Cincinnati, Ohio, started 2016 off with a bang. The Queen City, which had been experiencing population declines since the 1950s and took the housing crash very, very hard (with losses in values and a foreclosure crisis that extended long into the purported national “recovery”), found itself once again gaining in population and the recipient of a number of positive accolades, including Forbes’ “Number One Up-and-Coming City for College Grads” and a place on Christie’s International Real Estate’s “Top 10 Cities to Watch in 2017.” On the latter list, only one other U.S. city made the cut, so Cincinnati mainly kept company with cities like Vienna, Panama City and Lisbon.
Despite all the positive press, however, the Ohio metro ended 2016 on something of a sour note. Members of the media dubbed the area a “cold” market due to lack of inventory. Local housing advocacy groups and real estate professionals alike complained about the lack of inventory—affordable and otherwise—and the region’s negative equity numbers were still something to be concerned about: 16 percent of greater Cincinnati homeowners were still underwater at the end of last year (compared to 11 percent nationwide). It was hard to tell which direction, exactly, was actually “up” in the regional market as one could read, back to back, an analysis of the market indicating that things were stone-cold to the touch and an upbeat prediction about the burgeoning and as-yet-not-fully-tapped profitability and potential of turnkey rental investments in the area. To make things more complicated, both analyses could be backed by cold, hard numbers.
The truth of the matter is: Both analyses could have been right. Cincinnati, along with the greater Ohio real estate market and the northernmost part of Kentucky, can best be described as “looking-glass” real estate. For the investors who put their money into and feel affec
tion for the area, the region’s confusing market temperatures just mean that their rental properties are going to stay full and cash-flowing—and that the time might be right to pull a few more into the portfolio. Conversely, however, the real estate professionals cited throughout the general media bemoaning the lack of inventory and expressing concerns about the region’s ability to fully recover without a massive amount of new construction also have valid concerns. Fortunately for investors, if you’re in the market to own rental property, that specific market sector is steaming along at a nice, even pace with a pleasant but certainly not unsettling degree of heat. Regional history indicates that rental ownership in Cincinnati tends to be a solid investment strategy.
Getting Through the Looking Glass
So how can you have a market that is simultaneously chilly and heated? In Cincinnati – which was recently ranked as one of the worst housing markets in the country by WalletHub.com but also boasted appreciation in 95 of its 100 ZIP codes this past summer and an average boost in sales price in excess of 6 percent – the key to reading the reality of the housing market lies in identifying precisely what factors have led to the positive or negative market diagnosis. For investors, the Cincinnati metro area, and indeed much of Ohio, is rife with opportunity—and not the kind of opportunity that requires a long view and a high risk tolerance.
This housing market is still wide open for investors. If you’re a traditionalist in that you like to buy low and sell high, limited inventory will enable you to leverage that strategy, particularly if you focus on renovating and selling properties in the $200,000 “affordable” range. Although the region has largely returned to pre-crash statistical levels, it still is experiencing higher-than-normal levels of foreclosures as the Ohio delinquency backlog continues to work its way through the system and blighted “zombie” properties still plague many neighborhoods. As you might imagine, this distressed inventory represents pure opportunity for savvy investors.
Furthermore, the Cincinnati population is shifting and, for the first time in decades as of the 2010 U.S. Census, actually growing, albeit by about 1 percent a year. That incoming population holds another key to accurately viewing the state of the Cincinnati housing market, and 2016 was a pivotal year to observe the area to see which trends held true and which predictions fizzled. The results are exciting if you own or want to own rental property in the area because a large portion of Cincinnati’s burgeoning population represents the very best of the ubiquitous Millennial population: young professionals willing to pay through the nose for the right location and an attractive living environment, and as yet predominantly interested in renting rather than owning. This population not only represents huge buying (or renting) power, but also represents enormous economic leverage as developers, retailers, employers and even educational institutions and government offices attempt to attract a portion of their spending budgets. A city attracting a Millennial population is a city primed for solid rental real estate expansion.
Of course, no market can rely fully on the under-35 crowd to sustain its growth indefinitely, although one could certainly argue that “Generation Z,” presently upperclassmen in high school or still working their way through college, will soon begin to supplement the Millennial generation’s effects on real estate. Further, given their likelihood of exiting their higher education with heavy debt, Gen Z’ers are likely to do so as members of the renting population in the near term. Statistically, Cincinnati is “younger” than the rest of the country, with an average age of 37.3 years and a population of college graduates comprising nearly a third of the city’s population. So in this market, the relatively affordable real estate market and the attractive employment opportunities in the area, combined with a truly innovative music and arts scene, are making the area attractive to individuals of all ages seeking gainful employment with a dash of green space, entertainment and culture. Many of those individuals will become homeowners eventually, but right now, with that limited inventory haunting the “flip side” of the region’s housing, they are far more likely to rent rather than buy.
Building on Diverse Growth and Opportunity
The Cincinnati economy is characterized by a diverse foundation of employers in the professional and business sectors that not only stabilizes the economic status of the current population, but represents greater-than-national-average growth year after year. As a result, rental property owners can rest in a fair amount of certainty that tenants will not only be in a position to pay their rents, but will also likely reward good rental management with multi-year stays in the property as they climb upward on their professional paths
and remain in the area. While many professionals in today’s job market are forced to “job hop” in order to continue to advance in their industry, Cincinnati’s growing economy is supported by industries and businesses that allow for and historically support upward mobility without the necessity of changing employers or careers.
In 2014, the regional economy experienced 2.5 percent growth (compared to 2.3 percent nationally) and sharply accelerated over the year prior. Since that time, the local economy has surpassed its pre-recession level by a full 2 percent, while nearby areas and the nation as a whole still struggle to reach and exceed those benchmarks. More than half of this growth may be attributed to jobs in the legal, accounting, architectural, engineering and advertising sectors of the market. This diversity indicates that the region is essentially free from a true “kill switch” that could flip the economy overnight, as is the case in areas more dependent on sectors like hospitality or tourism, which rely heavily on consumer sentiment.
The Cincinnati region also boasts a strong commercial real estate market that has, so far, resisted oversupply, thanks to an extremely cautious municipal approach to what Collier’s International refers to simply as “speculative construction.” The resulting balance between strong commercial development projects and just enough demand to keep retail and office rents rising delivered a solid 2015 to the commercial sector. In 2016, however, Real Capital Analytics reported that the $1 billion in commercial sales that occurred over the course of the first three quarters of the year represented a substantial drop-off in activity – around 30 percent. Perhaps not surprisingly, given Cincinnati’s status one of Zillow’s projected “Hottest Rental Markets for 2017,” the only sector in which this drop-off did not occur was the multifamily sector, in which sales volumes nearly doubled to $296 million. It seems quite likely that the city’s careful planning, which is also evident in the meticulous development and tracking of building projects throughout the region, is paying off with a steady, upward trend even as some sectors level off for the time being.
Relying on Rentals
So if rents are the hot ticket in this somewhat contradictory market right now, what is to prevent this trend from turning on its head by the end of this year? After all, a lot of hot predictions for 2016 ended the year “frozen out.” Bryan Blankenship, CEO of Venture Real Estate Group LLC, a local real estate investment firm specializing in turnkey rental properties, says that this concern is one that investors can largely rule out, in his opinion, because the rental market in the area has simply not been one to boom or bust. “Ohio has been a consistent performer [for rentals] because we don’t have the big booms. We’re not going up 12 percent a year, nor will we ever,” he said. For reference, Zillow is predicting rental rates in 2017 will rise a respectable 5.2 percent, which is likely to be competitive with a lot of those “double-digit markets” out west. Even with the rising rates, Cincinnati will remain one of the most affordable major cities in the country.
Blankenship believes that in the long term, the same principles will apply for the area’s homeowners and property owners, too. “No matter what happens, this market is never going to go up 15 percent a year, and it’s never going to get decimated either,” he said. “Sure, foreclosures were high … but even then, rents did nothing but go up.” For real estate investors seeking a rental market on the verge of sustained, substantial growth, Cincinnati and the surrounding area offer significant hidden potential that could remain overlooked and, as a result, be had at an advantage by the sharp-eyed investor.