Introduction: US Real Estate Post-Subprime Crisis
Number of existing homes sold in the United States from 2005 to 2019 (in million units)
2005 and 2006 were peak years for the US housing market. The excesses of the real estate market during this period are well known. The chart above paints a true picture of the highs and lows suffered during the great depression. But, the economy in general and housing market in particular have bounced back and the stable housing numbers are a testimony to the fact. What is even more encouraging is that the stakeholders in the ecosystem are positive:
2009 was one of the worst years for American housing with only 22% believing that American housing prices would increase. Contrast this with only 10% Americans in 2018 thinking that housing prices are destined to fall. As an investor, you might have a Déjà vu feeling when you analyze that only 5% Americans saw a correction coming in 2005. So the question, during an era of unbridled optimism, is how should investors play the multi-trillion dollar real estate market?
Deep Dive: Understanding That All US Real Estate Is Not Equal
The real estate market is vast and has multiple subsectors. The market can broadly be divided into residential, commercial, industrial and farm land. Major investment opportunities in real estate lies in avenues like multifamily housing complexes, healthcare, office spaces, and hotels, among others. Taking a look at these:
- Multifamily housing complexes: The residential structure where more than one residence dwells in the same building is called a multifamily housing structure. This structure is the most common housing form in the US, with majority being renter-occupied. With ~14.6 million units across the 62 metro markets in the US, the National Multifamily Housing Council estimates that the total value of the rental properties is above $3.3 trillion.
The above highlights the size and the trends in the multi-family real estate segment. Years 2018 and year 2019 are poised to record the highest multifamily completions, depicting a sustained demand.
- Healthcare: Healthcare real estate refers to the commercial real estate that is being utilized by medical community and organization like hospitals. The healthcare REITS form a 12-14% (approx) part of the REIT indexes and own nearly 1/10th of the whole $2 trillion healthcare real estate assets in the US. The below image gives us an overview of the healthcare real estate and its distribution in multiple segments:
- Office Spaces: The subsector experienced a price drop in 2018 of ~2.2% and resulted in a refrained office central business district (CBD) investment volume. The office CBD sales have dropped to 17% compared to 10% drop in suburban office sales. With the advent of co-working spaces like WeWork, the industry is poised for further volatility.
- Hotels: As per the Hotel Horizon’s December 2018 edition, US hotel occupancy is estimated rise up to 2% by next year, a fifth straight record level. This growth is the result of a projected increase of 2.1% in demand, more than sufficient to balance an estimated net increase of 1.9% for the year, in supply. But CBRE is not all too positive on the cyclical lodging industry. In its report it states:
Opportunity: US Real Estate
We have learned about the multiple investment opportunities available as an investor in the trillion-dollar real estate industry. But it is critical to take a 360-degree view of the industry and its segments.
Office and Hospitality real estate are one of the most lucrative yet most volatile among real estate assets. From the analysis above, it is clear that office space is in a mini-recession. It is important to understand the effect of co-working spaces on the industry. Players like WeWork are disrupting the office space industry with features like space on demand and open office spaces. The result? They are on an average using 50% less space as compared to traditional offices. Hospitality is on a multi-year high but so is the building boom. In a cyclical industry like lodging, betting on the peak is like investing in housing in 2007.
So where does that leave the investor?
The real estate investments need to be structured with a mindset that an economic slowdown might be around the corner. Which industry is immune to recession? Healthcare.
The image above highlights that the smart money understands the opportunity in healthcare real estate assets (and medical office buildings aka MOBs in particular) and are investing aggressively to corner the market. An ageing US population is another demographic dividend for the industry. All these facts are reflected in the returns being generated. The graph below illustrates that medical real estate has outperformed almost every other asset by a massive margin since the recession.
Similarly, the multi-family housing market is a stable asset with predictable cashflows. The overview of the segment helps us understand that the millennial demographic shift is a major tailwind for the industry.
Do you need more proof?
With among the lowest standard deviation (risk), multi-family housing unit has given the highest returns in a 15-year analysis.
Key Takeaway As An EB-5 investor
- EB-5 Investor Visa Program requires $500,000 in minimum investment. Investing in real estate is more secure (and usually more lucrative) than launching a new business in a new geography.
- Investing in stable and growing US healthcare and multi-family real estate assets further shields the investor from the vagaries of the US economy and the market.
- The investor has a predictable and secured revenue stream for the life of the asset.
- The investor is betting on key demographics trends paying a dividend. An ageing population is a strong positive for healthcare assets and as millennial generation enters the real estate market, the multi-family housing assets are expected to remain stable cash-flow generating opportunities.
- If the goal is to earn stable growing returns, medical real estate and multi-family housing are the safest bets.
Why US Freedom Capital
US Freedom Capital is a global investment firm committed to the long-term growth and security of investor assets. Its EB-5 investment solutions focus on US medical and multi-family residential assets. The focus is on absolute dollar returns with the security of US real estate behind your investments.