what’s on the horizon? what’s on the...

Mark Sprague State Director of Information Capital Mark Sprague State Director of Information Capital

www.IndependenceTitle.com

WHAT’S ON THE HORIZON?Mark Sprague, Director of Information CapitalWhat’s on the Horizon?

Mark Sprague State Director of Information Capital

What do you think?

Will the market in 2018 be

Better? Same? Worse?


US Economic Outlook


Job Growth Remains Strong


National job market is strong enough to support

employees quitting for better opportunity.


Education matters! With job openings above

pre crisis levels, some cannot find jobs


Wage growth does not reflect strong labor market.


Slow GDP Growth the ‘new

normal’?

– Last 7 years growth average 2.1%

– 2016 GDP growth 1.5%; 2017 stronger.


Gross Domestic ProductTake Away

– National GDP: +3.3% (Q3 2017)

– Texas GDP: +3.3% (Q3 2017)

GDP is the total value of everything produced by all the people and companies in the country. It doesn't matter if they are citizens or foreign-owned companies. If they are located within the country's boundaries, the government counts their production as GDP. GDP is the blood pressure of our nation.


2018 U.S. Economic Outlook • The national economy continues to improve through 2018.

• Slower growth economy the ‘new norm’, last 7 years avg. 2.1%; 2016 GDP growth 1.5%; 2017 2.2%.

• Federal fund rate continues to improve, raising lending costs.

• Inflation improving. 2017 2%- 2.5%.

• U. S. housing improving, not fully recovered.

• Bigger question is can they build affordable where needed?

• Employment better, national, regional and local unemployment rates below 5.0%. However wages are not improving as quickly.

• Looking for a ‘Driver’ for expansion.

• Longer path to a soft landing. Historical economic data suggests that the US is due for a correction, yet most analysts cite a continued strong economic path rater than a nose dive.

• Retail is changing. Department store deconstruction and obsolescence. Over built. Overall retail maturity end of cycle. Changes in consumer habits; shopping, apparel needs, preferences. Retail technology advances.

• Tax Reform – the overhaul has numerous impacts (intended and unintended) on the real estate world.


U.S. Economic challenges and

issues• U.S. economic growth has been low and unequal,

relative to historical performance

• Headwinds facing the US economy:• Nation is only about 45% recovered from recession.

• Out of top 50 US metros, only 8 have fully recovered. 4 are in Texas. *(full recovery of GDP, real estate values & employment)

• Weak productivity growth. (industrial and manufacturing)

• Low unemployment (below 5%)– Lack of qualified applicants

– Falling labor force participation

– Lack of wage growth

• US housing improving, not fully recovered

• Looking for an ‘economic driver’ for expansion

• Increasing polarized income distribution

• Tax Reform 2017


Texas Economic

Outlook


Texas & U.S. Economic GrowthAnnual Percent Change in Real GDP+


Texas Employment Has Outpaced U.S.


Texas Employment Broad based


Texas Economic Outlook• Texas economy better in 2017; energy rebounded, healthcare, business and

professional services up. 2018 will be somewhat the same.

• Energy sector downturn impact mostly over; not the negative of 2016.

• Texas job growth picked up, outpacing U.S.

• Population expansion continues.

• Texas manufacturing and service sector continue to expand.

• Construction activity slowing:– Multi family and single family building have slowed.

• Concessions disappeared after Harvey.

– Construction and material costs rose significantly and should continue through 2018.

– Houston and Austin close to overbuilding.

– Shortages for homes under $300K dragged down state total home sales.

– Office and Warehouse construction strong,• Office construction and rent growth should slow as vacancy rate gets closer to natural rate (15 to 19%).

• Texas employment strong; however, Austin and Houston much slower job growth from previous 5 years. San Antonio about the same pace.

• Local growth and regulation issues becoming more pressing, causing strain on value vs. cost of labor and materials.


What to watch?

• Job Growth• Gross Domestic Product• Population Growth• Consumer Confidence• Real Estate• Interest Rates


Job Growth

• The gross number of payroll jobs created in the American economy in the previous month reported by The Bureau of Labor Statistics. – Self employed people are not

included in this number: that includes Realtors!


Job Growth

• Unemployment is a phenomenon that occurs when a person who is actively searching for employment is unable to find work.

• The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force.

• 4% unemployment is considered full employment.

Texas Unemployment Compared to Other States


Job GrowthTexas Metro Unemployment


Job Growth Take Away

Simply put, job growth equals home sales / rentals.

• 2.5% to 4.0% job growth is healthy!

• San Antonio preceding 12 months = 30,800 jobs– Positive direction 3.0% growth.


Green indicates states with both the highest predicted GDP and Job Rate growth!

Gross Domestic ProductCurrent State of the US Economy


Gross Domestic Product takeaway•GDP economic growth is the measurement of two economic factors, the growth

of jobs and the productivity of those employed.

• A rise in real GDP (national, regional or local) effectively means a rise in

income, output and total money spent. Economic growth should enable a rise in

living standards and greater consumption of goods and services. As a result,

economic growth is often seen as the 'holy grail' of macroeconomics.

•A rise in GDP growth can help various macroeconomic objectives:

✓Reduced Unemployment

✓Increase attraction for corporate resettlement.

✓Reduction in poverty

✓Improved public services

✓Economic growth will encourage investment as firms seek to benefit from

rising demand

✓Confidence to invest. Higher growth encourages firms to take risks -

innovate and invest in future products and productive capacity.


Population Growth

• Population size is affected by the birth rate, the death rate, immigration rate and the emigration rate.– Immigration is to come into

another country to live permanently.

– Emigration means to leave one's country to live in another.

(Death Rate + Emigration)-

(Birth Rate + Immigration)=

Population Growth

The rate of population growth means the change of population size in a given unit of time, usually one year.


Population Growth

• Half of the US population lives in the shaded Counties!

National economy 44+% recovered from the recession+ with only 2% of the population participating!

Where Does America Live?


Population Growth Take Away• You either grow or don’t grow. Whether through birth or immigration,

continued population growth is necessary for a healthy market.

• Every year, the U.S. Census Bureau releases its latest data on cities and

population growth. The reaction is always the same: News outlets, analysts,

and economists look at the numbers showing which places gained and which

ones shed residents, and use them as instant proxies for a decline, a boom,

or a turnaround in cities all over the country.

• Population loss can become a symbol for other things people feel is going

wrong in a city, such as rising poverty and unemployment rates, vacant and

blighted housing, increased violent crime, the exit of pro sports franchises,

etc.

• Age, population trends, and gender do matter in the home buying process.

Someone in their early 20s probably can't afford a 3,500-square foot home on

5 acres in Virginia with a stable, and someone in their 80s probably doesn't

want it anymore, or may want a cottage out back.


Interest Rate Forecast

For every 1% the interest rate increases a buyer’s purchasing power may decrease somewhere between 9 & 11%!

For every 1% increase in rates, there is a 12% loss of buying power.


Consumer Confidence

• A statistical measure of consumers optimism in the state of the economy. It’s used as an overall state of the economy. Monthly survey of 5,000 households.

• A decline in consumer expectations can be a leading indicator of slowing economic activity.

Primary driver of demand in the US Economy. When people are uncertain about the future, they buy less!

Consumer spending is 70% of the GDP


Consumer ConfidenceNational/Regional Consumer Confidence Strong


Consumer Confidence Takeaway

• The baseline for consumer confidence is 100. A healthy index

number is somewhere between 90 to 110.

• Consumer confidence retreated in December after reaching a

17-year high in November 2017.

• The decline in confidence was fueled by a somewhat less

optimistic outlook for business and job prospects in the coming

months. Despite the decline in confidence, consumers’

expectations remain at historically strong levels, suggesting

economic growth will continue well into 2018.

• Renewed gains in incomes as well as rising home and equity

values have acted to counterbalance the negative impacts from

the hurricanes.


Real Estate

Real estate is property comprised of land and the buildings on it.

Real estate can be grouped into three broad categories based on its use: residential, commercial and industrial.


Real Estate

• Rising house prices, generally encourage consumer spending and lead to higher economic growth.

• A sharp drop in house prices adversely affects consumer confidence, construction and leads to lower economic growth.

The Real Estate Market Affects the Economy!


Residential Real Estate Volume


Real EstateA prime indicator of sales growth is job growth! Without job growth, there are no

home sales. Historically for every 3 jobs there is 1 home start.

• In the preceding 12 months, San Antonio has had 11,000 home starts and created 30,800 jobs. The good news is that of all the Texas metros, San Antonio is not overbuilding. The other three are at eh point of overbuilding.

• As evidenced by rental concessions on 30% of apartment rentals, San Antonio had overbuilt multifamily (apartments) properties.

• Due to post-Harvey demand, these concessions have disappeared in San Antonio and other Texas Metros. However, this is temporary and will not continue.

• Labor and material costs were going up 1+% a month before Hurricane Harvey hit. As a result of Harvey, we should began to see these costs appreciate dramatically.

Dallas and Houston lead the nation in home starts 1 and 2. Austin and San Antonio are in the top 25 in

home starts.


San Antonio Multifamily


San Antonio Office


New Braunfels Office


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16

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28

$14.00

$16.00

$18.00

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$22.00

$24.00

$26.00

$28.00

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Austin DFW Houston San Antonio

Overall Office Rent Rates(Gross Asking Rates)

Source: CoStar and NAI REOC; Real Estate Center at Texas A&M University


San Antonio Retail


New Braunfels Retail


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Retail Rent Rates(Triple-Net Asking Rent Overall)


Mark Sprague State Director of Information Capital Mark Sprague State Director of Information Capital

www.IndependenceTitle.com

San Antonio MSA Industrial


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$3.00

$4.00

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Industrial Warehouse Rent Rates(Triple-Net Asking Rent Overall)



• 11,000 home start this year.

• 9,030 listings on the market.

• 3.3 months of inventory.

• 160,448 total rental units in San Antonio

– 89.6% occupancy = 14,736 units available + 11,500 units under construction to be completed in next 12 months.

– Total of 26,236 rental units available in the next 12 months.

• Total shelter 35,266 units available.

The Numbers

• Total annual new job creating of 28,000.

• Total annual immigration of 72,800+.

• Total units needed of 10,000+.


Economic Forecast for 2017/2018

• 2018 should be as strong as 2017!• Real Estate values maintain.• Sales slow.• What should we pay attention to?

– Unemployment numbers .– Cooling in employment

growth.– Slowing of GDP growth.– Tax reform unintended

consequences.


• Texas employment growth between 2.5- 3.0 through 2018.• Slowed in 2016. 2017 saw energy, healthcare, business and professional services improve.

• Energy sector downturn impact mostly over. Seems to be stabilizing with WTI per barrel improving.

• More of the same, on multiple fronts, 2018 will be much like 2017. ( home sales values )

• Local growth issues in the four Texas metros becoming more pressing. New codes, approval process, etc. causing delays forcing values up unintentionally.

• Tight inventory in all real estate channels.

• Good news for investors, rental concessions disappeared late 2017. 2018 should maintain that strength.

• Labor and materials should increase 15 to 25% in 2018 due to supply and demand.

• Affordability in all metros being challenged.

• Repair and remolding constriction explodes.

• Consumers staying longer in homes (10 years+) due to all the above.

• Tight labor market across all employment sectors. (lack of qualified applicants a local, regional and national issue.)

• One of the reasons why many people feel concerned about the Texas markets is because we’re seeing one of the longest expansive price growth runs in our collective memories.

Economic Forecast for 2018


• Increased sales of 3-5%+ in San Antonio area in 2018.– Home values will continue to improve, just not as aggressively. – Commercial will continue to be challenged to keep up with demand, but

more cautious on rent values.

– 2017 inventories climbed to 5+ month point, but have moved closer to 2.5 months supply (sellers market). Caution, certain price points and neighborhoods will be challenged as buyers markets due to values.

– Regional psychology remained positive, but cautious in 2018.

– Home sales a tad better than 2017.

– One of the reasons why many people feel concerned about the San Antonio and Texas markets is because we’re seeing one of the longest expansive price growth runs in our collective memories.

Where are we headed?2017 Was A Good Year!


There is not a better time to buy!

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