Real estate is changing … again.
The post-pandemic world is a volatile one, and the real estate industry is just as susceptible to volatility as any other sector. Real estate has long been a “hedge asset,” one that is somewhat insulated from economic pressures and declines. As a result, investors often believe their strategic decisions are insulated from economic pressures.
However, four trends began emerging this summer that will affect your returns as soon as third quarter 2023 (if they are not already doing so), so be alert and be aware.
1. The “Free Money Fountain” Has Been Shut Off
There are more houses being listed every day, and although most markets are still quite “tight,”you will start to see “healthier” inventories with multiple months’ worth of homes listed.
This will dramatically affect how you should calculate your returns, holding costs, and even the amount of time and capital you dedicate to repairs. So, carefully monitor your local market conditions and watch those “days on market” metrics closely. Remember, as more listings appear and fewer people are comfortable borrowing at a 6% or 7% interest rate, it is going to take longer to sell your properties, even if sales prices remain high. Extremely low interest rates have made buyers extra sensitive to any rise in rates, and it will take a while for today’s historically low interest rates to feel anything other than painful.
2. Airbnb Won’t Win Them All
In the midst of the pandemic-era remote-work melee, it seemed like Airbnb investments and other short-term rental assets were essentially guaranteed wins for most investors. Now, that could be changing.
Airbnb posted a near 50% decline in revenues according to data from AllTheRooms, with Phoenix, Arizona, and Austin, Texas, leading the pack for lost income despite an 18% increase in listings year over year. Interestingly, Airbnb pushed back on this report, stating simply that the data presented “is not consistent with our own data.” The company declared there are more bookings than ever, although it did not directly address how much revenue those bookings were generating. Airbnb faces multiple complicating factors when it comes to generating predictable returns in this sector.
First, post-pandemic employer demands are sending many workers back to the physical office. This means less time for travel and less flexibility while doing so.
Second, inflation is hitting everyone in the country, and that means the dollars to spend on vacations do not go as far. Further, as a property owner, your dollars will not go as far when it comes to maintenance and marketing of those properties. You must plan for your money to continue to be worth less, just as your guests must plan for the same.
Finally, Airbnb competitors like Booking Holding and Expedia had great first quarter performances, which means the short-term rental market and travel markets are becoming increasingly saturated and institutional players are beginning to jump in. This affects how much competition you will see for your rentals, regardless of what Airbnb CEO Brian Chesky says about it. Chesky continues to insist no competitor can touch Airbnb, but the company’s growth is slowing just as others are accelerating.
3. The Apartment Market Is Shifting
Although the market for apartments is still certainly competitive, you can see early signs of shifting conditions in previously white-hot cities like Las Vegas, Nevada; Riverside, California; Phoenix, Arizona; Austin, Texas; and San Francisco, California. According to data from Realtor.com, these metro areas were the “hottest destinations” just a year ago, but now rent prices are pulling back the quickest in these municipal areas. For example, during 2020 and 2021, Las Vegas posted 40% gains in rents. In the past year, however, those rates have fallen 6%. Riverside and Phoenix are experiencing similar rental rate declines, and the trajectory appears unlikely to change at this point.
You should note that Phoenix is also facing another complicating factor in its housing situation: Arizona’s governor recently announced that new development must show access to 100 years’ worth of water, not including groundwater. This is going to force multifamily and infill development in areas that already are cleared for development and interfere with single-family rental (SFR) developments on the outskirts of the metro area. As a result, short-term rental owners may soon be looking to sell or switch to longer-term leases to accommodate this shift.
4. The Median Age of American Adults Is Rising
According to Statista, the median age of adults in the U.S. has risen more than 10 years since 1970. This trend is not unique to the U.S.. The global median age has risen dramatically as well.
In the U.S., the rising age of adults has, not surprisingly, been accompanied by delays in other milestones associated with aging. Americans are waiting longer to get married, have children, and buy their own homes. In the meantime, they are spending more money (and going into more debt) on education, which means you should expect renters and buyers to have more restrictive borrowing situations than you may have gotten used to during the past decade. Although fearmongers like Elon Musk (who predicted a month ago that the commercial real estate sector would “melt down fast” and that residential housing would be the next to go) may be jumping the gun, an aging population will create a need for more housing to accommodate it.
Interestingly, baby boomers recently ousted millennials as the largest home-buying population in the country. This means that although most analysts 10 years ago would have told you that boomers would, today, be looking to sell off their homes, far more than projected are actually buying.
Although senior housing has long been a staple of the responsible investor’s portfolio, making minor adjustments to the ways in which you renovate your fix-and-flip or rehab-to-rent properties could serve you well also. For example, wider doorways, grab bars, and step-in showers all make living alone as an older adult easier and make your properties more attractive to this powerful buying demographic that has age, wisdom, and money to spend—unlike its younger counterparts.
As you can see, access to accurate data about your specific markets is more important than ever before. You must carefully monitor this data and draw your own conclusions about local trends in your target markets. If you ignore emerging trends, you do so at your own peril.