Research Study Points to Investment Opportunity?

Recently I received a report from Marcus & Millichap's Research Services that I found quite interesting. In the report, they point to the very real potential of further increases in homeowner delinquency rates and further declines in homeownership rates.

They estimate more than six million current homeowners owe more on their home than they are worth. Assuming no additional declines in value nearly all of them will need at least five years to just to get back to break even on their value. U.S. homeownership rate currently sits at just over 67% which is down about 2% over the highs we saw a couple years back. However, once you take into account the upside-down homeowners, the effective homeownership rate is nearly 6% lower. Markets we've all heard about - Phoenix, Miami and Las Vegas - have been hit the hardest and the biggest gap in homeownership exists.

So what does this mean for investors? M & M points out that apartment owners will be the group that benefits the most from the increase in residential defaults projected as prior homeowners become renters. According to their findings, cccupancy rates are likely to improve in late 2010 and 2011 as economic recovery gains traction. They do point out that many bank-owned homes will elevate rental competition as investors scoop up good deals and this will limit rental gains for the next 12 to 24 months. Long term, they believe, the expanded renter pool (which will also benefit from the growing echo boomer population) should contribute to increased rent growth.

I also thought it interesting that they believe the retail market might actually benefit from the increased defaults on home mortgages. They theorize that, as a portion of cash is freed up from prior larger mortgage payments, retail sales will increase. They do indicate that they continue to believe relatively modest job growth (triggered by early signs of a recovery) will cause retail fundamentals to lag the broader commercial market.

It will be interesting to see how the summer and fall months (with many political races also occuring) will impact these predictions. Talking with a number of real estate professionals, there is a real sense that the homebuyer tax credits did, indeed, provide a boost to the housing recovery (or stabilization). In addition, as some of the temporary government census jobs are dismissed, it will be interesting to see if the economy has yet gained enough traction to offset these lost positions.

So what's an investor to do? Sell now? Hang tight? Add to their portfolio? Exchange to re-position their real estate assets? While opinions vary, many experienced investors and financial profesionals believe there are winners to be had in the present economic environment. It is up to you to determine whether those opportunities exist in apartments, rental homes, retail or some other category. With just as many opinions on the direction of the economy and the impacts on real estate, this is an individual question that demands consultation with a trusted real estate expert (or a few!), reflection on your own personal finacial situation and risk tolerance and, of course, the help of a solid tax professional.

If you determine that re-position your portfolio fits your situation, you have a great advantage in the taxation question with a 1031 exchange. The professionals at 1031 Corporation would love to speak with you about the opportunies that exist to exchange your present real estate assets for ones that may position you to take advantage of future recovery. Give us a free, no obligation call today at 888-367-1031.

Real Estate Investments for a Slowing Economy

Matt Hudgins of National Real Estate Investor has written an excellent short article on the effect a recession in 2008 would have on real estate. He cites a Property & Portfolio Research report that indicates apartment properties, while more volatile in their net operating income during a recession, are better positioned to hold their value. In an odd dichotomy of the effect between net operating income and market-accepted capitalization rates, investors seem support capitization rates better on apartment properties versus other commercial classes of real estate during an economic downturn. Retail, the report says, are the most negatively impacted in a recession as consumer spending dries, lease rates fall and vacancy increases. Rather than restate the whole article, here is Matt's report.

In a November Marketwatch report, John Spence says analysts at UBS disagree somewhat stating that regional malls proved to be the best option during a downturn. He says they held values better and showed their defensive qualities during the last consumer-led recession in the early 1990s. The resilience of consumer spending and patience from larger, national mall tenants makes them more stable. He noted that it takes almost two years of slowing sales before malls start to face falling rents and increased vacancies.

Peter Korpacz, MAI supports this view. He says that regional malls are protected by leases that span recessionary times and by credit tenants whose long-term strategies involve continued mall presence. These top-tier malls will either continue to maintain their values or at worst will suffer minimal, short-term value declines. He also likes grocery-anchored retail centers during tougher economic times. He reasons that consumers typically cut back on durable goods, such as furniture and electronics and reduce their expenditures on soft goods, such as apparel resulting in negative growth in those retail property categories. However, their overall tendency is to continue core buying habits even in a recession. People tend to increase spending on food and drink and other local services typically found in grocery-anchored food centers which support occupancy, lease rates and, ultimately, value.

So who should an investor listen to among the market experts? Obviously, many other factors than the national economy factor into specific property values. Property specific lease and vacancy rates and terms, local economic and political conditions, competition and, of course, property location all are important. Opinions are going to vary as to risk factors that factor in. But property type should be an important consideration in light of economic forecasts that highlight the very real possibility of recession.