EP 645 – Top 3 Things To Consider In Picking An Emerging Real Estate Market With Nicholas Gerli

NCS 645 | Emerging Real Estate Market

NCS 645 | Emerging Real Estate Market

 

Everyone likes to think of their own city as the best place to invest, but there must be objectively better markets out there when you take a closer look at existing data. Scott Carson sits down with the CEO of Reventure Consulting Group, Nicholas Gerli, to talk about the top three factors that he looks into in choosing emerging markets for his real estate investing clients to target. He also shares information about his top growing markets and how he uses Census and Labor Statistics to pick emerging markets. Moving on into 2021 and beyond, the best-informed investors are going to be the winners in the coming years. Join in and learn where you can potentially make the most bang out of your buck in today’s real estate markets.

Listen to the podcast here:

Top 3 Things To Consider In Picking An Emerging Real Estate Market With Nicholas Gerli

I’m excited to have a fellow Austinite on the show. It’s not very often I get somebody from here in the Lone Star State. He’s got to keep it weird in real estate here in Austin, but I’m honored to have a new Austinite join us on here. He is doing some amazing things and providing such great content and knowledge to so many people out there, investors, funds and stuff like that. I’m honored to have Nicholas Gerli join us. He’s the CEO and Founder of Reventure Consulting. He provides real estate investors and owners with recommendations on the best markets, which is what we’re all looking for, and even neighborhoods to look for real estate growth.

His company, Reventure Consulting, uses a proprietary database of economic demographic and real estate-driven indicators to analyze and rank the best places to invest. That might be a little important for you guys as we roll into 2021. Prior to doing that, he worked for a nationwide commercial lender. He did over 200 large loans and equity investments, totaling over $2 billion in funding. He knows the lending industry. I came across him on LinkedIn. He was sharing some information about the best tips to cities out there in Austin and I was like, “I like what you’re doing, Nick. We’ve got to get you on.” Welcome to the show. How is it going there for you?

I’m doing great now, Scott. I’m excited to be on here and to finally be in Austin. Working here was a goal of mine for a couple of years. I’m originally from the Northeast, but I’ve slowly made my way South. I enjoy the city so far. I’m glad to be in Texas and here in Austin.

You’ve done such a great job with your marketing and in helping out. What made you get into what you’re doing now at Reventure?

Fundamentally, with Reventure, my goal and passion are to inform real estate investors on the best markets and the best neighborhoods to invest their money in real estate. I started thinking about founding Reventure several years ago. I was working at a debt fund out of Boston. I would travel around the US and close $20 million to $50 million commercial real estate deals in all these different markets. I go to Texas, California, Georgia, and New York and I started thinking, I was like, “On all of these deals, I feel like I’m being told the same exact.” On every single deal, it was like, “This is the number one area for Millennials. This is where all the tech is going. This is the number one growth city.” I was like, “That can’t be true about everywhere.” Some of these cities and some of these neighborhoods need to be better than others.

That question started percolating in my brain. I felt like I didn’t have the tools and data to answer those questions well and to try to figure out, “Why is this city growing more than this city? Why is this neighborhood growing more than that neighborhood? What does that mean for the future of the real estate, value and rent growth?” It was several months ago that I left my old company and devoted myself to understanding that question and becoming obsessed with it. I have an Economics background by trade. I applied a lot of what I learned in Economics and put these databases together that turned out to be instructive and predictive in real estate growth when you analyze this data. My goal is to go to real estate investors, developers and owners and show them, “This is where the data is pointing you to in terms of where you need to invest.”

Everybody thinks their city is number one, and I guess it is number one for a lot of things. It depends on how you spin the smoke or how much smoke you blow in a lot of cases. What have been some of the underlying factors that you looked at? Especially the commercial side and doing the commercial project, it all varies in what’s going on with that property and the asset class.

Uniqueness and individuality out of a real estate, every deal is unique but there are some common trends. Whether you’re dealing with a multifamily property or even a retail property, or I would even say office in a lot of cases, what you’re caring about and what you’re looking for are three fundamental things each time. I want to be in a city or neighborhood that’s a growing population. If you’re a growing population, there’s more demand for apartments. There are more people who are going to buy goods from retail stores. There are more people who are going to fill office buildings.

The other thing you want is income growth. I find most people, when I say population growth, get it but income growth, if not, is more important. You need a population that’s already there to be earning more money. If they’re earning more money, that’s more money to spend on rent and retail goods. If they’re earning more money, that’s likely a sign that the economy is producing productive jobs, which will help the office market.

It’s population and income growth, and the final thing you want to look at is supply. That’s the thing maybe a lot of people want to forget like, “Let’s focus on the demand side of the equation. How many people are moving there and how much money they’re making.” Supply is very important too in terms of multifamily or a single-family. How many new permits are there each year relative to the existing population? Do we feel like maybe there’s a shortfall in supply compared to demand? Do we feel like there’s too much supply compared to demand? Those are the fundamental tenets of where I start when advising clients on where to look.

A lot of people get to fall in love with the project versus looking at some of the economic factors. I know with self-storage, we get self-storage deals and they will send to us. That’s one of the first things we look at, “What’s the 5-mile and 10-mile radius? What’s their vacancy factor to see if there is an opportunity to decrease vacancy factor?” It varies at 65. You’re not going to go above 65 once you cut your throat. You don’t want to do that. That sets a bad precedent. That’s important to think about, especially in cities that are growing, the demand is growing, and there’s a lack of inventory, especially here in Austin and some other parts of the country. The cost goes up because the demand is up and the supply is down. I want to throw something back at you though when we’re talking about office space. If you think about what’s happened this 2020 in office space being hit so hard in a lot of places out there, how has that figured into what your numbers are saying and things that you’re looking at?

That’s a curveball right there with COVID and working from home. People in the office space need to tread carefully. They need to probably focus even more so on the underlying demand factors. One thing is like a traditional downtown office skyscraper mentality and not being the locus of where he wants to be, I think that’s not so much anymore. To be honest, that was even declining prior to COVID when you look at the data. It’s more of what they call the holocentric office model, where there’ll be different hubs and spokes throughout a city where the office clusters will be.

The Domain in Austin is a great example. That’s a new development 10 miles North of the city where there’s a lot of new office going in there. I would say in terms of practical advice for people looking at an office, you want to look at where are small business concentrated in your city. If you can find pockets where there are concentrations of small businesses, but maybe not as much newer office development, that could be a sign that there’s some potentially untapped demand.

People are avoiding the downtown centers a lot of times with what’s going on there, but there are still businesses running. They talk about Austin being such a big city. The expectation is that in twenty years, the Center of Austin is going to be 20 miles West. That’s where the city has grown to. Knowing the path of progress is something important too.

When a client comes to me and wants investment strategy advice, there are two ways to do it. One is starting at the city and the market level. Trying to figure out what cities and markets do I want to be in, which is very important. A lot of people already know where they want to be or they’re already committed to a location or they live in an area and it doesn’t make sense for them to go to another market. For those people, it’s very important to understand like the back of your hand where the growth is in your city, where the income is, where the Millennials are and where the spillover occurs.

NCS 645 | Emerging Real Estate Market

Emerging Real Estate Market: The three fundamental things you need to look for in an emerging market are population growth, income growth, and inventory.

 

One of my favorite ways to do that is you can load data. The census is producing data on population growth. You can load that into mapping software in a program that is called Tableau. We can look for the heat maps. What are the highest growing ZIP codes fundamentally over the last years, in terms of population and income? That’s going to point you to where the path of progress is heading. That’s one approach that I enjoy a lot.

Usually, what will happen is you have a lot of homes that get built-in. The infill of commercial and things filling around that growth on the outside. We’ve seen that on the North side of Austin where Cedar Park, Leander and other parts like 30 minutes to an hour outside of the city is starting to grow. People don’t mind waiting an hour in traffic to live in something that’s a three-bedroom, two-bath versus one-one that’s three times the amount of cost. Now, with everything that’s been happening in these last several months, looking at the market, what’s your take? This is a two-part question. Where do you think the biggest opportunities lie for the residential space and the commercial investing space? The commercial may be a little bit of a mix.

In terms of residential, there are two things that I’m looking at. One is, “What are the undervalued and underappreciated markets?” Austin is a great market, but Austin is not underappreciated or undervalued. Austin is fairly valued. Other growth markets like Raleigh, Salt Lake City and Denver are all great. They have amazing demand fundamentals but they’re very discovered and explored, which means they have a lot of supply and price points are a little higher. In uncertain economic times, maybe right now is not the best time to get in. If you can find a market like Columbus, Ohio, Indianapolis or Phoenix where they’re adding all these households and this income, but they’re not adding up too much supply, you put yourself in a pretty good position for investing in residential heading into 2021. That would be the first thing on a market-by-market basis.

The second thing would be no matter what market you’re in, look for where the spillover opportunities are. What I call spillover is you look at your ZIP code and you’re not as much focused on the fundamentals of your ZIP code. You’re more focused on the fundamentals of the surrounding ZIP codes because that is proven to be very predictive of value and rent growth. If your surrounding ZIP codes and areas are strong and stronger than your ZIP code, your ZIP code is going to benefit eventually. Heading into 2021, focus on markets that have good growth, but are underappreciated. Focus on neighborhoods that have spillover opportunities, where population and income are going to spill over. That’s going to be positive for rent and value growth.

If it’s saturated, it’s going to leak out and you could call it the ripple effect. That makes a lot of sense everywhere. That’s why the secondary markets do well too outside your major cities because that’s where people will go and roll into and business will go in the path of progress. Where do you think the commercial market is, especially in 2020? That’s probably a whole different ball game.

It is a whole different ball game with the commercial market, particularly office. The fundamentals are similar, but they detach a little bit. When a company is making a relocation decision, they’re not necessarily relocating to that secondary tertiary market. Maybe they’re not relocating to Indianapolis, but they’re probably going to consider Austin. Palantir is this big tech company that just had an IPO. They moved their headquarters when they had the IPO from Silicon Valley to Denver. For instance, Tesla is opening up their Gigafactory in Austin. There’s a big move now in corporate relocations and expansions into these first-year growth markets, Denver, Austin, Raleigh and places like that. I think the office market will be strongest in those cities. Those cities might be slightly oversaturated in residential, but the office demand and retail demand in that city pool will be strong.

You hit the nail right on the head there. Raleigh and North Carolina have been a popular market for years. Things have been growing there. Raleigh has been going through tremendous growth in that neck of the wood. We’ve seen that quite a bit with these values in the residential. Even the commercial stuff, we are starting to see the supply and the demand be met and growth to take place as businesses are moving there. Companies and investors are doing there. As you said, people move there, they buy stuff. They need retail and office space. That goes to support them along the way.

Scott, I want to ask you. I know you have a presence in different parts of the country. What markets have you had success in? What markets do you prioritize and why?

It’s funny, it’s not a surprise. I do love Ohio. I think Ohio is a great market. Columbus is the number one area, not just because of the growth, but it’s one of the few cities that has seen growth in Ohio. Whereas a lot of the other cities are losing population. People are moving to the warmer parts of the country. Columbus with the Ohio State and other things going on there is doing well. Indianapolis, I’m a big fan of that and Indy as well. They had some growth that does have some very affordable real estate still. When you look at what rent rates are compared to property values, it’s got a nice ratio where rental rates are pretty high compared to other place of the country.

I still am a fan of Michigan. The major cities in Michigan are great places. Some people give me crap about Flint, but I’m not drinking the water. There are still people living in Flint who are loving it there. You can still pick up in Michigan relatively inexpensive real estate with a nice rent rate, or even if we’re just buying the debt ratios. The mortgage payments that we modify work well for us. I do think that parts of South Carolina and other areas of North Carolina are going to do well. Florida has been overpriced, especially in the Southern tip. If you look back on what happened several years ago, Florida has pretty much recovered. What’s going to be a big opportunity is the void of jobs in Orlando, whether it be in such a big tourist, hospitality and event space. It’s going to be cheap to have an event in Orlando, and it will be interesting to see what happens with the Biden administration. If they do shut things down, it’s going to get even worse.

I’m a big fan of Hollywood, Florida. I like the Southwest part of Florida as well because you get a lot of people from New York moving down there and they are still okay. I think of Southwest Florida Park, like Lehigh Acres and Cape Coral and I don’t talk about Naples. Naples is overpriced, but it’s still a beautiful spot to be at. Those other areas that are used to be big touristy spots, you’re going to be able to find some deals there as people are moving away from that. Other opportunities, short sales, foreclosures or note sales, we’re starting to see some of that stuff pop up now with what we’re doing.

I like a lot of the markets you mentioned. You touched on two points that are interesting. One is inbound migration that a lot of Sun Belt cities are getting, Florida in particular. Florida is great for real estate because they’re getting all this inbound migration, but they don’t expand supply as much as some of the other growth cities we’ve talked about in the Southwest. I think Florida has good demand and supply dynamics. The Midwest cities are also interesting. As you said, a lot of the Midwest cities, whether it’s Pittsburgh, Cleveland, Akron or Detroit are flat or even negative on population growth, which is concerning, but then you look probably because of that, there are no new developments in those markets. There are still people there who are staying there, want to live there and want quality housing. Some of those Midwest markets in 2019 have been the best-performing in terms of value and rent growth.

I’m not a fan of Cleveland because of some of the things that the city has done. If you take back property or foreclosure, you’ve got to bring a completely up to brand-new code with double-pane windows and other things like that. They require investors to purchase a $10,000 bond, which is not fully refundable. It makes it hard if you’re an investor and wanting to go into Cleveland. When you go to Akron, Canton, Dayton, Columbus or even Cincinnati and Ohio for some better deals for the most part without having to jump through those hoops. You see that in different parts of the country and cities trying to enact things. Chicago has been dealing with this for years of all the zombie homes out there, the vacant homes that are big Xs on it. If they catch on fire, don’t bother trying to save them because we’ve got too much of a glutton of inventory out there.

When you say zombie home, no one’s living there. I heard in Detroit, the city raises homes like that. Do they not do that in Chicago?

Yes, they will do that and knock it down or they don’t have the resources. As you said, Detroit does that. Cleveland and Chicago do that. It’s gotten better as the South side has regentrified a little bit, but you still have a big problem with violence and vandalism with the South Side parts of Chi-Raq, as I like to say. The foreclosure process in Chicago, compared to the rest of the state of Illinois, is difficult. It takes forever to foreclose. It’s a very corrupt legal system. If you don’t live there, they don’t usually side with you. They’ll side with a borrower who lives there because it’s their votes versus your vote. We’ve seen that. I hate to say that, but that’s what we see happening. They still give their borrowers time and opportunity. Again, I’m like, “Come on. I’m trying to bring the property back up to help the neighborhood but you don’t want to help me.”

NCS 645 | Emerging Real Estate Market

Emerging Real Estate Market: In terms of residential real estate, you need to look for undervalued and underappreciated markets with spillover opportunities.

 

It’s like anti-growth initiatives.

It feels that way.

That reminds me of a story I heard about Chicago a couple of years ago, where the tax assessor will always assess the values high on all the properties, whether it would be homes or apartments. It was known that he would assess it high and then you would hire a lawyer to appeal. They would knock the stuff. Everyone went to the same lawyer to appeal it because he was the best lawyer to appeal it, but it turned out that lawyer was the one who funded the assessor’s campaign and got him elected. It was this backhanded and dirty trick where it’s like, “We’re going to assess high so we can have this lawyer make some money on the appeals.” The unfortunate thing about that is, “Who does that ended up hurting?” It’s often maybe for more disadvantaged people who don’t know that they can appeal and don’t know that they can hire a lawyer to appeal their tax assessments. That reminded me of that story.

Chicago was like that, and a few years ago, you had something similar happen in Detroit, where they had tax sales and every property was going to a tax sale to one guy who owned a big car dealership. They sold the tax sales stuff well-below value of what they would have gotten in the original options aspect of it. There’s a big uproar about this. This guy has a big car dealership for $4 million. He bought every tax sale in a swoop like that. It turned out there were a backdoor connection and under-the-table shake taking place.

That’s a good segue to talk about growth initiatives versus anti-growth. I was mentioning certain cities have a lot of supply. For instance, Austin is permitting more new housing units than any other Metro in the US as a percentage of its housing stock. In 2020, Austin is on pace with permits and almost 5% in expansion, which is huge. That’s massive. You have places like Chicago or Detroit, which may be two reasons. One is there are not a lot of developers going in there. The other is they’re permitting 0.5% to 1% expansion of their housing stock.

It begs an interesting question. While Austin is permitting a lot of units, it’s very pro-growth. While there’s more supply, which might decrease value and rent growth a little bit, you probably feel better about the durability of your long-term demand, increase in population growth and businesses moving in than you do it in a place like Chicago, where the republic policies aren’t favoring the contract. They’re doing that with you or with someone looking to own an apartment building. What are they doing with the corporation that wants to move into the city, or the corporation that wants to expand? It’s probably a similar situation. That’s an important thing for people to also consider when they’re planning there.

Are there any other cities you’re seeing something like that outside of Texas? Other cities that you’re seeing big growth on the permit and stuff like that?

Yes, I am. Austin is one. Nashville is another. Nashville is not quite on Austin’s level, but it’s around 3.5% of supply and demand. Nashville has got a lot of positive things going on, a lot of growth. AllianceBernstein relocated there. They’re starting to get a little bit of a tech presence. Nashville is permitting a lot. Raleigh is permitting a lot. Raleigh is very interesting though. Raleigh’s permitting is skewed a lot more to single-family. Raleigh might be number one in family permitting, but they’re pretty low on multifamily permitting. If someone was an investor in Raleigh, they’d probably want to understand that distinction. If you’re buying a home or going more for a single-family rental, you might have more supply competition than if you were to buy a more traditional multifamily property. That’s another interesting thing to think about. Are we permitting more multi or more single-family? Most markets are even. They find that balance but some markets are skewed, one way or the other, more towards single or more towards multi.

That’s an important thing if you’re a local guy trying to get into investing and knowing where the opportunity lies. If there is a little opportunity where you’re located, it makes it a whole lot different. I think it’s one of the biggest things that I like the most about looking at many different markets. There are a lot of opportunities across the country if you can get out of having to touch and see everything personally and be able to use vendors, realtors or other investors to be your eyes and ears in those different markets out there.

That’s where data comes in. There are many different deals, opportunities and cities to explore. Often with my clients, the question is, “How do I save myself time? How do I figure out the best places to be?” It’s also, “How do I save myself time if I’m entering a new market and I’m not as familiar?” Let’s say I’m going into Raleigh or Durham. To make heads or tails of that market can take months of talking to brokers and visiting there. Data is not a replacement for doing that, by any means. If you can hone in on several key ZIP codes that meet your criteria for growth, that focuses your efforts and saves a lot of time.

Data is such an important thing versus just flipping a coin. The whole point is some people get away from that. Data is used as a filter to help you filter through all the different opportunities out there. Coming to the point of marketing, specifically for deals in the neck of the woods, are opportunities out there. Data is important. You’ve got some interesting stuff that you pull in. How did you come across this? Does this go back to your days as a commercial broker or mortgage broker and stuff like that? How did you pull these different things in to help you identify that? How did the company come about that? It’s a bit of a big jump from going on the origination side to be in valuable data and research purposes.

Personally, it started back with my education. I was an Economics major. I went to the London School of Economics. I’ve always been a nerd. I always had that inclination even when I was working on the origination and underwriting side. As I’ve worked more on that side of the business and I did more deals, the desire to understand these markets better took over. When I founded Reventure, it was a deep dive into an academic paper, talking to all these different people in different markets and learning to code, so I could pull the data that I needed when I wanted it. A lot of the data is out there. I pulled a lot of data from the US Census. You can get granular with census data. I can find out the percentage of people between 25 and 34 years old, their median household income by ZIP code, and how it’s changed over the last few years.

You can get down to that level of granularity with the US Census. They just make it very hard to extract the data. You need to know how to do API calls, coding and stuff like that. That was something I learned to do and amassed this big database, a lot of census data. Also, data from the Bureau of Labor Statistics have a lot of great information on employment and types of employment. Now, we saw how this downturn negatively impacted service-based jobs a lot. If you look at the year-over-year decline in employment, Las Vegas is leading the way with a 12% reduction of employment year-over-year. Could we have predicted that? Yes, if you look at the percentage of service jobs in their economy. Maybe Vegas will have some issues over the next fall because of that. I’m putting all that stuff together.

Another data source that I like using is Crunchbase. They analyze venture capital, startups and IPOs. Why that’s important is if you have a lot of startups and tech in your economy, that’s been proven to create huge numbers of jobs, not only in that industry but all across the economy. There’s a Stanford Economics Professor named Enrico Moretti. He studied this in 2010. He found that for every one tech job added to an economy, that tech job adds another five jobs over the next ten years in service-based industries. If you think about that, let’s say Google opens up a satellite office in Austin, which they now have several regional headquarters in Austin. That Google tech worker probably makes a decent amount of money. He probably makes $150,000 or something. He’s spending that money on the local economy. All of a sudden, restaurants, barbershops, yoga studios and fitness centers have more demand and need more employment.

Not only that, Google will then need accountants, lawyers and things like that. Maybe Google has its own corporate, but a startup would certainly need local people. One tech job creates five additional jobs across the economy over the next ten years. Looking at that data from Crunchbase and analyzing it on a metro level, looking at which markets have the most startup venture capital realm, which ones have the most IPOs. If a company is IPO, typically their employment will triple over the next 5 to 10 years. All of a sudden, if you have a lot of new IPOs in the economy, you’re predicting future growth. That’s one that I also like a lot. It has a lot of research backing it up.

If you think about it, that makes a lot of sense with what’s going on in Silicon Valley and San Francisco with it being so dense. Also, other areas like Boise, if you think back about a few years ago, were brand-new. It’s blossomed into that. Chattanooga, Tennessee also had a burst of high-tech stuff and regentrified that market between Arkansas and the neck of the woods in Tennessee. I like that. It’s got my head spinning.

NCS 645 | Emerging Real Estate Market

Emerging Real Estate Market: If you have a lot of tech startups in your area, they create huge numbers of jobs, not only in that industry, but all across the economy.

 

I can’t tell you how much it bugged me every time a broker or a sponsor was like, “This is the tech hub.” I was like, “Is it?” Looking at this data allowed me to answer that question conclusively, which is what I like. You brought up Chattanooga. It is a great market. I was briefly there, and I was shocked at how much nice, new vaulting supply there was and how vibrant their Downtown area was. If you can use data to find a diamond in the rough, that might not have gotten a lot of attention. Chattanooga didn’t get a lot of attention a few years ago. That’s also a great way to find return and value.

Let me ask you a question. We’re talking about growth expansion and high-tech jobs. Let’s flip the script a little bit here in affordable housing or low-end housing. When you have something like that, when the price skyrockets, it’s that low-level poverty line that gets squeezed out. There’s an opportunity for that for people creating tiny houses, 3D printing taking place, or modular housing in a small community. Has anybody approached you looking for places in the country that maybe have that stuff spring up by any chance?

I haven’t had someone approach me on something that specific like modular housing, but I do have a lot of clients who specialize in affordable space. It’s not Section 8. It’s not like that. They’re focused on providing quality housing for people who need it. It turned out that demand segment and that type of supply has performed the best of any residential supply segment. It’s a more affordable housing segment, which has done the best. Class-A has trailed, believe it or not. Yes, there are certain markets where you can prioritize that.

You said Boise. I liked Boise, but Boise went from affordable to trending, to unaffordable pretty quickly. A place like that would be an affordable entry point several years ago, but prices in Boise are starting to get above what you would expect in incomes in Boise. That’s the metric to look at, “What does that average annual rent look like to average annual income? What does that average home price look like to average annual income?” If you can find markets where there’s more affordability, it’s better for long-term demand.

Those are key figures to look at to identify. Otherwise, it’s too expensive and you outpriced your supply of borrowers, renters or property owners. You mentioned the 25 to 34-year-old category there. Why did you target that market? Is it because there are a lot of first-time homebuyers? Are people going through the most amount of change in their income levels? What brought you to that?

There are a couple of reasons why you target that demographic. I call it the Millennial Percentage. First of all, it’s the highest rental market. If you look at rental versus owner share by age, owner share will go down the older age bracket it gets. If you’re in a place with a heavy 25 and 34 population, you know that there’s a lot of rental demand in that population. There’s also that transitional demand that you mentioned. Those are people who might be moving into a city. Also, they might go to that area. They would be more inclined to need rental housing. In general, that demographic is less settled in their life, which is good for renting. You want people who aren’t settled. You want people who aren’t ready to make a commitment to owning necessarily.

The other thing about 25 to 34 is that tends to be the leading indicator of the growth, hipness or coolness of a neighborhood. If you start seeing an increase in the 25 to 34 population, chances are, you’re also going to start to see quality retail. That becomes a self-reinforcing mechanism. Once quality retail starts going in, in reaction to more 25 to 34-year-olds being there, that makes the area even more desirable. More people want to move in. Yes, 25 to 34 and sometimes even 25 to 44 is the key age demographic, in terms of both local and at a Metro level. This is taking it as a step-up for a second. If you have a Metro or a market with a high 25 to 44-year-old population, that would be Austin, by the way.

Austin has the highest share of 25 to 44-year-olds in their population than any city in the US. That’s good for growth everywhere in the city over the long run. A younger population means more employers are moving in because of the labor force. A key factor people often don’t think of too is that means more births. If you have more 25 to 44-year-olds, that means more births in the population. More births equate to more consumer spending, which equates to more jobs, which equates to more demand for housing. It’s important to look at that age demographic, both locally and zooming out at the market level.

Those are some great contributing factors to a lot of things. It also increases hospitals, daycare and other things that go along with it, and the treasury markets around the side there. Did study in London?

London School of Economics, yes.

Were you there for a semester or a year? How long were you there?

I was there for a year.

I get a lot of people who come over here and they were like, “Why can’t we start doing what we do with the mortgage history over there?” London is such a unique city, but it’s a very expensive city. If you were to compare London to a city here in the United States, as far as expensive-wise or market similarities, what would you compare it to?

There are only three potential comparisons. It would be New York, Boston and San Francisco. There’s no other city in the US that compares to London in terms of cost and size. I had a sweetheart deal as a student. I lived in Trafalgar Square in a resident hall for something like £1,000 a month. The market rate though for that apartment was maybe £3,000 a month, which would be like $4,400 or $4,500. London is a special city. It’s my favorite city, but you need money to live there for sure.

I’ve spent some time there traveling in the last few years. It’s one of our favorite cities and we’ve always toyed of the idea of bouncing around and living abroad for six months in different places, and London being one of those things. Is there anything that you’re looking at with foreign investors coming into the United States? Do you have any outside organizations or investors that are looking and coming to you?

NCS 645 | Emerging Real Estate Market

Emerging Real Estate Market: If you’re in a place with a heavy 25-44 population, you can expect a lot of rental demand in that market.

 

Yes, there are a lot of them.

Where do you see them coming from in different parts of the world?

Right now, the Middle East. I’m seeing investors from the Middle East who I’m talking to about their plans in expanding and investing more in the US. That’s the biggest segment. The investment of foreign capital from China might have tailed off a little bit because of the capital control that China has put in. I’m seeing Middle East, Singapore and places like that. That’s great to see to be honest. The more foreign capital and people we can get who are interested in investing in US real estate are good for US real estate. That’s a positive sign. Hopefully, the COVID situation improves and travel opens back up a little bit, that will even kick into a higher gear.

We’ve seen it quite a bit. It could be an interesting year. The point is, if you’ve known how to pivot and know how to read the trends or numbers, you’ve got a lot of opportunities. I love what you’re doing. You’re seeing through all the emotions. You’re seeing straight down to the numbers and trends. We’ve had the markets keep going up for such a long time. It’s bound. I’ve been saying it. I think a lot of places have been overpriced. Austin is being one of those markets here in other places. It’s got to start either flattening out or dropping down in areas there. It all averages out but knowing those areas where it can drop down, where you get some opportunity to ride it back up in the next kick, makes a lot of sense.

Right now, for me, there is a lot of insecurity in the economy, socially, and what’s going on with COVID. When there is insecurity, it’s time to focus on the fundamentals. As you said, let’s stop talking. Let’s stop going with platitudes and going with gut feelings. Let’s focus on the fundamentals because that’s what’s going to matter in the intermediate to long-term. You’re right, there’s a bunch of markets that are a little overpriced. Austin might be one of them but I don’t necessarily think any neighborhood in Austin is overpriced, but certain neighborhoods are. Targeting that market in Columbus, Ohio, where your entry point is still solid and you’re not spending too much money, so there isn’t much room for values to go down.

There isn’t much supply getting built, and you couple that with a strong increase in households and population, you’re hedging your bets there. It would take a lot to go wrong if you were to invest in a market like that. Whereas if you invest in a market with a lot of supply and increasing values, or your margin for error shrinks a little bit, then you need to make sure you get into the right location in that market. That’s the way I do it. I would never say to totally ignore this market or go into this market, but know the risk factors going in, “Do I have more of a runway for error maybe in a place like Columbus or Indy? Do I have less of a runway for error in a place like Austin? How do I then approach my decision on where to buy because of that?”

For years, we’ve had Austin investors who were targeting San Antonio or even Corpus Christi because they didn’t like the price in Austin in a variety of different ways, or they found what they were looking for in other markets that made more sense to them.

In your mind, when will you say is the turning point for Austin?

I think it was about a few years ago. A good example is looking at Downtown Austin on the East side of I-35. When it used to be shacks, you’d have people going there, ripping those down, and building up a beautiful house. A lot in East Austin, you can pick up for $10,000 or less. Now, it’s $100,000. We’re looking at that aspect of things. We’ve had some issues where you had houses that would build up too much that the underlying utilities they couldn’t handle, the water, sewage, and stuff like that. They overdeveloped it.

It was about a few years ago when we started seeing a trend of more people here locally as I was out networking and talking to people. They’re investing in other markets because of the lack of inventory of a deal flow. It does not mean that homes weren’t being bought, but for stuff that made sense for them as real estate investors to pick up something at a discounted price. They didn’t have to go in and try to, “I’m going to buy a shack and do this total rehab job to try to uplift the value by turning it from a 900-square-foot house to a 1,800-square-foot house.”

Was it a few years ago that you mentioned that some of the local investors were like, “This is getting a little too hot under those similar market?” Were there more external institutional investors? Was it around that point when they started coming in?

It may be more so not institutional. I would think it would be more of the influx of people from the West Coast like California and Arizona because that’s been a big thing with people moving here to Austin where they could sell their shack. They can move out of here by three times the size of the house for a third of the cost of what it would be in San Diego, LA or Orange County. Austin, Texas being one of the number one transitioning markets for people from the West Coast and moving into a desirable city, you just have to look at the West part out. Steiner Ranch has been part of that for the last many years, and then looking out at four points outward 620 and 71 meet, all that was nothing several years ago, except Wood which now you’ve got the biggest mall in that neck of the woods. All the high-end housing and high-end shops, exactly like you just said, has filled in. That’s where they expect the town center or the physical-looking center of Boston to be here in the next couple of years.

For the traffic, hopefully that becomes true. I haven’t even experienced the most brutal of the traffic since I moved here during COVID, but I heard nightmare stories about the ones on 35.

I avoid 35 like the plague, that’s why I live North. I go downtown off hours if I can. When we started this episode, we’re talking about how each city can rank the best for one thing. Austin, for years, has been the number one city for the worst traffic problems in a mid-sized market for the most part. If they do decide to do some big development downtown turning like 35 there at Riverside into a tunnel and other things like that that they’ve toyed around, part of the issues too has been the city council. The leadership has been very anti-growth up until about a few years ago. Now, they’ve changed up and realized they have to embrace it. That’s part of the issue with the traffic here is they didn’t do a good job of planning out roads and highways. If you look at what San Antonio has done with the inner and outer loop, they have been much more progressive in the planning, growth, expansion and the infill taking place. San Antonio has traffic, but it’s not nearly like what Austin has for the most part. You could lose 50 to 55 hours of your life sitting in traffic on an annual basis there.

With the COVID situation and working from home, I feel like a lot of people, and maybe some people, are fortunate to be able to make this decision to say, “I’m over that. I don’t do that anymore. I won’t put myself through that.” I think it’s like what we’ve talked about hopefully and that will lend itself to more of this polycentric model, where you don’t need to be as focused on that urban core of the city. You can be 10 miles on the periphery this way or 10 miles on the periphery that way. You’re starting to see that trend in a lot of Southeast cities. I hope we see that more. Steiner Ranch has the domain. I hope we see that more in a place like Austin, as well as other cities in the South.

NCS 645 | Emerging Real Estate Market

Emerging Real Estate Market: We need to stop going with gut feelings and really focus on the fundamentals, because those are going to matter in the long term.

 

Nick, this has been fun. What is the best way for people to reach out to you, connect with you, find out more about what you’re doing and work with you to help them make accurate decisions on their investment?

The best way to reach me is to go to my website, www.ReventureConsulting.com. We’ll also be subscribing to the YouTube channel, Reventure Consulting. I post videos 2 to 3 times a week there. That’s a good way if you wanted to learn more about the data that Reventure Consulting has and how it can help you. Go to Reventure Consulting’s YouTube channel, subscribe, and keep up-to-date with the videos. That will help inform you and then give you a better idea of what Reventure does.

I highly recommended it. You can get sucked into a lot of the great stuff that he is doing. It is so valuable. Those investors that are going to succeed the most in the next 12, 24 and 36 months are the ones that are most informed and understood the numbers and trends. You can’t just throw a dark blindfold on it. You’ve got to look at what you’re doing. That’s part of the reason I want to have Nicholas on here because I saw what he’s doing and it can add value to all of you and out there looking for some. Nicholas, thank you so much for coming on the show. This has been great. We have to continue the conversation. I’m going to have you come back at another time.

We definitely will, Scott. Thank you so much for having me on. It was a pleasure. It was good talking to you and your readers.

Thanks, Nicholas. Guys and gals, go out and take some action. Go subscribe to Nicholas’ YouTube channel. It’s well worth it. If you’re looking for opportunities, are burnt out in your local market and can’t seem to find anything, it’s probably because the market has moved on from your investing strategy in what you’re looking for. Take Nicholas’ advice, check out Reventure, and identify different markets. It’s the 21st Century, ladies and gentlemen. You don’t have to live in that market to invest in that market. Go out, take some extra money, and we’ll see you all at the top.

Important Links:

About Nicholas Gerli

NCS 645 | Emerging Real Estate MarketNick provides real estate investors and owners with recommendations on the best markets and neighborhoods to look for real estate growth. His company, Reventure Consulting, uses a proprietary database of economic, demographic, and real estate-driven indicators to analyze and rank the best places to invest. Prior to founding Reventure Consulting Nick worked as an underwriter for a nationwide commercial lender, closing more than 200 loans and equity investments totaling over $2 billion. If you would like to learn more about Reventure Consulting, please visit the company’s website (www.reventureconsulting.com) and YouTube Channel (Reventure Consulting).

Love the show? Subscribe, rate, review, and share!

Join the Note Closers Show community today:

Leave a Reply

Your email address will not be published. Required fields are marked *