We talk a lot about understanding the drivers of supply and demand as important inputs that dictate where our next investments will take place. Last week, we saw some of the benefits that came from understanding when to get out. On some level this is nothing new.
Prices in 2021 in particular, got really out of control in some parts of the world. And part of that is really good for our economy longer term as the big economics that came with elevated pricing incented more building and more jobs.
But this cycle always plays out the same way. Perceived shortages lead to big upticks in pricing, followed by overbuilding and price declines (or at least slowing rent growth). Clearly, the Sunbelt is where this is most acute. Exciting business and population growth over the last several years have meant significant increases in starts, and that new supply is finally starting to result in deliveries.
While recent numbers are encouraging for absorption, warm weather markets like Austin, Raleigh, and Las Vegas are all staring at negative rent growth as supply significantly outpaces fresh demand. In each of these cities, we have confidence that new supply will be absorbed, and the supply and demand will tighten, but the cycle will take time to play out.
Meanwhile, other parts of the market, particularly the Midwest, continue to grind higher. The pace may be slow, but as is usually true during the down part of the cycle, the economies that are slow and steady (like Cincinnati) continue on, without the “excitement” of short bursts of economic expansion. For perspective, Vegas and Austin are currently seeing negative rent growth of 21.4% and 17.7% respectively, and Cincinnati is seeing positive rent growth of 4.2%.
This really shouldn’t surprise anyone. The Las Vegas economy is obviously heavily influenced by tourism and gaming, and the last several years have seen a boom in both that increased the need for local workers. Austin is the primary beneficiary of bad tax policy in Silicon Valley, and obviously this has meant a massive migration of well-educated technologists and engineers to a region already well supported by the University of Texas.
Cincinnati, meanwhile, is a city whose economy surrounds consumer non-cyclical goods. There’s no great reason for that market to grow exponentially, but there’s every reason for it to grow with the total population of the US or slightly more in perpetuity.
For real estate investors, there is reason to appreciate both types of cities. But it is important to realize where we are in the cycle so that we can be focused on which types of assets to own during different timeframes.