Rent Sense: San Diego Investment Properties
By: Neil Fjellestad and Chris De Marco FBS Property Management
In recent columns we have tried to demonstrate how California compares with the rest of the country as a world ranking economy. Nine California regional economies and nine associated geopolitical regions were specified in about 1998 by the California Regional Economies Project. There are numerous similarities. For instance, there is no region in California where residential rents are affordable to those in the bottom quarter of household income distribution. There are also significant differences. In this column we will detail one region that has shown remarkable economic breakout this century. We believe this to be valuable throughout the golden state because savvy investment capital that is already based in California has reasons to stay but will optimize return through regional targeting.
For this discussion let’s look at the San Diego region as one large unique parcel; from 30,000 feet if you will. Value is determined by scarcity and utility. Natural terrain borders create scarcity for this parcel and if the utility never changes then value can only be driven by perceived and/or real changes to scarcity. We’ve traditionally defined San Diego real estate value this way. But what if the utilization of the parcel is evolving into something different? Say for instance, that this region during this century is transforming into an international economic hub? If correct, it will re-set all assumptions of value.
NEW REALITIES ARE CHALLENGING TRADITIONAL CONCEPTS
Cities have always been the natural economic units of the world. But over the past half century, clusters of cities and city regions have grown outward and into each other, forming megaregions. More than just a collection of cities or one giant city, a megaregion is greater than the sum of its parts. A megaregion dominates commerce; employment and lifestyle attractiveness in a central way and therefore, is becoming an international standard for the assignment of financial investment and economic resources due to the comparatively unique strategic value to the whole. Much of our entrepreneurial career has been spent observing, monitoring and interpreting these economies and specifically their short and long-term effect on real estate related businesses.
There are a dozen megaregions in North America. San Diego is the southern piece of the Los Angeles centric So-Cal Megaregion. However, changes within the last 10 years and during the next 15 will likely make San Diego the centerpiece of a new Cali Baja Bi-National Megaregion. There are no less than ten 21st century economic drivers that are and will continue to define this revised destiny. This is due in part to the following: proliferation of STEM technologies and industries, generational proficiencies and preferences, and a geographically “one-of-a-kind” location. The interaction between these factors will create a diverse employment (multi-generational & multi-cultural), attract international notoriety, and drive financial investment at sustained levels never before experienced.
Illustrations abound: the premier desalinization plant on the west coast (privately funded and operated) is only a single example of our dynamic “blue economy”; the only U.S. city and one of four worldwide to be showcased in a National Geographic documentary “World’s Smart Cities”; a growing “biomed cluster” that cannot be duplicated and enjoys the attention of the U.S as well as other leading world governments; the same is true for “cyber security” and the privatization of “space transportation”; emerging energy sources including acres of wind-turbines constructed with parts supplied throughout the international community, constructed in Mexico and plugged into the California power grid.
In addition to 21st century trends there are also generational tipping points being experienced that will likely change the composition of traditional real estate demand. We can use metrics to know exactly how we’re doing. Our regional economic dashboard uses 20 different metrics to track the region’s standing among the 25 most populous U.S. metropolitan areas. This transparent feedback will be conducive to a more strategic approach to economic growth.
TIPPING POINTS CREATE PERMANENT CHANGE
Understanding investor mentality in order to create and/or modify the strategy for owners of local rental property is a separate challenge. Why own; to what end; and how to change outcomes? A tipping point is that we have an entire generation that could retire without self-sustaining resources. Baby boomers are realizing they can’t get there from now with their current investments and/or the traditional financial strategies available. Investment alternatives are expanding to include the power, protections and flexibility of independently owning local single homes, individual condos, small apartment and commercial properties held long term as rentals to build wealth and provide retirement income.
Another tipping point – It is no longer uncommon that millennials will buy to own an investment while remaining renters themselves. Rent securitization, steady low interest rates, expanded 1031 exchange utilization, transaction crowdfunding, reverse and/ or shared equity mortgages, and Self-Directed IRAs are all part of this 21st century alternative investment surge. If millennials don’t prioritize to become real estate owners through these alternative means they likely will stay renters by choice. Such choice by many of this generation will be seen as a logical reflection of the times and their priorities.
In 5-10 years millennials (Y & Z gens) will occupy 75% of both local rentals and jobs. They are more educated, connected, collaborative and demanding as employees and customers than any generation before them. They believe in the integration of work, play and family; not bogged down with having it all or plagued with achieving balance. They are accustomed to freedom of space and connectedness. They were raised to be a preferred customer especially about housing. For the first time we have 5 generations (separating millennials into Y & Z) in the workplace along with at least as many generations of technological communication. Properly acknowledging the uniqueness of various generational individuals while raising group emotional IQ is a new leadership mandate. Keeping everyone on the same page but in their own lane is a 21st century management challenge.
We need to listen to a millennial generation that would have us be more collaborative and connected. We can be in step with the changes all around us though we must be educated and pro-active. Though there are some technologies that we remember this new generation doesn’t even call any of it technology. To them it is life as they know it and they can’t understand why the way we do things at work is as different from real life as they know it. Take a different look at how others view things. But enjoy history and what it has given you. Change is a good thing especially for those of us old enough to appreciate a good thing.
OPPORTUNITY HAPPENS WHEN PEOPLE ARE SLOW TO CHANGE
San Diego has a deep housing problem because we refuse to provide new housing within the region the way we use it; about half of us rent. We cannot change the supply significantly until we change our paradigm and unless we dramatically change the process right now. To predict outcomes in the SD Region we cannot focus on local history but rather need to study comparable situations elsewhere to see the free market reaction to bad planning. There are less affordable areas in which we have had extensive real estate business experience. Examples include: NYC metro plus adjacent NJ corridor; Boston metro and the SF-SJ Peninsula. Each has useful comparable elements with SD Region. Each is a centerpiece of socio-economic change that fosters educational opportunity, lifestyle diversity and international investment. A high barrier for residential development especially rentals hinders a steady housing supply. Each produces significant annual employment totaling at least 3 times their annual new housing starts. All of these conditions have existed in each area for multiple years.
The real estate results are knowable. Comparable ‘for sale housing prices’ are up to 5 times the national median and ‘rental rates’ are up to 3 times the national median with imbalances growing worse with the economic recovery. This is San Diego’s future. There should be no doubt that anyone owning San Diego rental property without debt and performing within ‘industry best practices’ will enjoy a financial future similar to other successful small business ownerships. By the way, nationwide four out of ten rental properties are single homes or individual condos and especially in this region perhaps the best way to own rentals.
Change creates problems. Problems keep us creating solutions; the bigger the problem, the better the solution. One thing for sure, in 5 years (2020) everyone will see things more clearly, right? Most will watch San Diego go platinum while savvy investors will participate.
“Rent Sense” is an informative series for Rental Owners or those looking to become R.E. Investors. This monthly insight is brought to you courtesy of Neil Fjellestad and Chris De Marco, Principals of FBS Property Management in San Diego, CA. The goal of “Rent Sense” is to educate individuals with correct expectations for investment performance; inform about trends and concerns for Rental Owners; give thoughtful consideration of “best practices” now possible due to technology advances being made by our company and other industry leaders. We are investors, responsible Rental Owners and entrepreneurs that have started, grown and sold a dozen real estate-related businesses. Currently FBS operates rental properties in 69 zip codes within southern California. Now in our 5th decade we report to 800 clients. All of this daily exposure provides us with a variety of topics to discuss. Neil, Chris and the rest of the FBS team is available at 619-286-7600 or www.fbs-pm.com.