It has been a year, to say the least. This unprecedented period has challenged the world while also being a ridiculous burden for millions of people struggling not only to survive with their health, but financially. You may hear about this in your news feeds, but it is right in your backyard; even our local Communities are struggling to survive (have you noticed all of the For Lease signs in retail spaces?). I mention this because I think it provides perspective when reflecting on 2020 and looking forward to a new year.
Regarding real estate, the sky is not falling. In fact, it has been quite robust given the circumstances. My forecast for 2021 will be different from previous years, hopefully for obvious reasons. I have no doubt the new year will bring continual surprises and we will continue to adapt and pivot as necessary and as opportunities present themselves. Imagine if you went all-in the market back in late March or if you invested heavy in Bitcoin or Tesla or Apple, even in this crazy year there have been opportunities for huge returns. Real estate has not been as sexy, but I think it is still one of the most robust assets to own. The new year may be an opportunity to upgrade your existing home or pivot into investment property, for example, but it is not the time to raise rental rates. Since we know there will be continuing uncertainty in 2021, I would like to highlight some facts and unknowns to help determine the best strategy for your own family.
Real Estate Facts:
Local real estate sales have been stable, but I would not call it a hot market, rather a segmented market.
I hear places like Lake Tahoe and California coastal properties have never experienced such a high demand for real estate, both in sales and rentals. These are hot markets. These types of areas are experiencing a mass influx of people from tech centers looking to escape during a WFH world. Some of these areas have seen over 30% growth in values since March, which is remarkable. However, there are other areas that are not selling as well. Condo sales near job centers are not experiencing the demand they once enjoyed since there is a lack of clarity as to when people will be back in their offices. Overall, the local market is still moving well with quality homes still demanding interest and an ample buyer pool to absorb the current inventory levels. Supply/demand is our chronic problem in the valley, so even though the demand may have decreased, there is still ample demand to absorb the minimal inventory available.
Remote working has diminished local housing needs.
There has been an exodus of families and individuals from the valley through this year and it really picked up in late summer during the fires.
Remote working enabled families to leave the valley and relocate, whether temporary or permanently, to less expensive areas and usually closer to family. It is understandable, the valley has become synonymous with transplants, so many people came for work while their parents and other family lived elsewhere. The WFH model, added with kids online schooling, has been extremely difficult for families so many decided to move closer to family for support, while other families moved out of the valley to save money – why pay valley prices when you are not enjoying the amenities and the necessity of being near work.
Rental rates have fallen approximately 15% on housing near job centers and downtowns.
What started as a San Francisco phenomenon became prolific in the valley – the high-priced garage conversions and other housing close to high paying tech jobs has been on a decline. It makes sense since there just is not the demand to be near the office plus the lack of new talent flocking into the valley for new jobs. Historically, there is a constant flow of new talent looking for homes and that is just not happening right now. Not to mention colleges are mostly online, so all that housing near Stanford, San Jose State and Santa Clara University, is not seeing the strong student tenant demand.
This past week I spoke to an owner of a 16-unit apartment building across the street from San Jose State University – that building was always running at a 100% occupancy rate, until now. She currently has 9 vacancies! Fortunately, they have owned the property for over 20 years, so the costs are manageable, but even at that they are hemorrhaging money monthly. Do not fret, I don’t think this is the new norm for the valley, it’s temporary while the majority of tech is working from home and schools are remote. Even as our top tech companies are hiring new employees, they just are not moving to the area, yet. For the time being, be realistic. If you have below market rents on properties, you are likely fine. But those that keep their rental rates at top market prices, expect tenant negotiating when leases come due. Fingers crossed we get back into the office soon, not only to help the rental market, but that will mean we are getting back to some normalcy in the world.
Mortgage interest rates are still ridiculously low.
Would you believe you can lock up 30 years of debt at only 2.375%? That’s ridiculously low, and very difficult to obtain, but most lenders are still giving you less than 3% on 30-year debt, which is also amazing! This is a perfect example of opportunities during a crisis. Those that can pivot and take advantage of opportunities such as these rates will be setting themselves up for future financial success. Though if you are struggling to stay above water during the pandemic, likely you will not be able to make these kinds of pivots and reap the rewards.
Wall Street has been particularly good to the tech industry, which helps the valley.
No doubt the strong growth in the tech sector this year continues to make our region robust. While some segments of the stock market are struggling, tech has been posting record numbers. This helps our local community that is heavily invested in these companies as well as providing confidence through strong portfolios. There is no clear sign of any game-changers in tech, so for now, I would expect it to continually drive our communities.
Real Estate Unknowns
When will jobs come back to office?
I think it is unlikely that we can signal being back to a local robust economy until we are open for business with crowded Facebook employee parking lots and some resemblance of afternoon commute traffic. But who has not been enjoying the lack of commute traffic this year?
What will happen with the new administration?
We will have a new administration in January, and the first 100 days are usually full of changes. We do not know exactly what is on the table, but there will likely be chatter about things such as the SALT deductions, additional tax burden for certain tax brackets, tech regulations and so much more. The direction of the administration should be impactful to the overall markets, so I will watch that closely.
Proposition 19 may impact sales.
By a narrow margin, proposition 19 passed this November, which will impact families with real estate that intend to transfer it to their children at death. Previously, that real estate had the potential to maintain the original tax base, effectively keeping overall expenses down. Going forward, only primary homes that are inherited can maintain the tax base. In addition, there are changes to the way individuals over 55 can sell existing homes and maintain their tax base. Theoretically, there may be more transactions because there is less incentive to hold these properties for future beneficiaries since there will not be the property tax benefit and because sellers have more flexibility to sell now and bring existing tax bases to another home. Time will tell whether it is impactful to the supply and demand relationship, but I bet it will be insignificant in the overall volume. continued pg.4
How will the stock market fare?
As discussed earlier, the stock market, especially tech stocks, will directly impact how our valley fares. If we continue to see a strong run, I expect to see similar in the valley. It does not take that many buyers to absorb inventory, so when Tesla stock increases 20%, there is a lot more purchasing power in the market.
Vaccine rollout – when will the world be back to “normal?”
This is really what is on everyone’s mind – when will the vaccine be available to the masses. I think it is too early to tell, but it sure would be nice to be back to normal living by spring. Let’s stay optimistic!
The fallout from lack of income in 2020
In the back of my mind, I keep wondering, “What will the fallout look like from 2020?” This year has been survival mode; just getting by at all costs for millions of people. But I think that means once we settle down and evaluate where we go from here, there will be a large problem – tons of money will be due from: past rent, mortgage forbearance repayments, ballooned credit card debt, small business survival, Municipal solvency and the like. What our economy will look like in 2021 is still to be determined and I am concerned with how we manage the fallout.
We are not out of the woods yet by any means, but I think we are hopeful for 2021 and the potential to rise from this pandemic as better people, better neighbors, better leaders and better communities. I expect a similar cyclical market cycle with inventory ebbs and flows and a stable demand source. Another economic shutdown can alter the cycle as it did in 2020 where we basically lost our spring market, but overall, I’m not expecting the sky to fall and I think there will be more demand than supply. As you look at your financial picture and plan out 2021, I say there are opportunities even today, but one person’s opportunity is not another’s. It has been an honor to work closely with my clients and carefully plan out long-term strategies tailored to their family needs. I hope to do the same for you in the new year.