In the Bible of real estate-
Commandment #1 is: Location, Location, Location
Commandment #2 is: All real estate is LOCAL
The market dynamics across the US over the last 5 years has been an excellent case in point.
During the immediate two years after COVID, markets in ‘getaway’ destinations soared while cities plateaued.
Then Texas and Florida exploded, only to have the tide go out with a strong undertow in 2024.
Many markets throughout the US are experiencing softer pricing, while others, like the Northeast have remained very strong without any decrease in pricing.
Divergence of local markets create an ideal time for sophisticated investors to sell high in one market and buy low in another, providing a higher return. As you turn your eye to other markets, here are 10 things to consider.
1. Master the Boom-Bust Cycle Fundamentals
Understanding what drives market cycles gives investors a crucial edge during downturns. Booms typically result from a combination of easy credit, population growth, job creation, and investor speculation. Busts occur when these factors reverse or when markets become oversupplied.
- Smart investors recognize that downturns often create the best entry points, as prices disconnect from underlying fundamentals.
- Study local employment data, credit conditions, and development pipelines to identify markets where the fundamentals remain strong despite temporary price weakness.
Markets with diverse economic bases tend to experience less volatile cycles than those dependent on single industries.
2. Distinguish Between Lasting shifts and Fads
The difference between lasting demographic shifts and temporary fads can make or break an investment strategy.
- The “Yellowstone effect” that drove urban dwellers to Montana after watching the show ‘Yellowstone’ exemplifies how media can create short-term migration patterns that may not sustain long-term growth.
- While some relocations stick, others reverse when reality sets in regarding limited job opportunities, natural disasters (like fires in Montana), or lifestyle adjustments (Montana ain’t for you if you don’t own a gun & a truck)
Successful investors look beyond the headlines to examine whether new residents have established permanent roots through employment, business ownership, or family ties.
Areas experiencing genuine demographic shifts typically show sustained job growth, infrastructure development, and diversified economic activity rather than just population influxes.
3. Follow the Private Sector Money
Major infrastructure investments serve as powerful catalysts for long-term real estate appreciation, often outlasting economic cycles.
- Manufacturing plants, distribution centers, research facilities, and transportation projects create sustained employment and attract secondary businesses.
- These investments typically involve multi-year commitments from corporations or governments, providing more predictable growth trajectories than market speculation.
- During downturns, identify markets where major infrastructure projects are planned or underway, as these areas often recover faster and experience stronger growth.
- A great local example is the new GSK (a drug & vaccine company) that is investing $800M to double in size their facility in Marietta, Lancaster County. This will provide 200 new jobs to the local economy.
The presence of committed infrastructure spending can support property values even when broader markets struggle.
4. Navigate Political and Regulatory Risks
Political pressures can dramatically impact real estate returns, making regulatory awareness essential during market volatility.
- Rent control measures, development restrictions, tax policy changes, and zoning modifications can either enhance or destroy investment potential.
- Markets facing political pressure often present contrarian opportunities if the underlying economics remain sound. Research local political climates, upcoming elections, and proposed legislation that could affect property values.
- Rent control measure in New York City are an example of this. The imposition of the measure wiped out Millions in equity for many owners. For a new owner to come in and purchase at much lower prices may present an upside, as the demand for living in NYC is likely not going away anytime soon.
Areas with business-friendly policies and stable governance structures typically offer more predictable investment environments, while markets facing regulatory uncertainty may present higher-risk, higher-reward opportunities for experienced investors.
5. Apply Supply and Demand Analysis
Real estate fundamentals always return to supply and demand dynamics, regardless of economic conditions.
- During downturns, construction typically slows or stops, potentially creating future supply shortages when demand recovers.
- Analyze building permits, construction starts, and development pipelines to identify markets where supply constraints may drive future appreciation.
- Similarly, examine demand drivers such as population growth, household formation, and employment trends.
Markets with limited developable land, restrictive zoning, or natural barriers to expansion often experience more dramatic price appreciation when economic conditions improve.
- South Florida would be a great example of this- with significant land under conservation, the buildable land is very limited, making future values higher with limited supply.
6. Embrace Contrarian Thinking
Some of the best real estate opportunities emerge in sectors or markets that others are avoiding.
- Florida’s condominium market faces significant challenges with the double whammy of higher insurance costs and building assessments, which are now mandated by local law to have higher reserves.
- Similarly, Office real estate has been heavily discounted due to remote work trends, but certain submarkets or property types may offer exceptional value like medical, technology and energy sectors.
Contrarian investing requires careful analysis to distinguish between temporary challenges and permanent impairment, but markets experiencing temporary distress often provide the highest returns when conditions normalize.
7. Leverage Transportation Infrastructure
Transportation hubs create inherent value through connectivity and economic activity.
- Ports, airports, major highways, and rail terminals generate employment, attract businesses, and facilitate commerce.
- During economic downturns, properties near transportation infrastructure often maintain better occupancy and rental rates due to their strategic importance.
- Be careful until complete- The ‘Train to Nowhere’ in CA, was planned to be a high speed railway from San Francisco to Los Angeles. However, after ballooning from $33 Billion to 100+ Billion, the project has only completed a small sliver.
Consider proximity to existing transportation projects when evaluating investment opportunities, as connectivity often drives long-term property appreciation.
8. Target Recession-Resistant Sectors
Certain industries demonstrate greater resilience during economic downturns, creating more stable real estate investment opportunities.
- Healthcare, essential services, senior care, and increasingly, artificial intelligence and technology sectors, often maintain growth even during recessions.
- While AI may disrupt traditional education models, healthcare demand remains relatively inelastic regardless of economic conditions.
- Properties serving recession-resistant industries typically experience lower vacancy rates and more stable rental income during downturns.
Focus on markets and property types that serve essential needs or growing industries that benefit from economic transitions.
9. Consider Natural Resource Advantages
Areas rich in natural resources often provide economic stability and growth potential that transcends typical market cycles.
- Energy production, mining, agriculture, and water resources create fundamental economic value that supports real estate markets.
- However, resource-dependent economies can be volatile based on commodity prices, so diversification within these markets becomes crucial.
- The Pennsylvania Marcellus Shale is a rich natural resource that will continue to be an economic driver. However, this will be affected by commodity prices. Many areas in rural PA in the Marcellus Shale are often lacking in other economic drivers, so they would be a place to consider carefully.
During downturns, resource-rich areas may offer opportunities if commodity cycles are favorable or if new extraction technologies create economic opportunities.
10. Identify and Follow Industry Clusters
Industry hubs like Silicon Valley, Wall Street, or emerging technology centers create concentrated economic activity that supports premium real estate values.
- These clusters benefit from network effects, specialized talent pools, and supporting infrastructure that make them resistant to economic downturns.
- The concentration of specialized businesses, research institutions, and skilled workers creates sustainable competitive advantages that translate into real estate value.
- ‘Data Center Alley’ in Loudoun County, VA is an example of a growing tech center that is supporting a growing industry for AI.
Even during recessions, industry clusters often maintain higher occupancy rates and rental premiums compared to more diversified markets.
Conclusion
By focusing on fundamental drivers of value creation rather than short-term market sentiment, investors can identify opportunities that provide strong returns as markets recover.
Remember that the best opportunities often emerge when fear dominates headlines, but ONLY for investors who have done their homework and understand what drives long-term value in real estate markets.
Many Investors we work with comment on the holistic view we bring to help increase their returns over the market cycles. Contact us to discuss your next strategic move.
