Which real estate markets are growing more rapidly in the US, and why? What will happen to construction costs given the on and off tariffs? Pike Oliver, author of Transforming the Irvine Ranch, shares his insights.
Regarding markets from your newsletter, the few growing cities are Raleigh, North Carolina, Gainesville, Georgia, and smaller, large metro areas.
There are about 56 or so metropolitan areas and more than a million people in the USA, and the ones that are growing more rapidly now are the smaller ones, those that have a couple of million population. Raleigh and Gainesville would be an example of that. And even areas that are in the 500,000 to a million range, I think some of that has to do with housing affordability, and I think that also people just maybe wanting to be in a less congested environment, that has shown up to be a factor now. The larger regions, Southern California, the Bay Area on the West Coast, Seattle, New York, all the Boston to Washington corridor on the east coast, and Atlanta, they're growing at slower rates, and a large portion of those regions do present a housing affordability challenge. If you look at the percentage of household budgets that go to housing and transportation, it's a significant percentage. Can you manage your transportation cost? Maybe that'll be somewhat dependent on distance to work and commuting, but the big cost is having the vehicle, insuring the vehicle, and financing that. The one that you can manage is to go to a market that has much less expensive housing. If you're in a market that can offer you a $400,000 house, versus a market where it takes a million, that makes a big difference.
I wonder how the inflation will continue to make an impact on the bedroom communities?
That's a big question. The whole issue with potential tariffs. Now, I believe we're on again with some pretty significant tariffs on aluminum and steel, affecting Canada, Mexico and and certainly China. I think that's as I understand it, across the board, that'll have some impact. I think just the uncertainty will have some impact.
And then construction costs, my take on that is I don't see much abatement in that area. We're going to have, I think, continuing in Southern California, because of the fire effect, they'll be as significant and particularly on the labor side. And this also then relates to the issue of immigration enforcement in the construction industry, particularly the residential construction industry, there's a substantial percentage of undocumented people working in those areas. Again, an open question as to how much of that is going to translate into higher labor costs.
Have you been in touch with some contractors who have been affected by that?
I have been, but this is where the question gets complicated, because ever since the E-Verify program came in, I think more than a decade ago, the percentage of documented people in residential construction has declined. And I honestly don't have a handle on what the current percentages are. 15 years ago, for example, in Southern California, if you looked at framing contractors and heating, ventilation and air conditioning contractors, there were percentages of undocumented people that were in the 25 to 40% range of the total workforce. I think it's lower than that. How much of that are people who have a questionable documentation status? I really couldn't tell you.
Looking ahead in 2025, people were saying, hold until 2025 and you'll be fine. And now, they move to 2026, I hear lenders are extending their loans to their existing clients based past 2025, where do you think we're going to be this year? Do you think it's a great or not so great time to invest in real estate?
It's always a good time if the characteristics of the individual property are great and if you can swing the equity or the debt to close the deal. As to whether there are a lot of real bargains, that doesn't seem to be the case, the only area where that seems to be a possibility is with office assets, but then you're taking on the challenge of occupying that space, or undertaking a residential conversion. We've seen more of that, but it's a challenge to do it only certain floor plates work for that. And even if you have a floor plate that's small enough with core to exterior depths that are short enough to have light come in for a residential unit, then you have the challenge of running utilities to support all the kitchens and bathrooms that you don't have in an office plate, and that's difficult.
Now, some folks have gotten pretty good at cracking that code, but as to it being a large-scale opportunity for just a passive investor? No, I don't think so. I think you have to be an expert at figuring that out, and you also have to be able to sustain a long period of no revenue until you can accomplish the conversion, so that means you'd have to be fairly equity rich and debt shallow to accomplish transactions like that. That's a very limited area of opportunity but for most people, if they're not in the field, then the opportunities lie in the real estate investment trusts. And there's some good ones out there, and some not so good ones, and a lot of those are very well managed and have a long term perspective. If I were to advise someone who wasn't in the field but wanted to make an investment in real estate, or have part of that part of their portfolio in the real estate realm, I think that's where I'd say to look.
Is there anything else that you we have not touch on that you think is important for our audience to know?
As far as what's going on with federal policy, keep your seat belt fashioned. I mean, this is really unprecedented. My own personal view is that there's certainly opportunities for greater efficiency in the administration of government, for example, Internal Revenue Service, the computer systems and all need updating and upgrading, a slash and burn policy similar to takeover to Twitter. I'm not sure that's going to turn out so well in the government realm.
I listened to his audio book, and it's really interesting how he has done these things. The way he thinks is you cut so much that when it hurts, those are the only things you put back in. You cut a little bit more than what is needed, so you can figure out what is needed.
The Twitter or X doesn't process health insurance payments, right? No, yes, you know. Social media is important, but it's not like a life-critical enterprise. The Medicare and medical programs, social security, and veterans benefits, all those kinds of things are pretty critical. Whether you can take that approach of cutting till it bleeds or till you hit the bone? I am not so sure.
Not for life threatening areas, I agree.
Pike Oliver
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pike@urbannexus.com