385: 2020 Market Outlook

SHOW NOTES FOR EPISODE 385: 2020 MARKET OUTLOOK

Will the next recession hit in 2020? What will happen to real estate prices? How should we invest?  In today’s podcast episode, returning guest and CEO of MultifamilyU Neal Bawa shares his insights on the current economy, issues directly affecting real estate investors and prudent strategies to invest today and still profit big!

What You Will Learn

• Will 2020 have a recession?
• What key things you need to look at to determine to understand where we are as an economy in light of a recession
• How is the Federal Reserve directly affecting our extended growth cycle
• What will happen with real estate pricing in 2020?
• How  the 2020 economy will affect the real estate market
• The 5 key sources Neal uses in evaluating the economy
• Should we hold on to our cash in anticipation of great property deals ahead?
• What are the best real estate investment markets for 2020

About Our Guest

Neal Bawa

Neal Bawa, you may recognize the name as a previous guest on the Old Dawg’s REI Network (episode # 211 “A Scientific Approach to Real Estate Investing” June 4, 2018)

Neal brings extremely strong strategic and operational experience to his role as CEO at Grocapitus Investments.  Neal sources, negotiates and acquires Commercial properties across the U.S., for 500+ investors.  Current portfolio over 2000 units/beds, projected to be at 3000 in 12 months. The portfolio includes Multifamily and student housing properties in 9 U.S. states.  Neal is a nationally recognized, in demand speaker at Multifamily events, IRA events & meetups across the country.  Nearly 4,000 students attend his multifamily seminar series each year and hundreds attend his Magic of Multifamily boot camps.  Neal’s nationwide Meetup network (Multifamily University) has thousands of members.  Neal leads Grocapitus Investments where he is driving the syndication and acquisition of multifamily properties.

What Neal Has Been Doing Lately

• He has been actively looking at constructive ways to apply technology to real estate
• Commercial real estate has not been penetrated by core technology – still the “old boys network” operating by gut feel
• He’s also been actively utilizing outsourcing to optimize his properties with “armies in the Philippines”
• He has been in full “experiment mode” applying technology that works in other fields to real estate
• This has allowed Neal to grow his portfolio rapidly to $187 million in multifamily last year
• Returns to investors went up 3X in 2019, compared to 2018

Market Outlook for 2020

• He loves to talk about macro-economics and its impact on real estate
• If you are going to look at how real estate will be impacted in 2020, you need to look at a number of things:
  • What’s the economy doing?
    • Because real estate depend is very tied to jobs, inflation, consumer spending and interest rates
      • For example, if we lose 2 million jobs, the demand for housing drops off
      • It’s not enough to say we have an under-supply of homes, when you lose 2 million jobs, you have an over-supply
    • The economy is always the foundation of everything we do in real estate
• When you look at the economy for 2020, the key theme is “recession risk is definitely waning but an economic slowdown is extremely likely”
• However, there have been a number of things that have happened to reduce the risk of recession:
  • The Federal Reserves extremely accommodating interest rate policy – When we thought we would see big increases, in 2019, we’ve seen significant declines in interest rates
    • Fed funds rate today is 1.75 – it was 2.5 a year ago
      • He sees a long term negative impact
      • But in the short-term, it massively reduced the risk that 2020 would be a recession year
      • It does affect growth, however, to cause growth to slow a bit
      • The Federal Reserve is forecasting:
        • A slow down in 2020
        • Consumer spending was at 2.4 in 2019, it’s predicted to go down to 2 in 2020
        • Real GDP was at 2.2, they’re now forecasting 1.8
        • Inflation was at 2.1, they’re now forecasting 1.7
  • We’ve done enough to avoid a recession in 2020 by slowing things down
• The economy will likely have a negative effect on real estate but not as much as would have occurred in a recession
• One of the “X-Factors” for 2019 was the trade wars but it looks like things have calmed down – a positive today
• Neal sees a “slow down” coming but not a recession

Real Estate Pricing in 2020

• Neal has looked at 5 sources
  • Today Magazine
  • Freddie Mac
  • Fannie Mae
  • Mortgage Bankers Association
  • National Association of Realtors (NAR)
• The forecasts are all pretty consistent
  • 2-3% real estate price growth
  • Rent is growing at about 2%
  • That has actually ben the percentage trend percentages for the last 50 years
• Interest rates in the 3.6% range
• People are not buying because of the interest rates, they aren’t buying because home prices are still too high for their income

Multifamily Market

• International Investors
  • Have been pouring money into the US
  • The US real estate market is still the best place globally to invest
    • The US economy is great – look at our GDP
    • Our debt may be 100% of GDP but that’s better than places like:
      • Chine is 200%
      • Japan is 250%
  • We are one of the few countries that have positive interest rates
    • There are banks (possibly Sweden or Norway) where you can get a 30 year mortgage at under 0%
      • So, if you buy a home for $400,000, you pay back $396,000 at the end of 30 years
      • The banks are getting money at negative 1% from the market
  • For the last two years, an insanely large amount of capital have been flowing from pension funds in Europe and Japan and other places with 0% interest rates.
    • Most is going to multifamily
    • It used to go to single family when the Chinese were investing
  • Who are the big buyers today?
    • Canada
    • Saudi Arabia
    • Singapore

Looking Ahead – Should We Hold Cash Waiting for the Downturn Deals?

• The Federal Reserve Bank seems to have learned a lot from previous recessions
• They are very sensitive to preventing a recession because the world economy is so much weaker
• Don’t hold your breath for the recession, according to Neal.  He doesn’t think it’s coming in 2020

Where to Invest Today

• Rentzilla – Major push for rent control by politicians
• There’s no proof that rent control works – San Francisco and New York have it but they have the highest rents in the country
• He doesn’t invest in real estate in Democrat states (even though he is a Democrat)
• Landlords are under attack
• Southwestern States are doing well in job and population growth, housing and investment opportunities
• However, North Carolina, Texas, Florida and Georgia are doing better in job and population growth than California
• Highest population growth city – Atlanta, GA
• Other high growth cities:
  • Orlando
  • Dallas
  • Austin
  • Houston
  • Nashville
  • Boise
• However, prices have risen in these places as well
• Top States for Neal
  • North Carolina
    • Best Cities:
      • Raleigh
      • Charlotte
      • Winston-Salem
      • Ashville
      • Housing is inexpensive
      • Cashflow at 6-7 but appreciation is strong
  • Florida
    • Best City:
      • Jacksonville
  • Arizona
    • Best Cities:
      • Phoenix
      • Gilbert
      • Chandler
      • Mesa (a favorite of Neal)
      • Tucson
  • Texas
    • Best Cities:
      • San Antonio
• He believes that Primary markets or MSAs are currently pretty risky
• It’s better to look at secondary markets
• Tertiary markets, however, could be a bit risky
  • Denver – prices have increased by 55-60%
    • A safer bet would be Colorado Springs
    • Any city within a 100 mile radius of Denver would be better
  • Nashville has also gone up 50% plus
    • Chattanooga is a better bet
    • Memphis, too
  • In California
    • The inland empire (Riverside, San Bernadino) is better than most of California
• He can’t find any good properties under market
• However, if you can find any, the “Rustbelt” may have those deals:
  • Indiana
  • Kansas City
  • St. Louis
  • Philadelphia
  • Ohio
    • Dayton
    • Cincinnati
    • Cleveland
  • But BE AWARE
    • Make sure you check population growth before you go into these places
      • Cincinnati is better than Cleveland or Dayton because population in Cincinnati stays the about the same while Cleveland and Dayton are losing population
      • Philadelphia is pretty good
    • Stay away from dangerous markets like Detroit
      • It does well during an expansion
      • It gets destroyed during a recession

How Should Old Dawg’s Invest in Light of a Coming Recession?

• Multifamily is still pretty good
  • In 2008,
    • Single Family Homes went down 58% in value
    • Multifamily only went down 10%
      • Rents only decline for one year (that was in 2009)
• We’ve turned into a landlord nation
• Workforce Housing (Class C+ and B- properties) is a fairly good place to invest now
  • Older apartments with few or no amenities
  • Who are the Workforce Housing tenants: bus drivers, Starbucks worker, airport workers, retail employees, teachers)
  • Some prices have gone up there, causing cash flow to go down
  • But it’s still a good place to invest
  • This is type of property was the highest rent growth property in the last 6 years
• Superstar Markets (like Phoenix)
  • New construction can be a good investment
• REITs
  • Self-Storage
  • Mobile Homes

What Will Happen to Multifamily if There Is a Recession

• Let’s say the second half of this year (2020) there is a recession – two consecutive quarters of negative growth
  • When this happens, the Federal Reserve will cut interest rates – maybe to 0%
    • It won’t help anything in the short term – it will take about 9 months to wind there way through the economy
  • In the short term, rent growth will go down and owners of apartments will stop distributing money to their investors and start focusing on filling their properties
    • People are losing jobs and will actually drive demand for apartments
    • Every recession, more than a million people lose their homes
    • Apartment owners will be focused on keeping occupancy up and delinquencies down
      • Once they stabilize their properties they can pay their mortgage and wait until the end of the recession
    • After the recession ends, it will take the Federal Reserve 2 to 3 years to even think about raising interest rates
      • In 2009, it took 6 years before interest rates went back up
      • Even if the next one s mild, it should take at least 2 years to go back up
      • Apartment owners will be able to increase rents, re-finance at GREAT low interest rates and it creates great cash flow
      • Although it can work out well for apartment owners, they still much management prudently all through the recession

A Message for Californians

• Californians are probably breathing a sigh of relief to think they will be OK in 2020
• However, be cautious, there are other factors that could hurt investors in 2020 in California and other “rent control states”
• Legislators have been trying to win people over to the idea of rent control
• If you are looking to invest or already invest in California, do a Goggle search and see what is ahead for rent control on California
• It is a phased approach – Legislators are fighting a war, not a battle
• At least two more tiers of rent control are coming to California within the next year, year and a half
• Research what is ahead before investing in California rental property
• He does not see California as a good place to invest for the next 10 years
• He doesn’t see a “separate California Recession” happening but the regional economics is not good at this time
• Flipping may have more opportunity than long-term holds but it’s still more likely that prices will decline and not go up

MultifamilyU.com

• Neal always wanted to build the “Wikipedia of Real Estate”
• He wanted a place where people could do a deep-dive learning without being sold an expensive package of stuff
• He does 50 deep-dive webinars there every year
• Content is not just on multifamily
• There’s content on self-storage, legal info, taxation, AirBNB and more
• The goal is to bring in experts from all over the U.S., with a “no sales pitch” approach and leave the webinars on the site
• Neal has a dozen himself and he covers multifamily and insight on key US markets

How to Reach Neal

• neal@multifamilyu.com
• MultifamilyU.com

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

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