Is Texas the Next Real Estate Panacea?

2023 was a really funny year for real estate investing – in Texas and everywhere else. However, real estate continues to be a very solid and wealth accelerating investing option – when done right. Selenid and I continue to use it in a direct investing fashion. However, many physicians are interested in a more “hands-off” approach.

Our new partner, BV Capital, is a very skilled group with great past returns and experience in the market. 2023 really tested real estate groups and I sought out those that came through stronger than ever. BV Capital, is one of those.

So, I asked Rob Anderson, president of BV Capital, to share some of his thoughts on the real estate market and where it is going. None of us have a crystal ball. But I love hearing what others are finding in their experiences!

I’ll let him take it from here!

Where does the real estate market go next?

Passive real estate investing offers many benefits to investors, such as access to an uncorrelated asset from the stock market, tax advantages, potentially higher returns, and a hands-free way to invest in real estate.

In evaluating any investment, one must adhere to some core economic principles. The core fundamentals for real estate investing are population growth and job growth.

Areas like Texas have become a top destination for real estate investors due to its thriving economy and attractive multifamily fundamentals. The metros like Austin, Houston, and Dallas-Fort Worth are magnets for corporate relocations and domestic migration, the key factors behind the state’s surging job growth and housing demand.

Population Growth

Did you know that about half a million people have moved to Texas yearly since 2000? Texas is now one of only two U.S. states with a population of 30 million or more: the nation’s second-most-populous state recently reached a population milestone by passing the 30-million threshold.

Texas grew +20.68% from 2010 to 2023, the third-highest increase of any state (only behind Utah and Idaho), and has an estimated 2023 growth rate of 1.34%. Because Texas is the second-most-populous state and has more than 30 million residents already, a 1.34% annual growth rate means that the population of Texas grows by more than 1,100 people per day. All of these people in Texas need a place to live – and that is what real estate is for!

Job Growth

What about job growth?

With over 53 Fortune 500 companies headquartered in Texas, the state again led the U.S. in job creation last month, as it has every month for over two years. Texas has now had its 31st consecutive month of job growth. Since September 2022, Lone Star State employment grew by 435,800 positions as Texas’ annual growth rate of 3.2 percent outpaced the nation by 1.1 percentage points.

Texas has maintained a long-standing reputation for its favorable cost of living, making it a magnet for transplants. RentCafe reports that the state’s general living costs are 8% lower than the national average. The median home sale price is also lower, at $347,800 as of September — over $64,000 less than the US median sale price and considerably lower than California’s median home price at $787,000, per Redfin.

Why Multifamily?

Now that we’ve discussed where to invest, the next question is what type of asset to invest in. Our answer is class A multifamily, which will typically create some questions:

Why are there so many apartments around town nowadays?
Or, why are you building more apartments when we have so many already?

The chart below answers these by comparing the cost of home ownership vs the cost of renting an apartment. This analysis demonstrates how home prices have risen faster than rents, making it harder for first-time home buyers to buy their first house and making renting more affordable.

Adding to this price difference is the difficulty in acquiring a mortgage loan nowadays due to higher interest rates and tighter lending standards. If a new home buyer has the appropriate credit and down payment, they still face a higher interest rate expense and higher homeowners’ insurance. This can make the difference in someone buying that first house.

Thus, we now have the highest-ever average age of first-time homeownership in the US at 36 years of age.

This explains why we have so many new apartments in our cities. They meet the needs of our younger workers who are climbing the corporate ladder but are not ready to buy their first house. This is also why we are adding fun new amenities to our properties to help cater to this demographic. Some examples are pickleball courts, more than one pool, high-end coffee bars, EV charging stations, and valet trash removal. An amenity-rich property will demand higher rents and thus produce a higher NOI, which produces higher returns for investors.

Real Estate Today

Generally speaking, 2023 has been quite a year for real estate, especially ground-up multifamily construction. Development capital has been difficult for many Sponsors to attain. This is because many of the largest banks have reduced real estate lending. In contrast, smaller banks shied away after the failure of regional lenders earlier this year, further exacerbated by a decline in bank deposits attributable to the move of money from bank savings accounts to higher-yielding money market funds. Bank deposits have fallen for five straight quarters through June 30, limiting the amount of lending activity at the banks. As such, many banks have reduced their LTC target, making capitalization of new projects difficult.

According to GlobeSt.com, new multifamily construction starts have dropped across Texas from 2022 at a sizable margin:

Houston starts fell by 79%
Austin starts fell by 74%
Dallas – Fort Worth starts fell by 64%

This reduction will create a future supply and demand imbalance that, as investors, can mean only one thing.

We believe that opportunity is there

We are bullish on investing in the ground-up construction of class-A multifamily in the current market cycle. Demand is still high (especially in Texas), and supply will only catch up for a moment now that new construction starts are at all-time lows. Once the current building is finished and leased up, there won’t be very many new properties coming online behind them, and where we expect to see this imbalance materialize in 2025.

The construction projects that make it out of the ground today will provide some of the only new multifamily products in a market with ever-growing demand for at least a year or two, maybe longer.

A supply and demand imbalance such as this historically drives rents higher, which raises Net Operating Income (NOI), increasing returns for investors. Further, the opportunity may exist over the next 2-3 years to sell these newly built properties at a time when interest rates have fallen or continue to fall. Lower rates historically increase sales prices upon the exit. BV Capital is a Texas-based real estate private equity company that is part of the Bridgeview Real Estate family of companies.

BV specializes in ground-up multifamily construction deals in the state of Texas as we have our own in-house construction company, which has allowed us to achieve historical returns beyond those of traditional value-added investments. We realize that some sponsors have had to reduce or permanently cut distributions this year due to the challenging environment. We are proud that we have not reduced any of our distributions. Instead, we have increased distributions on two of our deals.

We’ve never lost investor money and have never made a capital call.

A recap

Jordan here again. I’ll say it again, 2023 was a weird year for real estate. Many sponsors went under due to ARMs and other factors. And it was scary to a lot of real or potential investors without a lot of experience.

However, opportunity remains and I believe will even get greater in the future. As always, you have to vet options very carefully. Rob and his team at BV Capital offer great experience and past work. That’s why I choose to learn from him and his team!

If you are interested in learning more, you can right here!

And, in the meantime, here are some other helpful resources for doctors interested in real estate investing:

What do you think? Is Texas the next big real estate market? If Texas isn’t the next big real estate thing, what is? Have you invested in real estate? Let me know in the comments below!