Dallas-based Developer Craig Hall On His 7 Major Trends Behind Real Estate Cycles.

By Troy Corman, www.t2realestate.com

Craig Hall, Dallas real estate developerCraig Hall started his real estate career by buying a rent house in Ann Arbor, Michigan with $4,000. While his early forays in real estate investing centered on rental housing near the University of Michigan, today Hall Financial Group, has tentacles in real estate development, real estate ownership and management; structured financing for real estate and other businesses; software application development; oil and gas; and the vineyard and winery business.

After starting in 1968 at the ripe age of seventeen, Craig Hall’s companies have owned and operated more than 100,000 apartment units and more than 4,000,000 square feet of office space. His latest signature development, Hall Office Park features 3,000,0000 square feet of office, hotel and retail development north of Dallas in fast-growing Frisco, Texas. With more than 40 years of experience in all types of real estate investing, he looks at seven major trends to determine the current real estate cycle and where it’s likely headed. (More detailed information on this topic can be found in one of the five book’s he’s written, Timing The Real Estate Market. Check it out at Amazon.)

The seven trends determine the four general real estate cycles. The cycles include the beginning of an upward trend, the plateau of the top, the downward trend, and the bottom. Typically, there is a plateau period, although sometimes brief, at the top and bottom of each cycle. Real estate cycles can be as short as two years or as long as ten. Unlike the stock market, real estate is harder to quantify since there are fewer transactions to track and each piece of real estate, for the most part, is unique. As real estate prices fluctuate constantly between each cycle, Mr. Hall recommends you think of prices in ranges, instead of absolute numbers. 

The seven major trends include three national trends and four local trends. Inflation, interest rates, and flow of funds are the big three national trends that have an impact on real estate prices. The remaining four trends are location-based and include job growth, migration, “path of progress” and new construction.

1. Inflation – According to political leaders, current inflation is subdued. But visit your local grocery store or talk to home builders and you’ll most likely get a different view. Inflation is generally regarded as a friend of real estate owners. Real estate buyers with a fixed-rate mortgage usually benefit from steady inflation rates, as property values and rents increase, the monthly mortgage payment stays fixed. However, too much inflation can hurt real estate investors. Rising inflation usually leads to rising interest rates and can raise the costs of utilities, labor, maintenance and insurance faster than investors can raise rents. 

Locally, in the Dallas area, the low inventory of homes for sale is not keeping up with home buyer demand. As a result, prices are rising for both existing homes and residential development land.

2. Interest Rates – Interest rates are near their all-time lows. The lower the interest rate, the more real estate prices generally rise. In fact, according to real estate consultant,  John Burns, today’s home buyer that could afford a $200,000 home in 2008, can now afford a $300,000 home. Low interest rates usually lead to more home buying activity and put pressure on apartments because it’s cheaper to buy than rent. Low mortgage rates are now gaining traction as the last few years of depressed real estate development has finally created pent-up demand.

As interest rates rise, lenders often require pre-payment penalties for those looking to refinance or to pay off their mortgage early. One such penalty is “yield maintenance”, which requires the borrower to pay the lender the difference between what the lender could have made had the loan remained in place, versus what the lender could make today if he/she were invested in a treasury note for the same duration. These penalties favor the lender in times of rising interest rates. 

Only hotels or motels allow the real estate owner to adapt quickly to inflation since the rental period is daily, rather than the usually yearly residential leases or multi-year leases common on office and retail real estate.

If interest rates rise too high, prices of real estate deflate because the costs of financing increases substantially. Per Mr. Hall, you want to sell when interest rates are low – because prices are higher.

3. Flow of Funds – Flow of funds refers to where the money is going. Right now, the United States is benefiting from the Euro-crisis since more capital is fleeing the Euro-zone and landing in the U.S. With the ultra-low interest rates, investors are seeking higher returns in real estate as private money is helping finance new residential construction. Also, there seems a general sense that Mr. Bernanke’s money printing press is likely to fuel inflation and a weaker dollar in the years ahead. That’s a recipe for higher real estate prices.

According to Mr. Hall, investors will favor one type of property over others in a given time period, and they also have a herd mentality and usually move in the same direction. As media reports upward price momentum and investment or development success, everyone jumps on the bandwagon, creating a shift in the movement of capital. In this way, success breeds success.

4. Job Growth – Job growth is looked at on a local level when it comes to real estate investing or development. A very strong trend in job growth helps almost all real estate categories including apartment occupancy levels, retail sales per square foot, single-family home sales and rentals, and office occupancy rates. Positive job growth usually increases net operating income (NOI) of investment real estate, and thus, property prices.

For 2012, New York led led the nation in job growth with 112,500 jobs while Houston was next with 82,300 jobs and Dallas-Fort Worth rounded out the top three with 70,000 jobs. Experts expect the Texas cities to continue to attract job seekers from across the nation, which leads to the next trend, migration.

5. Migration – In-migration or out-migration. In-migration occurs when more people move into an area than move out of the area. Texas cities have been among the nation’s leaders in the last few years when it comes to in-migration. In fact, according to the U.S Census Bureau, Dallas-Fort Worth-Arlington grew more than any other metro between July 2011 and 2012. The region added 132,000 people while Houston-The Woodlands-Sugar Land region was next with 125,000 people added.

Positive in-migration increases rental demand, and with the increased net operating income (NOI), higher real estate prices. Out-migration decreases rental demand and, in turn, NOI and property prices.

6. Path of Progress – The path of progress is the areas in a region or city where growth and development are headed. Other areas of a city can be stagnant or even in decline, while those areas in the path of progress can be in demand. Being in the path of progress is where you want to be, so you can enjoy the upward trend in rental demand, NOI, and property prices.

7. New Construction – New construction deals with supply and demand. New construction that exceeds demand can have a very negative effect on NOI as there is too much real estate available for the demand. Today, we have the opposite effect. In Dallas-Fort Worth, there were just north of 12,000 residential building permits in 2012, and less than 10,000 in 2009. At the last top, in 2004 and 2005, there were over 30,000 permits.

As both the Dallas and Houston metros add jobs at the fastest clip in the nation, we should expect more in-migration. That means more people that need a roof over their head, and more new construction. Until the supply of homes can meet or exceed demand, look for home prices to continue their upward trend.

 If you would like a free over-the-net property evaluation or need real estate help, contact Troy Corman at 214-690-9682 or troycorman@t2realestate.com