I sense everyone is getting pretty nervous right now: 1. This has been a really long economic advance. 2. Trump’s election has enhanced and lengthened it. 3. Interest rates are rising, for now. 4. All believe we are in the Late Stable stage of the commercial real estate cycle. 5. I have seen investors putting cash aside for the next “buying opportunity” and not being too eager to jump in, as increased appreciation is suspect. 6. The stock market looks a little crazy right now, jangling everyone’s nerves.
A prominent commercial real estate research company, Green Street Advisors, says that nationally, property appreciation is running about 2% per year, since 2015, so this means properties are just keeping pace with inflation. The rise of interest rates is not going to spur higher growth rates, as it adds to the cost of debt, which composes 50% to 75% of a property’s capital stack. The stand out exceptions to this plodding rate of growth are industrial properties and, … wait for it … manufactured housing parks, which have grown at 11% and 16% respectively over the past year.
The Dallas Federal Reserve Bank says that San Antonio’s economy is remaining mild, and growing below our long term average. The unemployment rate remains very low, at 3.3%, which is a very good thing for those looking for jobs, but causing increasing hardships on small business owners trying to hire good people. This may be one reason that job growth is soft right now – but it is just hard to find qualified people to hire. San Antonio’s labor force only grew at a 0.6% rate, which is just over 6,000 new jobs, while Texas is growing at a rate of 2.9% and the U.S. at 1.7%.
The good news is that single family home starts are continuing to be strong and reached the highest level since 2007. The important “days on market” indicator remains strong at just over 3 month’s supply, indicating a tight, Seller’s market is still in place. The rising mortgage interest raise have an impact on housing affordability, which will remain an on-going problem. (See reference to manufactured housing above.)
It will be very interesting to see how Apple’s announcement of a new $1-billion campus addition in Austin affects San Antonio. Apple already has a huge presence in Austin and this makes it the largest Apple presence outside California. There are already 6,200 Apple employees in Austin, and this could lead to another 15,000 over time. While no Texas city got the highly sought after Amazon HQ2, this win for Austin is almost as big, and more synergistic. Will anyone thank President Trump for this, since it comes from the 2017 Tax Act and Apple’s commitment to repatriate its $252-billion overseas cash hoard? It will take three years to build the campus, but this tech dominance in Austin can only benefit San Antonio.
I hear about businesses and families leaving Austin to move to San Antonio because of the lower costs and easier business climate. One home builder I know says no one can develop a new project in Austin in less than 2 years because of the crazy city “red-tape.” Unfortunately, our city government sees Austin as a “great model.” Remember the Sick Leave mandate? Austin’s got overturned as unconstitutional; but not yet San Antonio’s ordinance. We’ll see.
So, I see the year ahead as continuing “good” but no acceleration. Steady as she goes.