1 – Developers Adding Inventory
Even though foreclosures have not completely disappeared, they have definitely gone down compared to previous years. In cities that have been able to recover faster from the real estate bubble, a foreclosure is rare nowadays. In cities where supply has caught up with demand properties have started to appreciate slowly. Developers have noticed this trend and have started to announce new construction. For example, more than 5 new construction projects were announced and broke ground in 2012 in Brickell, one of the hottest areas in Miami. Renters who have seen rents increasing up to 20% in 2012 will be happy to see developers adding this much needed inventory.
2 – Banks Easing Financing
We all know that banks played a huge role in the real estate bubble. After years of lax underwriting, now lenders ask for higher down payments and have stricter rules to approve mortgages. This is actually one of the reasons behind the sluggishness of the real estate recovery. In fact, most of the best deals such as foreclosures and short sales are now sold to cash buyers. Usually, these cash buyers are either hedge funds or international investors. These cash investors like real estate because the cap rate (return on investment in real estate terms) is very attractive. In some cases the cap rate can be higher than 10% and this does not take future appreciation into consideration.
Since cash investors are a minority in the world of real estate buyers, lenders play a huge role in the real estate recovery. Years ago, a foreclosure or a short sale in the credit history of a mortgage applicant was seen as negative and most lenders would not move forward. Nowadays, after the real estate crash, foreclosures and short sales are a fixture in credit histories. Lenders have started to notice this trend and are taking other factors into consideration as well when they go through the underwriting process. As lenders ease financing, they will speed up the real estate recovery and will also allow locals and individuals to take advantage of current prices.
3 – More Latin Americans Buying Property In The US
US banks and the US dollar have always been a safe haven for international investors, especially Latin American ones. History shows that besides the Brazilian real, Latin American currencies and banks are not solid institutions. This is one of the reasons behind the FDIC lifting the insurance of deposits to $250,000 after the bank crisis of 2008.
Conservative investors get very low returns in money market accounts, CD’s and treasury bonds. They also see real estate as a safe investment but when prices went up the returns were very low as well. After the real estate crash when prices went down and now that we are seeing a recovery in some cities, real estate has become again a very attractive investment option. A lot of clients tell me today that they prefer to sit on real estate than to have their money sitting at the bank, which gives them meager returns.
One of the most international real estate markets in the US is Miami. Foreign buyers, especially from Latin America have been an important component in the real estate recovery process in Florida. Every Latin American country is different and each one has its own reasons to explain why investors are buying more and more real estate in the US. The main countries whose residents have been buying US real estate are Argentina, Brazil and Venezuela. Argentineans and Venezuelans buy real estate in the US mostly for political reasons. It is very common to hear them saying I need to have a plan B in case something happens in my country. When they say “something” they mean the radicalization of socialism and this will not stop, at least in the short term, because the presidents in these countries are still very popular.
In Brazil the situation is different. The Brazilian real has appreciated against the dollar as a result of economic growth and a commodities boom. Since it has become expensive to buy goods and real estate, Brazilians have started to look for alternatives. It is very common to hear Brazilians saying they prefer to buy real estate in the US because it is cheaper than in major cities in Brazil.
4 – Downtown Revival
Many factors have fueled the demand of real estate in downtown areas and many people have moved closer to work. One of these factors is high gas prices. Nowadays the gallon of gas costs approximately $4, 10 years ago it was approximately $2. Since the government cannot directly intervene in gas prices, they have provided incentives to car companies that are creating energy efficient cars. Since cars that use other sources of energy are still on the expensive side, consumers have started to look for other alternatives and one of them is moving closer to work.
Developers have noticed this trend and are building more and more multi-use real estate that combines residential, office and commercial space in downtown areas that used to be used for office space years ago. The other factor is commute. As cities grow, commute takes a toll and people look for alternatives. One alternative is to move closer to work, which as we saw also solves the high gas cost problem.
One of the main issues of downtown living is the high cost of real estate. Developers have noticed that the price per square foot is generally higher in downtown areas and have tried different things to solve it. The easiest solution is to build smaller units to make them more affordable. This might work but people usually do not like to sacrifice space. After extensive research, developers realized that parking was one of the factors that increase considerably the cost of real estate.
Also, if downtown dwellers have quality public transportation and entertainment options close to where they live, living without parking becomes an option. For example, My Brickell, one of the projects that broke ground this year in Brickell by the Related Group does not have a parking garage. And this is not the first building by the Related Group without parking. They built Loft 1 and Loft 2 in downtown Miami in 2005 and 2007, respectively, and neither one of them have a parking garage.
5 – Technology Playing a Bigger Role in Real Estate Business
The real estate business has always been behind technology-wise when compared to other industries. One of the main reasons is the fact that the real estate industry is very fragmented, as it is comprised of many small to medium sized companies which usually have small budgets to invest in technology, research and development.
Social media has played an important factor in this process, as it is a technology that is very easy to implement. Earlier this year I wrote an article called “Sales Office Disappearing” which explains how social media has played an important role in the real estate sales process in the past year. This trend will continue, as real estate is in part, a social experience. A lot of people “consume” real estate by association, it is very common to hear people saying they moved to a place because a friend of theirs lived there. This is in fact a social experience that can be easily modeled with social media technologies.
There is a caveat though; people do not go to social media websites to consume real estate. Therefore companies have to be very careful when creating their social media strategies. It is very common these days to hear companies saying they have not seen any return from their social media investments. A strategy that has worked for us so far is to publish pictures of amazing properties in social media to generate buzz.
In addition, research shows that the majority of real estate buyers do their own research online before contacting a real estate professional, if they even contact one. Years ago, real estate professionals controlled the property data that was provided to clients. Not anymore, as now most of this data and tools are available online. The real estate companies that make it easier for users to analyze this market data will be better positioned to conduct business with all these clients who rely more and more on the internet to conduct their own research before they make any decision pertaining to real estate.