October 7, 2020

JF2227: Why Multifamily In The Suburbs Will Thrive | Syndication School with Theo Hicks


In today’s Syndication School episode, Theo Hicks will be sharing some of the research he has done on the trends of Multifamily as a result of the Coronavirus Pandemic.

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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks: Hello, listeners and welcome back to another episode of The Syndication School series, a free resource focused on the ‘How-tos’ apartment syndication. As always, I’m your host, Theo Hicks.

Each week, we release a Syndication School episode that focuses on a specific aspect of the apartment syndication investment strategy; make sure you check out our previous episodes. We also have a lot of free giveaways, free goodies, free documents along with those older episodes, especially the first batch, where we go through apartment syndication from A to Z. Those free documents, as well as free episodes, are always available at http://syndicationschool.com/.

In this episode, we’re going to review a pretty heavy data research that I did on the trends of multifamily as a result of the Coronavirus pandemic. I’m going to start focusing on that. I think it’s been long enough since the onset, we have a lot of data to see how people adjusted their lifestyles in order to determine what types of real estate are going to be in demand, and what the new developments are.

One of the things that had been on my mind that I’d seen a few articles talking about was the market changes. So which types of markets are going to be in demand for the future. As you know, as a loyal listener, when we talk about markets, there’s lots of factors that we want to look at, essentially, to paint a supply and demand picture.

One of the metrics that is an indicator of demand is going to be the population change. All other things being equal, if the population is increasing, then the demand for real estate will increase. If the population is decreasing, then the demand for real estate will also decrease. Obviously, that’s just one factor that is relevant to demand. And there’s a whole other side of the equation, which is supply, so you can have an increasing population, but if the supply is outpacing the increase in population, you might have an oversupply issue. I know this is very simplified, but there are people who I’ve come across who will use the population growth, at the very least, as a disqualifier. If a market, whether it be a state or a city, does not have a positive net migration, so if more people are moving out than are moving in, the population is decreasing, then that market is automatically disqualified from contention. Whereas if more people are moving in than are moving out, then the net migration is positive, and they won’t disqualify it.

U-Haul actually has really good net migration data that they release each year. So definitely check that out. If you just type in Google “U-Haul migration”, that will come up.

But the reason why, and it’s kind of obvious, but the reason why you want to understand where people are moving to or where they’re moving from or where they’re out of is so that you can adjust your business plan accordingly. The reason why you want to look at U-Haul’s net migration data, the reason why you want to pay attention to any new businesses moving into the area or moving out of the area, is because if you’re in a market that has more people moving in than moving out, then you’re in a pretty good place, you’re sitting pretty. But if you’re in a market where the trend has turned, and now more people are moving out than are moving in, well, then that might indicate some trouble on the horizon, right? Not guaranteed, not always, but that is something that you want to pay attention to, because that is an indication that demand for real estate will also decrease. If you match that with a really high new construction rate, then you’re in big trouble, because supply is going up and demand is going down which is the opposite of what you want to see.

One of the biggest migration changes, population changes that is due in part to the Coronavirus, but it was happening, and I believe it was happening beforehand — there’s a really good, I think it was a Brookings Institute article that talked about the trend from people moving from urban centers to the suburbs over the past few years. Based off of some of the more recent articles, because of the Coronavirus and a few other things we’ll talk about a little bit, more people are interested in leaving, or they’re saying that “I plan on or I’m searching for, I intend on leaving”, whereas some places they’re actually leaving already. New York is a really good example, to not only show that it’s happening already, but that it’s something that is expected to continue to happen into the future.

An article in The Hill entitled Americans leave large cities for suburban areas and rural towns said that approximately a quarter of a million New York City residents plan on moving out of New York City to some other New York suburb, and another 2 million said that they plan on moving out of state altogether to somewhere else. Also more than 16,000 New Yorkers have already moved out of the city to suburban Connecticut. But this trend is not unique to New York.

There is another analysis done by Redfin, that said that a record number of their users were looking to move to another metro area. This was in the middle of 2020. And that number was 27.4%, I think it was up from 25%. A quarter of their users are looking to move out of the metro area that they are currently in.

The most popular places that people are looking to move to are going to be either the city or the suburbs surrounding Phoenix, Sacramento, Las Vegas, Austin and  Atlanta. And then to round out the top 10 is Dallas, Tampa, Miami, Nashville and Charlotte. And then this analysis also has where they are leaving from, and that would be Los Angeles, San Francisco, and New York. And then for Tampa — because they have it for top origin in states and then top out of state origin. The only ones that aren’t the same would be for Sacramento. Out of state is  Reno, Nevada, and then for Tampa, the out of state is New York or the in-state is Orlando.

On the other hand, the locations with the largest outflows were New York, San Francisco, Los Angeles – I said that already – Washington, Chicago, Seattle, Denver, Boston, Milwaukee and Rockford. That is where these Redfin people are searching to leave these larger metros for these more secondary metros.

Now something that’s surprising to me at the very least was that not only is there an increase in demand in these suburban areas, people leaving the cities to go to the outer suburbs, but there’s also an increasing demand for rural markets, even further out from these cities. This is a US News article, and they said that 57% of realtors that responded to their survey said that they had experienced an increase in interest in rural Montana. A lot of these came from people who lived in major metros in California, so San Francisco and Los Angeles. And the reasons why they were choosing rural markets, in addition to them choosing Montana, in addition to them growing up there and having family there, is because of the low Coronavirus infection rate.

In the same Hill article I mentioned earlier, they talked about how real estate sales were increasing in Montana with a 10% increase year over year. And that rural markets in Colorado, Oregon and Maine experienced similar increases in sales. And so people again are leaving urban areas for suburban areas as well as for rural areas.  Why? Why are they doing this? As I mentioned already a few times, Coronavirus, but there’s also other reasons. Surprisingly, Coronavirus isn’t actually the number one reason why people are leaving.

Another article in NASDAQ entitled The Urban-to-Suburban Exodus May Be the Biggest in 50 Years  provided some data on the reasons why the New Yorkers were fleeing the urban centers for other New York suburbs or leaving the state entirely.

The number one reason was the cost of living at 69%. Below that would be crime at 47%, and then looking for a non-urban lifestyle at 46%. Those are the ones that are above 40%. 40% of the people that respond or more said they were leaving because of crime, looking for a non-urban lifestyle, and the cost of living.

Then the other three that were common was the concern over the spread of Coronavirus, which is at 34%, the ability to work from home which is 30%, and then this last one is typical, it’s with childcare, which is pretty low at 15%.

One of the ones that stood out to me the most — cost of living, crime, looking for a non-urban lifestyle and concern, those three are common. Those aren’t unique to today. Coronavirus, obviously is unique today but the other one that’s unique too today besides the Coronavirus would be the ability to work from home. A year ago, people would not be moving out of cities because of the ability to work from home. That’s something that’s very new. This is one of the biggest COVID-related changes that are driving more people out of urban centers.

According to a blog that I found that tracks remote working statistics said that because of the Coronavirus, 88% of companies encouraged or require their employees to work from home; 88%. And 99%, so essentially universally across the board, people prefer to work remotely due to obviously the Coronavirus. but also because they like it.

Now, I think here was the most important and telling statistic, 88%-99% – what is this compared to? Well, you can compare this to just 3.4% of the US population working remotely before Coronavirus. This is the entire population, so it’s including people that don’t have jobs as well. But 3.4% of the population was working from home before Coronavirus, and now 88%, essentially. That’s a pretty big difference and there’s a possibility to have a pretty big disruption in real estate.

There’s some people who I’ve talked to who’s worked for big corporations, and they aren’t going back until, the earliest, this time next year. It’s kind of hard to tell if everything will go back to normal, and the same amount of people who were working in an office before will go back to the office, or if it’ll be half as much, who knows. But I would imagine it’s not going to be the exact same.

I was looking at some other study that said that a lot of jobs that are in offices can technically be done from home. Who knows, maybe these corporations after seeing people work from home for seven months now, by the time they start having people come back it’ll be at least a year, and maybe they’ll realize that their employees are just as effective working from home, they can save money by not having an office, things like that. Employees prefer to work from home, they have a hard time transitioning back. There’s no parking in downtown areas, because people are probably not going to take public transportation, how’s the elevator situation going to work, and a lots of different issues with going back to offices.

So what is real estate going to look like with more people working from home? One of the things is people moving to the suburbs; because if they don’t have to go to the office, then they’re choosing to live in areas—and this is from the Redfin article I talked about earlier… They’re choosing to live in areas that are more affordable, that are closer to their families, that have access to more local amenities, while still having direct access to a downtown, which is why they’re leaving the urban areas for the suburban areas, because the suburban areas beats the urban centers in all those categories.

But besides market aspects, there’s also the type of home that’s offered in the suburb or the type of home that is available to people that is offered in the suburbs. For example, now that people are working from home and are at their houses are often, they want more outdoor spaces, whether this a private yard for themselves or nearby green spaces and parks. They can go on walks, as opposed to being stuck in a skyscraper apartment type building in an urban center. And they also want to have a home with an extra room, or at least extra space to convert into their home office. As I mentioned, this type of green space is essentially non-existent in urban centers. It’s there, but it’s not as much as there is in suburbs, and it is usually more so in rural areas.

And then also, the cost for this extra bedroom would be a lot higher in urban areas, whereas you can get a lot more bang for your buck in the suburbs. It’s kind of unrealistic for people who are looking to move to a house that has more space to pay a lot more downtown when there’s all these extra benefits, plus cheaper in the suburbs.

They want to see real green grass, real trees, they want a home office. The suburb is really their only option. That or the rural areas; but they still want access to downtown, so that’s why they’re choosing suburbs over a rural area.

What does this mean for you, the investor? As I mentioned earlier, as a real estate investor, in general, you need to have an understanding of the population and migration trends in whatever market you’re investing in, at the very least. And then obviously, when you look to expand, you’re going to look at these things as well. But you don’t want to just look at the trends one time when you choose to invest and then not think about it anymore, because it’s always changing.

Once you’ve selected a market that has good demographics, good economics, you want to kind of continuously stay up to date on the actual metrics, as well as news stories. We’ve talked about this on the show before, setting up your Google alerts for your area and finding the local real estate news.

Based on what I’ve talked about today, if you’re someone who’s heavily invested in a major urban center, it doesn’t mean you should sell all your properties, right? But it might be time to consider pivoting and diversifying into the suburbs, or maybe not buying more in the urban areas, holding what you have, and then pivoting to the suburbs for new acquisitions.

If someone is already investing in the suburban areas, well, you’re in a pretty good spot, because not only are you going to benefit from the increase in rents that come from the increase in demand, but you might also see an increase in value that comes from more than just the increase in rents, but due to cap rates reducing.

Then for people who are less established, who are newer, this is really good news because you can take advantage of this trend towards the suburbs at a low barrier of entry. In the sense, generally, real estate is going to be more affordable in suburban and rural markets. It is a trend you can take advantage of without having to shell out a lot of money to buy in a new gentrifying urban area or something.

In conclusion, no one really knows exactly what the future holds, but due to the information I presented today, as well as stuff I’ve talked about in the past, specifically in the blog post and the syndication school episode we did almost two years ago now, back in January 2019, where I talked about the reasons why we believe multifamily is going to thrive during and into the next recession – well, a lot of these things turned out to be true because of the same metric we talked about; affordability, tightened lending standards, like I talked about last week, things like that. But combine that again, with the migration trends I talked about in this article, and you can kind of stack those two things together and say multifamily in the suburbs is going to thrive in the years to come.

That concludes this episode. Thank you for tuning in. Hope you learned something. Any questions, any comments, any feedback? Let me know at theo@joefairless.com. And maybe depending on what you say, I might read that off on a syndication school series episode or do further research and it might turn into an episode that I’ll give you credit for.

Make sure you check out our other syndication school episodes and those free documents at http://syndicationschool.com/. Thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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