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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

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Real Estate Investment Conclusions

and the Coronavirus

The outbreak of the coronavirus  and the spread of the disease to other parts of the world have caused rising fears of a global pandemic, with an immediate negative impact on real estate markets.       Moreover, vulnerability increased over the course of last year, making prospects for early 2020 all the more uncertain. The US, the world’s second-largest economy, appeared relatively resilient, but 2.1% real GDP growth in the fourth quarter of 2019 hardly qualifies as thriving.      The lack of Chinese demand is also likely to take a toll on the US economy, where China plays an important role as America’s third-largest and most rapidly growing export market. The sharp plunge in a preliminary tally of US purchasing managers’ sentiment for February hints at just such a possibility and underscores the time-honored adage that no country is an oasis in a uncertain global economy.      The coronavirus is undoubtedly causing a significant disruption to economic activity in the US. The magnitude of US growth is highly uncertain, as it depends on the extent that it spreads, the length of contagion, the measures taken by the US to curtail the risk of infection and the timeframe until an appropriate vaccine has been developed. This uncertainty with respect to the ultimate impact on economic activity will keep a real estate market volatility higher.       But as long as the outcome of the current situation is highly uncertain, we should continue to stick to buying properties in “pockets of opportunity” areas as reported in our companies’ quarterly newsletter Market Cycles. As historical evidence shows, the outbreaks of such diseases are temporary in nature.      Remember, real estate allows you to control your risk because you can actively participate in the decision-making process. Passive investments such as stocks don’t give you this opportunity. Movements in real estate values are less erratic than in the stock market. Most people don’t understand the economic forces influencing the market. Since real estate is less volatile, it’s easier to control and to understand.  Real estate is tangible. You can touch it, you’ve been exposed to it all your life, and you can identify with it. As a result of this familiarity, you are better able to understand it.       In the end, epidemiologists will have the final say on the endgame for coronavirus and its economic impact. While that science is well beyond our expertise, we take the point that the current strain of coronavirus seems to be more contagious but less lethal than SARS was in early 2003. ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization and President of calstatecompanies. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com UTUBE: https://youtu.be/868wrjNPQFM

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

¨E-Mail CalStatecompanie@aol.com  ¨ Webpage http://www.calstatecompanies.com

Coronavirus and the Real Estate Markets

The coronavirus has been the toughest force behind the recent volatility in real estate markets, which has been running uninterrupted since October 2019. We should be aware that real estate markets could react ahead of the peak of the epidemic, as they tend to overreact at the beginning of a crisis and then stabilize and rebound, despite the continuation of negative news. Unless this doubt is able to disrupt our economy into a shock wave – which is not thinking now – excessive downward setbacks could provide an opportunity for investors to acquire real estate with attractive valuations and good fundamentals.

Brexit and the US/China trade impasse were the headline stories of 2019, but the probability of a worst-case scenario on both issues has meanwhile clearly diminished. We see sufficient goodwill in the most recent US/China rhetoric to suggest that some of the previously announced tariffs could be cancelled rather than just postponed. Such an outcome might provide much needed confidence. However, the US, economic growth is expected to slow down in the near term, as the effects of weak growth, uncertainty and slower hiring continue to weigh on real estate investment. Nevertheless, policy actions by the government and the central bank to ease and maintain supportive financial conditions, lower rates, sound economic activity in the US service sector and robust job creation should result in sustainable growth of disposable income, strong domestic demand and private consumption, and thus drive US GDP higher in 2020. The US housing market could become a further source for an acceleration of economic growth in the US. Moreover, credit score requirements for new mortgages have eased compared to the level in 2018.

The decline in mortgage rates in 2019 has substantially improved the buy-to-rent and payment-to-income affordability ratios. According to the US Census Bureau, the median price-to-rent ratio (median home value divided by the median annual rent equals the median price-to-rent ratio) has fallen to 17.91, a level which compares to the ratios seen in 2015/2016 and is only slightly higher than the median ratio of 16 during 2004 to 2006. In 2007/2008, during the period when the US real estate market heated up, this ratio moved to 24.5, and then declined in the aftermath of the financial crisis back to below 20 in 2011. A very similar picture emerges by looking at the payment-to-income affordability ratio, which also stands at levels comparable with those of 2015/2016.

Another phenomenon is now  clearer. The excess homes built prior to the crisis have finally been digested, and the US housing market is now entering a period of overall scarcity, in which potential housing demand exceeds housing starts and housing inventories. US household formation is now growing faster than housing starts, which indicates that investments to grow the housing stock are needed to fill this gap. `Average annual household formations have risen since the period between 2013 and 2016, when they stood at around 1 million per year, and in 2019 now stand at approximately 1.45 million, an acceleration of about 45%, according the US Census Bureau. For the period 2017 to 2019, housing starts dropped behind household formations when they increased by only 18%. Against the backdrop of low funding costs and robust income projections for the next couple of years, this might result in excess demand for new apartments, and given an income multiplier greater than one, residential investment spending could spur GDP growth in the US.

Benefits of the partial solution for the US/China trade tension and the definitive Brexit decision will, however, outweigh the increasing concerns with respect to the outbreak of the novel coronavirus in China. We believe these corrections in real estate prices are only temporary in nature. We therefore currently do not intend to change our projections or our recommendations to purchase real estate in “pockets of opportunity” as pointed out in our quarterly research report MARKET CYCLES.

ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization and President of calstatecompanies. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com

UTUBE: https://youtu.be/868wrjNPQFM

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

¨E-Mail CalStatecompanie@aol.com  ¨ Webpage http://www.calstatecompanies.com

Real Estate Markets In

This New Decade

We at the Calstatecompanies’ Center for Real Estate Studies (CRES) are encouraged by most of the developments at the start of the new decade for the prospect of the real estate markets.      The deal between the US and China to resolve their trade disputes leads us to believe that our economy will regain some strength in 2020, after suffering in 2019. Uncertainty about future trade arrangements was one of the major drivers for restrained real estate investment spending and the main reason why our economy lost so much steam in the past year.      In addition, the parliamentary elections in the UK in December 2019 and the overwhelming vote to leave the European Union (EU) at the end of January 2020 are also sent clear signals, which have reduced uncertainty for the real estate investment markets. The UK left the EU on 31 January.     The uncertainty about a potential escalation of the US-Iran conflict also started to abate as Iran decided to avoid direct military with a token retaliation after the assassination of General Soleimani by a US drone.       A development that may have an immediate negative impact on our economy is discovery of the coronavirus in China and the spread of this disease to other parts of the world.  Real estate equities have posted losses since the discovery of the disease mid-January, with values down by around 3%.  So far, at the time of writing, 14,557 people have been infected by the new disease, around 99% of who are in China and only 1% in the rest of the world, according to data from the World Health Organization (WHO).      In contrast to the SARS disease in 2002/2003, China has taken strong measures to curtail the outbreak of this coronavirus, starting by notifying WHO immediately, restricting transportation and tourism within China, and expanding its capacity to treat infected people.  In addition, many health research laboratories are working intensively to find an appropriate vaccine. Given these measures, there is a good chance of containing this new infectious disease. With respect to the impact of this outbreak on our economy, it depends on the length and interruptions of production.       In CRES’ view, the most important development for our recovery is the partial resolution of trade tensions between the US and China. This shows that both countries are actively engaged in resolving their current differences in bilateral trade. Consequently, we are confident that the US and China will continue to negotiate further trade arrangements to iron out the remaining trade disagreements. This should restore real estate investors’ confidence. These developments will be closely monitored, and the impact on real estate values will be continuously assessed. ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and  investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization and President of calstatecompanies. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com UTUBE: https://youtu.be/868wrjNPQFM

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

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How to Pick the “Right”

 Property Manager

The following  is what you need to know before you hire someone to manager your property:

Be Wary of “Mom-and-Pop” Operations

            I prefer to use a medium-size property management company, rather than a “mom-and-pop” company. These kinds of operations usually don’t have the staff to do an adequate job. In addition to managing smaller units, they are typically involved with real estate brokering.   I’ve actually seen these operators give prospective tenants the key to a vacant unit, rather than showing it themselves. This type of marketing effort won’t do if you’re trying to keep vacancies down.

Be Just as Wary of the “Giants” in the Field

            Larger property management firms are geared to institutional investors. Midsize apartment buildings somehow get lost in the shuffle.  Individual attention suffers. The needs of your building might have to wait until those of a much larger complex are met. Your building might be assigned to a new or relatively inexperienced property supervisor to provide training.

Procedure Manuals Are Critical

            Ask to see the operations or procedure manual of the firm. Read it and ask questions. You’ll get a clear indication of how a property management company manages apartment complexes from the manual. Be leery of the company that doesn’t have one. In fact, do not consider using a company unless they have a formal plan on how they manage apartment buildings.

What to Expect from Your Property Manager

            Under no circumstances should you run the day-to-day management operations. Your role is to properly monitor the project in order to establish effective policies and to make management decisions.

            What support should your property management company provide?  Ideally, they should be able to provide all services in the areas of acquisition, operation, and disposition of your property.

            After you’ve pinpointed possible property locations, a good property management company should be able to give statistical, as well as subjective, information concerning socioeconomic, political, and developmental conditions. A quality firm should be capable of preparing physical inspection reports, capital improvement requirements, and an effective operations budget.

            During the operations phase, a competent property management company will issue timely monthly operating reports that compare actual income and expenses to budgets. They should be able to give you a detailed explanation of any major variances, and their representative should meet with you periodically.

            During the sale phase of your property, your management firm should be able to communicate with the potential buyers on your behalf regarding the building, and to assist in various inspections. They should have no problem providing these services because it gives them the opportunity to display their own expertise to the new buyers.

Controlling Property Management Fees

            How much should you pay a property management firm? Payment should be based on the various tasks you want performed. In assisting you with the acquisition, you should contract out on an hourly basis that’s comparable in the area. Under no circumstances agree to an inspection contingent on signing a management contract. You can readily see where this could lead. More property managed equates to more in-come, a flagrant conflict of interest. Work with a reputable company, one that won’t recommend you buy the building just to get the management contract.

             higher percentage than larger ones. Re-member, management fees are always negotiable. There are no fixed rates. Make sure all services and related costs are spelled out in writing before you enter into a management contract.

            It is important to note that fees based on the percentage of rents collected should not include other items such as total cash collected, projected rents, gross possible rents, security deposits, and laundry income, for example. Be careful. Know exactly what the rate is and how it’s applied.

            If you want to give additional incentive to the property management company, offer them a bonus based on the building’s performance. It could be based on net operating income or the overall improvement of the complex over a period of time, usually one year.

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and  investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

¨E-Mail CalStatecompanie@aol.com  ¨ Webpage http://www.calstatecompanies.com

Just Released Leading Rental Income Markets 4th Quarter 2019

            LOS ANGELES, CA. The Center for Real Estate Studies (CRES) research report has just released their fourth quarter 2019 issue of “Market Cycles".  It gives a forward look at more than 150 income rental markets with “buy, sell or hold” recommendations. This publication gives the real estate investor a two-year head start on where and when to invest in rental income properties.

            The current number of markets in the “Sell Phase” is forty, according to Eugene E. Vollucci, Director of CRES.  The number of markets in the “Buy Phase” is twenty. Mr. Vollucci states, “This quarter the three top buy recommendations are Austin, TX, Louisville, KY, Minneapolis, MN. The three top sell recommendations are Honolulu, HI, McAllen, TX and El Paso, TX.” according to Mr. Vollucci.

            In this edition of our Market Cycles, we find the fourth quarter 2019 rental vacancy rate outside MSAs (Metropolitan Statistical Areas) was higher than in the suburbs, but not statistically different from the rate in principal cities The rental vacancy rate outside MSAs was lower than in the third quarter 2018, while rates in principal cities and in the suburbs were not statistically different from third quarter 2018 rates. 

            Unemployment rates were lower in November than a year earlier in 223 of the 389 metropolitan areas, higher in 137 areas, and unchanged in 29 areas, the   U.S. Bureau of Labor Statistics reported today. 153 areas had jobless rates of less than 3.0 percent and 2 areas had rates of at least 10.0 percent. Nonfarm payroll employment increased over the year in 51 metropolitan areas and was essentially unchanged in the remaining 338 areas. The national unemployment rate in November was 3.3 percent, not seasonally adjusted, little changed from a year earlier.

            Real estate gains on residential property according to S&P’s over the last 10 years were up 3.4%. A booming economy, but insufficient homebuilding made property owners rich. 

            Approximately 328,000 new units are needed in the U.S. each year just to keep up with demand. That figure has only been realized twice since the late 1980s, in 2017 (the peak year for completions) and 2018 and is on track to make it in 2019, according to CoStar. Although some segments of the market may be approaching overbuilt status (luxury, urban core, specific submarkets), supply is still falling far short of demand in many areas across the country. In 2018 and 2019, absorption outstripped demand by an estimated 73,400 units and the current pipeline for 2020 shows fewer units coming on-line than 2019.

            In a recent Freddie Mac survey, homeowners and renters fifty-five and older learned that an estimated 6 million homeowners and nearly as many renters prefer to move again and rent at some point. Of those homeowners and renters that expect to move again, over 5 million indicate they are likely to rent by 2020.

            This is just another indication of the growing pressure on already tight rental inventories and the significant challenges to housing affordability in the coming years. While estimates vary, we can expect a shortage of needed affordable rental units that will run into the millions. As such, the affordability gap will spread much wider than it is today.

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and  investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com

UTUBE: https://youtu.be/868wrjNPQFM

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

¨E-Mail CalStatecompanie@aol.com  ¨ Webpage http://www.calstatecompanies.com

Real Estate Investments-A Year Ahead

          As we move into the year ahead, there is a general acceptance that we are at a point where long-term economic growth in the real estate industry will be slower, but sustainable.

          The word is that the year ahead is ideal for real estate investments because many investors are searching for safe havens for their capital. Real estate offers stable returns compared to other investments making it the “right” choice. However, there are several areas to watch as we approach the New Year. It is important to remember to diversify your real estate investments when navigating both certain and uncertain times. The Center for Real Estate Studies can help you do that with our monthly research reports and quarterly research report MARKET CYCLES.

          The past year has been filled with various forms of uncertainty. The one thing that seems certain is that companies are less likely to make growth plans and

capital investments in the face of such uncertainty. With presidential elections in 2020 and  banks willing to accommodate, we expect a softening of economic activity.

          The driving force remains domestic demand, especially private consumption, based on our strong labor market, which is operating close to full employment. The path for economic activity and risks has become unusually dependent on the ability of our administration to avoid an outright trade war with China. We believe the bank’s easing of interest rates will be strong enough to avert a slowdown in economic growth, prolonging the current economic expansion and supporting earnings growth

          The U.S. economy is doing quite well right now, but it could falter over the next couple of years as the stimulus fades away, said Paul Ashworth, chief U.S. economist for Capital Economics, and the winner of the Forecaster of the Month award for March.
          “We’ve been optimistic,” Ashworth said in a telephone interview. He and his colleagues had long assumed that the united Republican government in Washington would deliver a “sizable fiscal stimulus” and they were right. The tax cuts and the end of spending restraints should give the economy a nice boost this year and into next. Nevertheless, what happens next? “We are concerned with fiscal stimulus wearing off,” Ashworth said. He expects a “weaker” 2019 and 2020. Indeed, Capital Economics expects the Federal Reserve to be cutting rates in 2020.
         
          “The Fed’s economic projections, which envisage the economy growing above trend all the way out to 2020, strike us as far too upbeat,” wrote senior U.S. economist Michael Pearce in a recent note to clients. “The fiscal stimulus will provide a one-off boost to incomes and spending, but unless it expands the supply capacity of the economy, growth will inevitably fall back.”
          The economists expect only “a modest downturn that’s quickly reversed” in 2020, but of course the expansion has to end sometime. By then, it will be the longest expansion in U.S. history. “We stress to clients that they should think of the next downturn,” Ashworth said. “We expect it to be short-lived, with less permanent scarring” than from the Great Recession of 2008-09.
          We believe that the best way to hedge against the uncertainty in the year ahead is to invest in midsize apartments in “Pockets of Opportunity’ as reported in our quarterly research report Market Cycles.

 

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and  investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, an educational and research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com

UTUBE: https://youtu.be/868wrjNPQFM

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

¨E-Mail CalStatecompanie@aol.com  ¨ Webpage http://www.calstatecompanies.com

Real Estate Investment Outlook November 2019

          We at the Center For Real Estate Studies continue to hold a middle-of-the-road position for the real estate investment markets. There are signs of softening in our economy and monetary policy. The Federal Chairman, Jerome Powell,   is likely to evaluate economic data before additional rate cuts.

          With strong private consumption and the strength of the service sector, which accounts for more than three-fourths of our gross domestic product (GDP), he may be forced to cut rates even further if a resolution of the trade dispute between the US and China is again delayed. The Feds might return to buying short-term Treasury bills, given the looming budget deficit, which is expected to rise to -4% of GDP in 2020

          A recession is still highly unlikely, given strong domestic economic factors such as private consumption and low and declining unemployment. So far, the sluggishness in manufacturing has not spread into the service industry, and we believe that the momentum of job creation could be maintained in the service-producing economy.  Although real estate valuations appear somewhat stretched in some markets, the prospects of a solid economic cycle may justify our current thinking. In addition, the real estate markets proved to be resilient against rising volatility during the mayhem of 2011 and 2015.

          Because of the sluggishness of our manufacturing, the United States Dollar (USD) is appreciating against European Currency.  In Europe, for instance, a lack of real alternatives for investors is proving to be the main driver of USD strength. Elsewhere, the high level of uncertainty over the US-China trade talks is exerting pressure on the Chinese Yuan, thus strengthening the USD. The net upshot is less European and Chinese real estate investment being made in our country.

            One may argue that rate cuts may weaken the USD; however, cuts have not been the straw that broke the camel's back. They have lowered interest rates twice, and rate expectations have swung around. For now, there seem to be other factors driving the USD. Coordinated rate cuts created a friendly environment with depressed volatility, sustaining demand for real estate investments. As long as rate cuts are followed by other  banks, this mechanism will stay in place. As a result, Fed policy may influence the USD for a short time, but other factors may be necessary to undermine USD strength in the long term. In debt outstanding of more than 100% of US GDP, the funding requirements of the mounting fiscal deficit and the negative international investment of around 10 trillion USD are three factors that may be a burden on the USD over a longer period.

          In preparing our quarterly report, MARKET CYCLES, we take into account the input from Outlook, our monthly research source. At this point, we still believe that with midsize apartments you still get the best investment dollar for your buck. Midsize apartments generally outperform equities because of its higher yields, greater price stability, and downside protection even in a recession.  When stock markets are down (which we project will happen in 2020), they hold value and produce a positive return. They are less prone to booms and busts. Midsize apartments are now stronger than they have been in many years. 

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and  investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, an educational and research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com

UTUBE: https://youtu.be/868wrjNPQFM