Written by Don Wenner
As published in Forbes
There is no doubt about it: A migration is afoot. I see it every day, in every market my firm operates in: More and more young professionals, working-class families and senior citizens are choosing to move south to warmer climates with less expensive costs of living.
The bigger Southern cities such as Atlanta, Charlotte and Tampa have long welcomed a steady influx of newcomers, but they are no longer alone. As housing prices in those metropolitan areas have risen, more affordable secondary markets in the Southeast have become the latest magnets for new arrivals in search of a better quality of life. People are flocking to the likes of Spartanburg, South Carolina; Greensboro, North Carolina; Little Rock, Arkansas; Brunswick, Georgia; and Jacksonville, Titusville and Palm Coast, Florida.
Does that mean real estate investors should consider moving some of their money in the same direction? To answer that question, you need to understand what is driving this migratory trend and what could impede it.
What’s Driving The Migration
The price of housing in first-tier markets is the primary reason that people are actively choosing to uproot to secondary ones. It takes a staggering 115% of the average income to buy a home in New York City, according to ATTOM Data Solutions. Moreover, the average American cannot afford a median-priced home in the vast majority (71%) of markets in the United States. By comparison, home buyers need far less of their income to purchase a house in southeastern areas such as Macon, Georgia (11.1%) or Montgomery, Alabama (13.9%).
These statistics help explain the current population migration, but there is more to it. Secondary markets also boast an overall lower cost of living. Most notably, their citizens pay less in income and property taxes. And in Florida, Tennessee and Texas, they pay no income tax at all.
Jobs are another key factor. As the Washington Post points out, “Well-paid science, technology, engineering and math (STEM) jobs are flowing to some secondary locales,” and the Southeast and Texas offer more regulatory-friendly environments in which to start and maintain businesses. As more entrepreneurs move in and established firms relocate to these secondary markets, they bring higher-paying jobs.
Beyond concern for their pocketbooks, everyone from millennials to seniors wants less stress and a higher quality of life. The warmer weather, less congested streets and shorter commutes in these Southeastern cities seriously appeal to those fed up with the cold and nonstop traffic of bigger Northern cities.
Even millennials who settled in major markets like New York City are in greater number opting to return to their smaller hometowns to be closer to family. As Curbed explains, they prefer the “more approachable, neighborhood-oriented version of the urban lifestyle” that is now available to them back home.
What Happens If Circumstances Change
It is clear that secondary markets, especially in the Southeast, present tremendous real estate value right now. But could that change? Yes, and there are three particular contingencies that investors should keep in mind as they explore real estate investment opportunities:
• Cap rate compression: It is inevitable that the rising popularity of secondary markets will eventually increase their housing prices. That, in turn, will compress investor rates of return. The most value today is in areas where growth is still trending upward, rather than those that are close to or have already peaked.
• Economic slowdown: Let’s face it. As of July, we are in the longest economic expansion in U.S. history. A recession or downturn is inevitable; the only question is the severity. Depending on when and how significantly the economy slows, job opportunities in secondary markets could shrink, and layoffs could lead to a rise in home foreclosures. Heed warnings that some markets are already trending toward housing bubble territory. Tellingly, the cities most at risk are largely outside of the Southeast.
• Concentrated industry: Unlike major metropolitan markets that feature a variety of industries, secondary market economies typically rely on a smaller number of concentrated industries. Watch out for markets that rely primarily on one or two industries. With or without a recession, the exit or downsizing of such an industry would hurt the employment and housing outlook of the secondary market that relies on it.
Real Estate Investing Requires a Deliberative Approach
People moving to secondary markets are looking for and finding greater value for their dollar. Investors will find value there for the same reasons, as long as they are cautious and deliberative. Keep in mind that real estate investing requires far more nuance than equity, bond or mutual fund investing. Its end result is a generally stable and straightforward asset that will likely appreciate over time, but it is a holding that typically cannot be disposed of quickly or easily.
Given market uncertainty, investors must take that relative illiquidity into account when bidding on investment real estate or buying shares of a private real estate fund invested in these secondary markets or other areas.
Specifically, do your homework on any investment property or real estate fund you are considering. Be willing to bow out if the numbers of the deal don’t add up or the execution performance of the fund management is in question. Finally, keep the end game in mind from the very start: Always think through an executable and flexible exit strategy before entering into any real estate deal.