Commercial real estate has not fared as well, but is still fundamentally healthy. The number of leases signed for 2007 was about the same as for 2007 and was slightly higher than 2006. The number of sales, however, for 2008 were dramatically less showing a total sales volume of 1/3 the amount of the previous year, 2007. The figures for 2009 seem to on the mend, but with the small data sets we work with, are not conclusive.
2) What impacts has the national economy had on the Real Estate Industry?
Real estate sales are a local phenomena, but are affected by the national economy to a degree. They are governed by consumer need, consumer confidence, consumer’s ability to pay, and available loan programs among a few other minor factors such as revised appraisal guidelines. The need remains relatively high in the Iowa City area for homes driven by the University of Iowa, the University of Iowa Hospital and other government employment. Consumer confidence is eroded by the national economy, and the ability to pay is eroded only by the degree that jobs are cut and salaries are frozen. Iowa City has historically had ample mortgage money available from local banks and the current period is no different. Banks have tightened credit underwriting a bit, but employed people can still buy homes with 0% to 15% cash down.
The Federal Government has offered a first time how buyer benefit of $8,000 which is not subject to recapture. The State Government is also offering a liberal leasing credit up to $50,000 for properties that were subject to the flooding of 2008. Although this flooding credit is not recession connected, the effect of receipt of the credit directly affects recession recovery.
Commercial real estate is affected more by regional and national economic trends that is residential real estate. Home buyers are local, but commercial tenants and buyers may be regional and national. Lease or buy decisions of those companies are made by taking the national or regional health of the company into consideration and not just the local players. I believe this is the main reason for the dramatic reduction in commercial sales activity for 2008. There is ample local funding available for commercial projects, however some projects were scrapped due to forces outside our community.
3) What are the critical factors affecting Real Estate’s ability to grow in this market?
I believe there are four basic critical factors. The first is the most significant with far reaching consequences of State Jobs layoffs.
• Continued buyer confidence and ability to pay.
• Continued low interest rate loans available.
• Continued interest deduction on Schedule A.
• Continued First Time Homebuyer tax credit.
It is interesting to watch these items in the future as they unfold and develop. We have little control over them and can only respond to them.
4) What re the attributes of the community that benefit or challenge your industry?
Iowa City and the surrounding towns are collectively a “company town”. As the University of Iowa goes, so goes the real estate market. Residential real estate is directly affected by the annual ebb and flow of residents dictated by the University of Iowa. Area workers receive relatively high salaries which come as transfer payments from the government and not directly from selling a products locally, or from providing a service locally. This type of “basic employment”, money coming from outside the closed local economy, is very healthy for a community and helps insulate the community from economic fluctuations. This recession has begun testing this theory as State Government cuts will directly and adversely affect area employment and the ability to buy a home.
The commercial real estate market is really secondary to the residential market in this effect. There is little industry in the area aside from the University and a handful of area industrial employers. When residential real estate flourishes, and residents have confidence in spending, retail and service sectors thrive and require space to operate. When there is a retraction in residential real estate sales and values, there is necessarily a retraction in goods and services supplied to those residents.
5) Provide any projections of the Real Estate industry over the next few years.
Technically, the recession of 2008-2009 is over. The effects are not, however. I believe that there will be adequate funding for home sales and that home sales will be steady at the 2008 rate of 2,300 home sales per year. I believe that prices will also remain stable at the average $182,000 level, and may even increase at the rate of 1%-2% per year for the next five years. There are currently 1,560 homes on the market which is down from levels of 2,000+ homes on the market in 2008. This indicates to me that home building has slowed and that inventories of homes for sale are being reduced. The Iowa City area normally has 1,500 to 2,000 homes on the market so there should be room for new home building starting in the spring of 2010.
Commercial real estate trends are harder to read as there is a small set of data available. Based both on the available data and on anecdotal and experiential information I will forecast that commercial leasing activity will remain steady for local retail and service businesses. Some local companies are growing, but there is also a segment of businesses that are starting up as employees are laid off or terminated from traditional jobs.
Real estate investments are an area that will see some reductions in value. National expectations as reported by Kiplinger Letter and other experts anticipate a reduction in value of 35% for commercial and investment properties! This area will see a lesser reduction in values, but I forecast that capitalization rates of 6.5% – 7.0% which were perfectly acceptable for University area properties two years ago will rise to 8.0% and higher which have the direct result in lowering values of those properties. Some properties may lose 10% in value in this area, but keep in mind that there is no actual loss unless a property is sold.
6) What technology is emerging that would impact your industry, and is this considered positive or negative to our local Real Estate Market?
Technology is not something that directly affects the real estate market. There are marketing techniques that affect the business of real estate sales, but the market itself will be relatively unaffected by them. The internet and electronic delivery of information has dramatically changed how real estate is presented. The information on local homes is available 24/7 to home lookers worldwide. Buyer’s are more informed and educated than ever before. Upon their arrival in the Iowa City area, they normally still require professional services of a real estate broker, but they know better what they are looking for and actually get better service because of this. Some companies including Microsoft, have made attempts at cornering the real estate sales market, but have not been able to do so due to the fact that the product is profoundly local.
7) Are there legislative / regulatory changes that could present opportunities or threats to the Real Estate Sector?
There are many legislative and regulatory factors that continue to affect the Real Estate Sector.
Real Estate Taxes, rates and county assessment criteria.
First time home buyer tax credit.
Financing reform / regulation.
Deductibility of home interest.
Capital gains tax rates.
The biggest factor is still supply and demand. If there is a population who want to buy homes and can afford to do so, there will be homes available to purchase.