- Apartments are going to be an excellent investment, with both millennials and retirees finding what they need in this asset class.
- The high-end condominium market is set to become over-heated in certain popular markets.
Young people and retirees are both going to be flocking to apartment buildings in the next few years as they respectively leave the family nest or sell up family homes in the suburbs, according to leading real estate economist Ken Rosen this week.
As chairman of University of California at Berkeley’s Fisher Center for Real Estate & Urban Economics and Professor Emeritus at the Haas School of Business, Rosen gave his economic outlook for real estate at this week’s 38th Annual Real Estate & Economics Symposium held in San Francisco.
‘Buy apartments, buy apartments, buy apartments’
As well as predicting an interest rise next Friday if job numbers equal or exceed 200,000, Rosen told the audience, “I’ve always said the same thing: ‘Buy apartments, buy apartments, buy apartments.’
“It’s been a great performer. Except for the 2008 and 2009 years, it has been the best-performing asset class averaging double-digit returns — and over the last 5, 10, 20, 30 years, no asset class in real estate has performed better.
“Apartments are by far the best segment, and I think it will continue to be for a long time because there’s a shortage of space relative to the age structure of the population,” he added.
From millennials to boomers
Finding a tenant will not be a challenge with extremely low or zero interest rates in cities like San Francisco.
Those between 18 and 34 years old will be prime apartment renters, he said.
“We will also have a surge in the retired population, going from 12.5 percent to 23 percent of population aged over 65 — and some portion will decide to give up that suburban home and live in apartments, so there’s going to be strong demand for apartment living and urban core living as well,” he said.
According to Rosen, who has his own real estate market research firm, the Rosen Consulting Group, household formation has exploded from 1.3 to 1.7 million level over the last couple of years,with young people leaving their families to set up their own living space.
“As they get jobs, we will see them will move out and go, so I am really optimistic that there is a backlog of demand here,” he said. “I’m really optimistic that apartments have a longer run.”
High-end? Not so much
The real estate commentator is not so keen on high-end condos.
“There are some places I am really worried about in the top four — Seattle, Dallas, Austin and Houston,” he said. “We are building a lot of units relative to the size of the stock — Miami is building a lot, too. That’s a guarantee that high end condos being built there are being overbuilt again.”
The vast bulk of sales are to overseas investors, he said.
“In New York, the very high-end condos — if you can sell them short, you could make a lot of money,” he added.
Look outside the norm
Rosen urged investors to look at other places to buy than the main U.S. cities.
“There are a lot of places doing very well,” he said.
People enjoy living in Salt Lake City and San Antonio, Indianapolis, Louisville, Jacksonville and Nashville, he said.
“A lot of the global investment funds overlook the gateway cities, but there are a lot of places that are more affordable and have good business prospects,” he said.
Return to normal?
While he is predicting a good 2016, Rosen is forecasting a normalization of the economy and interest rate rises.
He added: “We also think the fundamentals are still good — much of real estate is in the growth phase. Rents are rising, house prices are rising and volumes of construction are increasing. We are not yet overbuilding — that’s true of most product types.”
But he added: “We have too much money, and too much money never ends well in real estate.”
“Some time in the next three or four years, there will be a big correction here (San Francisco) and certainly in the high-end New York market. It may have started already in the high-end New York market,” he said.