to cover on this this subject, but I want to share my top 10 takeaways from this webinar that will be most helpful to our IREM members.
- The value of a contract has never been lower. As many managers are seeing, force majeure clauses are being scrutinized heavily. The ambiguity of some verbiage found in these combined with the unprecedented environment we are currently in, has the potential to cause large legal headaches for parties on both sides of these agreements.
- More warehouse space will be built. One thing this pandemic has taught Americans is we should not rely so much on outside (non-U.S.) manufacturers to make products we need. The belief is that many companies will see great value in increasing production of certain goods within our borders, calling for more industrial/warehouse real estate.
- Real estate will do well, but overall profits will be lower. It is estimated that the Federal Government will keep interest rates very low for a long time (read years, possibly a decade or more) to support economic growth and consumer spending. So while there may be people looking to invest in real estate, therefore increasing growth in the market, the price they’re expecting/willing to pay will be lower. Cap rates will also play a role in this, but is more variable across different types of real estate.
- Single-Family home sales will skyrocket. There was some very notable growth in this market starting in January of this year and the lower interest rates will only increase that. Currently sales are limited due to social distancing, but once stay-at-home orders begin to lift, the market growth here could be explosive. This will be very beneficial for many local markets, including Houston.
- Changes in desired residential and multifamily home options. Dotzour noted desire for Class B and C apartments will rise over Class A as renters work to stabilize their financial situations amid the economic downturn. Additional, we will see a move towards RV parks as an option for a new kind of “affordable housing” as people sell larger homes and move to RVs and tiny homes.
- Loans will be forgiving. There are a few things at play that will create a more beneficial borrowing environment for real estate. First, lenders will allow for deferment of real estate payments for three months to offset immediate income drop-offs. Additionally, borrowing costs should stay low and there is an expectation for some flexibility when it comes to real estate loans.
- Inflation will be temporary. There has been talk of an inflation surge, which the U.S. market hasn’t seen since the early 80’s. While there will be inflation on certain items, this will likely be due to shortages resulting from current pandemic restrictions. These temporary inflated prices should return to normal once our day-to-day operations can stabilize.
- Increase demand in suburbia. As many businesses have been forced into a telecommuting scenario, there is a strong possibility for an increase in working remotely and millennials desiring to live in a more suburban setting. Small towns just outside of large cities and master planned communities will be in high demand, likely increasing the desire for other types of real estate (retail, medical, industrial) in these areas as well.
- Office design will have to change. Again, building on the idea of more businesses and companies becoming comfortable with virtual working, traditional large-space offices will have to change. This is a change many people have seen coming and have planned for, but the timeline for these changes has been accelerated. Expect to see a need for redesigning the way open office space is set up to accommodate for social distancing standards. There may also be some regression towards traditional separate offices in the short term.
- It’s all a bit of a gamble. While certain elements of our current situation may feel familiar to other moments in our history (Spanish Flu, WWII, 9/11), nothing quite like this has ever happened, so everyone is playing a guessing game. There are predictive models to draw from, but our environment can change daily and we have to be prepared for a variety of scenarios.
Even Dr. Dotzour will joke that his predications have a 50/50 chance of being right, but having some sense of where we’re all headed offers a bit of comfort, even if the outlook isn’t always positive. Understanding what’s possible and how our economy works can be very empowering, especially during times of stress and strain. I encourage you to listen to the full webinar when you have a chance and educate yourself on what is happening and what is coming. There’s great power in knowledge, and I think we’d all like to feel just a little more powerful these days.
About the Author: Lindsay Konlande has been with IREM Houston for over 6 years and currently serves in the Associate Director role . Lindsay earned her Bachelor Degree in Communication from Texas A&M and has 10 years of experience in marketing, public relations and copywriting.