Michael Luger

1
The Economy and Prospects for Real Estate in
the Triangle
MID-YEAR REVIEW

• Michael Luger
• Professor of Public Policy, Business, and
  Planning
• Director, C3E

Brier Creek Country Club, NC 28 July, 2005
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
2
Questions we are concerned about

• How healthy is the Triangles real estate
  market?
• Will demand for residential, commercial, and
  industrial property continue to be strong?
• In what industrial sectors and communities will
  demand be greatest?
• Are we subject to the effects of a real estate
  bubble, as experienced elsewhere?

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
3
Will real estate demand continue to be strong?

• Quickly review trends
• Note the forces that assure strength, and
• Identify some clouds on the horizon

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
4
Trends in the Triangles real estate economy

• The Research Triangle has undergone strong,
  steady population and business growth for decades

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
5
A growing Triangle
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
6
A growing Triangle

• Fourth fastest-growing population of top 50 MSAs.
  On average, 74 new residents move into the
  Research Triangle region each day
• Almost 700,000 more new residents are expected to
  move into the region over the next generation
  (2005-2030)

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
7
A growing Triangle

• Trends in population growth are paralleled by
  business and employment growth (in-migration
  without unemployment)
• The increase in people and businesses has led to
  a healthy real estate market steady and
  relatively stable growth
• Historically low mortgage and interest rates have
  made it easier for individuals and businesses to
  borrow to build

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
8
A growing Triangle
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
9
A growing Triangle
Index of housing affordability
Every 1 pctage point in mortgage rates
qualifies 3 million households to buy
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
10
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
11
Housing not evenly spread
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
12
Will the trend continue?

• The real estate market is affected from above and
  below

macro economy
regional economy
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
13
Will the trend continue?

• From below, the outlook is positive
• Triangle is/will continue to be hot location
• Vacancy rates are falling again
• Supportive public policy and strategic planning
  are creating markets for new cluster-based
  businesses

regional economy
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
14
Multi-family hsg vacancy rates are evven lower,
at approx. 8.7 percent
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
15
Will the trend continue?
macro economy

• From above, there are some
• ominous clouds
• Continued trade deficits are
• putting pressure on interest rates
• - China unpegging the yuan to the dollar
• Continued fiscal deficits will cause crowding out
• Consumer confidence is falling portending a
  drop in GDP growth
• Many regions even subregions in the Triangle
  will struggle to attract the high tech companies
  that are needed to survive, and instead will lose
  more jobs to China, India, eastern Europe, and
  elsewhere

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
16
Kerr-Tar hub
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
17
Will the trend continue?

• From above, there are some
• ominous clouds
• Housing (land) prices have run-up in many
  markets, creating wealth for incumbents, but
  making new construction and purchase difficult
  for many.

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
18
Median Existing-Home Price (national)
Thousands of Dollars
Note Shaded Area Recession
Source NATIONAL ASSOCIATION OF REALTORS
19
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
20
Where will the growth be?

• Geographically present trends will continue
• Residential growth moving along radials
• Chatham county
• Holly Springs
• Wake Forest
• Johnston county
• Business/commercial
• Near universities
• RTP
• Near major interchanges
• Near TTA rail stops?
• At the Kerr-Tar hub?

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
21
Where will the growth be?
RTP
The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
22
Where will the growth be?

• Sectorally
• Staying on Top
• The 10 clusters are
• Pharmaceuticals
• Biological agents and infectious diseases
• Agricultural biotechnology
• Pervasive computing
• Advanced medical care
• Analytical instrumentation
• Nanoscale technologies
• Informatics
• Vehicle component parts
• Logistics and distribution
• RTRP and C3E are now figuring out how to develop
  these sectors.

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
23
Are we subject to the effects of a real estate
bubble, as experienced elsewhere?

• No.
• USA Today (Wed) vulnerable markets
• Generally those with rapidly growing housing
  prices
• Those that are land constrained
• Those that had been subject to a supply slow-down
  due to regulation, environmental threat, etc.
• Those with narrow industrial bases

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
24
Are we subject to the effects of a real estate
bubble, as experienced elsewhere?

• The Triangle has none of those indicators
• Generally those with rapidly growing housing
  prices
• Those that are land constrained
• Those that had been subject to a supply slow-down
  due to regulation, environmental threat, etc.
• Those with narrow industrial bases

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise
25
Conclusion

• The next several years are very promising for
  real estate in the Triangle
• We will have continued growth that is sustainable
• We will have appreciation that is manageable
• There will be a shift in where the growth is, to
  some new geographic areas and new industrial
  sectors
• Our greatest vulnerabilities are from above, or
  from macro conditions higher interest rates and
  slower growth. But those threats are shared by
  all regions.

The Carolina Center for Competitive Economies
(C3E)
Kenan Institute for Private Enterprise