Real Estate Trends on the Upswing

first_img on April 2, 2013 Kemp started his real estate career in 1978 and is a principal real estate broker. He became a Compass partner more than a decade ago and earned the Compass Broker of the Year title in 2006. He repeated as top producer in 2008 and 2009. He also served as president of Compass Commercial for three years. Email Bend Chamber forecast event hears positive outlook and opportunities. Industry experts told Central Oregon business and community leaders that there was reason for cautious optimism regarding the region’s previously battered real estate market, with signs pointing to more sustainable levels of growth and a modest recovery underway.Keynote speakers Ralph W. Cole IV, CFA and Senior VP of Research for Ferguson Wellman Capitol Management, and Bruce Kemp, CCIM, VP Brokerage, Principal Broker and Partner with Compass Commercial, outlined something of a paradigm shift occurring in addresses to the Bend Chamber of Commerce annual Real Estate Forecast Breakfast, with historically low interest rates and more affordable prices helping propel a climb out of the recent trough in residential and commercial sectors.Kemp’s presentation to a packed house at Bend’s Riverhouse Convention Center also keyed in on “opportunities for the future and lessons learned from the past”, while Cole observed: “Recovery is real and getting stronger. Local real estate is getting better and national real estate is getting better as well.”In taking a macro view on the current real estate investment landscape, as well as trends to follow in 2013 and beyond, Cole said that homes are finally appreciating, with prices nationwide increasing in the range of from five to 10 per cent, and he predicted values rising an average of two to six per cent annually over the next five-year period.That trend, which emerged in 2012, boded well for the local residential market for the foreseeable future, as long as a growth occurred in a “rational” way – as opposed to the dizzying price hikes of the mid 2000’s which saw Bend ranked as the country’s most overvalued housing market.He added: “We think reasonable home price increases are sustainable year over year, as long as interest rates don’t increase too quickly” and highlighted a number of factors currently impacting the US economy and real estate, including the adding of some 200,000 jobs in the last four months and the Fed’s continued “quantative easing” policy of maintaining record low interest rates at least through 2014 or until the unemployment rate drops below 6.5 per cent.He said: “The number one priority right now is to achieve job growth and get things going.” Shale extraction methods in booming areas such as Texas and North Dakota were also helping push North America towards potential energy independence by the end of the decade, which was “an amazing change from the world we have grown up in.”National housing starts were at their highest point since 2008, according to US Commerce Department data, though inventories were dwindling somewhat rapidly, including in Deschutes County where the residential supply was down to just over five months as of February 2013.Cole emphasized that the housing recovery was an “investable theme” which could add between one-half to one per cent to GDP growth, but cautioned that potential future inflation could be the biggest risk looming on the horizon.He said: “The feds are printing money at a record rate and their balance sheets are at an all time high. If we get some velocity in this economy, all those low rates will pay off.“The other side is if we get too much inflation, what will that do to the overall economy? That is the balance we will be watching. That is the overall risk – can inflation stay under control?”Kemp said that as communities nationwide gradually stabilize following the ructions of the economic downturn, opportunities can present themselves – particularly in the context of learning lessons from the past.He said: “We are starting to see light at the end of the tunnel.“We can change history in our individual lives. We can learn from our mistakes, and this is where we get perspective.”Kemp said lessons heeded from the recent past included avoiding excessive leverage, evaluating trends before a purchase decision and buying low where possible with an eye to investing for the long term, adding: “So many times we get caught up in the euphoria and don’t look at the data.”He pointed to 2012 as something of a banner year for many in the local real estate industry, and was optimistic regarding Central Oregon’s growth potential in the near future, especially in the context of a potential four year university presence and increased connectivity including expanded air service, though cautioning: “We need to organize and make sure the growth is reasonable and sustainable.”Vividly illustrating how the previous breakneck pace of price increases in Central Oregon, which peaked around 2006, were “unsustainable” Kemp showed data indicating industrial land at $2.75 per square foot in Bend in 1996, rising to $13/sf in 2006. If that trend had continued, the extrapolation would have pointed to a stratospheric level of $61.50 by 2016 (!) whereas the reality is such property can still be picked up for less than $2.50/sf today.If the same calculations had been applied to industrial bare land in Redmond, which started at $15,000 per acre in 1996 and climbed to $300,000/ac by 2006, that would have indicated a mind-boggling level of $6.5 million per acre by 2016, instead of the post-crash availability of some $6,500/ac currently.“Could we sustain that pace? No, it’s impossible,” said Kemp.Housing was leading the way in current real estate market improvements, but there were also encouraging signs for the trailing commercial market, including in prospects for office, retail and industrial activity after the several years of price declines.The industrial market in particular was showing encouraging signs of renewed interest after the apparent bottoming out of values.While there is concern about another wave leading to fears of a second real estate bubble, Kemp believes Central Oregon won’t be unduly lured in that direction.While an average of more than 1500 single family home permits were issued in Bend in the peak years, Kemp said a range of 700-900 was more in line with a “healthy” community, adding that some 486 such permits were issued in the city last year.A bigger worry for the area currently was ensuring a future adequate supply of available residential and industrial land.The current inventory for residential housing in Bend is down to only two months worth, and Kemp said the perceived lack of inventory would see local home building continue to pick up.With the commercial sector typically historically lagging behind residential, he indicated there were still some attractive opportunities available, and he expected to see a better year in 2013 in the Bend office and industrial lease market as occupancy rates continued to recover.The emerging positive growth trends could be hampered in the future though if Bend faced another shortage of residential and industrial lots.Without additional available land, prices could start inflating once more. “The Urban Growth Boundary will not be expanded anytime soon,” said Kemp. “So for you City of Bend officials in the audience, please expedite the process!“Part of the reason why we had such a bubble was the shortage of supply to fulfill demand. This was the reason why we were the number one over-valued area in housing and industrial.“People were trying to grab land inside and outside of the UGB. If we don’t expand, we will get back into that scenario instead of having a steady and healthy growth, though, of course, once we expand the UGB, not all the land will be developable so there will be other issues.”He predicted the current climate as being a good time to buy industrial land in Bend and Redmond, as well as industrial buildings in Bend, and apartments. He also recommended buying residential lots in Bend and Redmond with a holding period of three to five years.Kemp’s forecast for Central Oregon real estate included:– A shortage of residential lots in Bend;– A shortage of industrial real estate;– Industrial lease rates will rise;– Apartment rents will rise.Additionally, his recommendations regarding real estate investments suggested:– Buy industrial land in Bend;– Buy industrial buildings in Bend;– Bare residential land and lots in Redmond;– Industrial lots in Redmond;– Apartments.Ralph W. Cole IV is a member of the Ferguson Wellman equity team and Investment Policy Committee. Cole is the global financials analyst and is the lead portfolio manager on REIT and International investment strategies. He also assists in the management of the industrials sector for Ferguson Wellman Capital Management. By Simon Mather, CBN Feature Writer LinkedIn Pinterest 0 Facebook Share. 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