Three Trends to Know for Real Estate in 2017

Continuing on the strength of 2016's performance, 2017 will bring require a skilled approach to selecting the right investments given the changing markets. Three trends we expect to have a high level of influence are:

1) Slowing Tier I Markets and the Rise of the Midwest

Prices in Tier I markets, such as San Francisco and New York - that saw sharp increases in 2013-2015 - will continue to soften in 2017. This continues the trend from 2016, as prices reach levels that stretch incomes, rising interest rates eat away at purchasing power, and development projects add supply.

While Tier I markets slow, it is the smaller, more affordable Tier II and Tier III markets that present select opportunities for cash flow and continued price appreciation. As an example, there are still niche Midwestern cities that are poised to benefit from population inflows and job creation.

Takeaway for 2017: Expect prices to continue to slow or fall slightly in Tier I, Class A markets. Tier II and Tier III markets such as Midwestern cities with enticing job incentives continue to expand. Leading the pack are Madison, WI; Columbus, OH; Omaha, NE; Des Moines, IA; Greensboro, NC; and Akron, OH.

2) Increasing Interest Rates

Pay close attention to interest rates and the impacts to buyer purchasing power. The seven-year stretch of historically low mortgage rates is coming to an end, beginning in 2017. Mortgage rates have already jumped by half-a-percentage point since late October. With the recent December Fed rate increase and promises of additional increases in 2017, mortgage rates will continue to climb. The effect on real estate will be two-fold:

a) Pressure on Prices

Higher mortgage rates will exert pressure on asset prices. Tier I markets will experience flattening and even falling prices while Tier II and Tier III markets with strong fundamentals have the potential to continue to appreciate despite the higher rates. Tier II and Tier III markets without sound fundamentals will be the hardest hit and will see falling prices;

b) More Selective Buyers

Individual buyers who have been on the fence will face more expensive mortgages and either buy smaller homes or continue renting. Institutional buyers will only purchase properties where there is growth potential.

Takeaway for 2017: Expect to see continued high asking prices from sellers, but fewer sales close at those prices. The bidding wars are largely done as buyers now have an interest rate headwind. Additionally, expect the number of sales to decrease from previous years as buyers take a more cautious approach. 2017 will be a transition year as certain markets begin to peak, while others continue to experience opportunistic growth.

3) Millennial Renters

Millennials will face challenges as buyers in 2017, as stagnant incomes, lower credit scores, higher debt levels, and rising mortgage rates limit their purchasing power. Additionally, they have strong preferences to skip the starter home and go straight to the move-up property. As a result, many Millennials will find this dream unaffordable. They will be forced to continue renting for the foreseeable future, further supporting multifamily rental investments.

While they rent, Millennials prefer urban and "surban" (suburban with urban amenities) locations. These cater to Millennial live-work preferences and quality of life choices. Focus on areas of growth that have strong renter populations, resilient economies buoyed by employers and universities. Prospects include Spokane, WA; Austin, TX; Merced, CA; and St. George, UT.

Takeaway for 2017: Millennials have the desire to purchase homes, but not the means to do so, leading to continued high levels of renting, particularly in urban-like settings with good job growth. Expect this trend to continue to support multifamily investments for the foreseeable future.

Overall

Real estate for 2017 will be heavily influenced by the economy, monetary policy, and demographic changes. Selecting and executing on successful investments will be harder than it has been in years. However, opportunities are present for the watchful. Niche market knowledge and the ability to move quickly will be crucial to securing attractive opportunities.

Invest Wisely,

Yousif