“Keep your face always toward the sunshine – and shadows will fall behind you”
This quote has been attributed to Walt Whitman, one of the US’s finest writers, but whether it was the great man who penned the expression or not, it aptly describes a trend that can be seen across the US today, with economic activity and jobs – and hence opportunities in US real estate – drifting southwards across the country.
The US economy was strong over the summer and continues to strengthen, with the tax reform package a prospective tailwind. But, to be fair, there is a notable dispersion in growth between states. In our view, these variations in growth and the likelihood that the economic cycle will continue to diverge across the country present significant opportunities for US real-estate investors.
US real estate: dive into regional and local data
It’s tempting to look at the performance of an economy and a real-estate market at the simple country level. But delving among the ‘weeds’ of regional and local data will often reveal significant, and in many cases exploitable, disparities in market potential, particularly in the US, the world’s largest and most investable commercial real-estate market.
I recently attended a conference of real estate investment trusts (REITs) in Dallas and took the opportunity to explore local markets in Austin, Houston and Phoenix. The conference and market visits provided further confirmation of the differing shapes of regional economies and property markets across the US.
US real estate: growth in the South and South West
Furthermore, analysis of the most recent state level GDP data suggests that the states and cities in the South and South West of the country are growing more rapidly than the US as a whole, while the North and North East are lagging behind.
Most notably, the economies of Utah, Florida, Arizona and Texas are all outstripping the US as a whole, while markets to the North have been considerably more sluggish, with New York, for example, growing by only 0.3% over the 12 months to the end of June 2017. Jobs growth is also moving at different rates, with Nevada, Utah, Texas and Florida all outstripping jobs growth in New Jersey, Maine and Connecticut.
Source: Bloomberg, as of 30/06/2017
Source: Bloomberg, as of 31/10/2017
US real estate: datacentres and single-family housing should benefit
We currently have a cautious 12-month outlook for the US as a whole, but we see potential for substantial local market variations and in the performance of different sub-sectors.
We expect fiscal and monetary conditions and employment growth to be less supportive for real estate in the US generally than in previous years. Lower-quality retail formats, multi-family housing and healthcare real estate are likely to underperform, but datacentres and single-family housing should benefit from a stronger US economy.
The puzzle of investing in the US is probably about to become more complex for investors trying to exploit the continuing divergence in performance across the country. The likely passage of the biggest shake-up in the US tax system in three decades will present many dilemmas for the investment community.
Whatever the final impact of the tax reforms, it should not alter the main challenge facing investors in US real estate. The key issue will not be whether to invest more or less in US property, but which parts of the country to focus on, what types of real estate to own and which companies will be best placed to deliver.
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Written on 05/12/2017