With low-interest rates one would think that Real estate markets would be booming and lead to a bubble. However, difficult lending standards have caused the real estate markets to rely much more on traditional fundamentals (Jobs, Affordability, Population increases). Coincidentally the fundamentals of the real estate market have not been this aligned in 20 years. Thus making this one of the most unique and exciting times for real estate.
With the lack of new construction projects over the last 8-10 years, many markets are experiencing huge increases in absorption rates. There is a lack of inventory and has resulted in increases of rents and property values. With the caveat that these values are driven by those fundamentals vs. speculation in previous real estate cycles.
Over the last year and a half, I have been a very big proponent of these fundamentals. So much so we have moved a lot of our investments out of markets that don’t align with fundamentals. One of the biggest challenges we see in California, NYC, Miami and some other core markets is affordability. Of course, there is a lot of foreign capital and institutional money flowing into these core markets to take advantage of the price upswings. But it is hard to predict these types of capital investments, as they tend to follow trends and comes and go very quickly. This
I am sure there are plenty of companies that are taking advantage these upswings in core markets, but we have a healthy respect for down turns in real estate. As such we rely much more on markets with good affordability. As tertiary markets tend to be driven more by local investment dollars i.e. local homeowners and businesses. As a result, the capital investments in those affordable markets are much easier to formulate and predict.
In conclusion, we at Harris Bay look at massive amounts of data and spend a lot of time and hard work to try and make the most educated decision with a healthy amount of risk calculated into every investment. When we do make decisions to invest, they are typically driven by these fundamentals that we believe will be sustained over a long period.
Happy Friday the 13th!
Jake Harris - Managing Partner