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Dr. Sam Chandan Q&A

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Chandan: Real estate investors like Texas

Austin Business Journal by Cody Lyon, Staff Writer

Date: Thursday, September 15, 2011, 10:00am CDT – Last Modified: Thursday, September 15, 2011, 11:52am CDT

Cody Lyon
Staff Writer

Last night I caught up with Sam Chandan in New York. Chandan is the president and chief economist at Chandan Economics as well as an adjunct professor at the Wharton School of Economics. He’d just returned from a trip to Dallas where he was keynote speaker at the Dallas-Fort Worth Real Estate Forum. The focus of the forum: investing in a time of crisis.

Here’s what he had to say:

ABJ: In a nutshell, who else were you speaking to in Dallas?

Chandan: I spoke at the National Association for Business Economics’ 53rd annual meeting, where Dallas Fed PresidentRichard Fisher was also on the agenda. And at the DFW Real Estate Forum, where I gave the lunch keynote.

ABJ: When you talk about transaction activity and credit conditions improving in major markets — lagging spillovers into tiered metros are in the early stages — what does that mean? And, might Austin be one of those tiered metros?

Chandan: So far into the recovery, the rebound in commercial property sales and prices has been concentrated in the nation’s most liquid markets, such as New York, Washington, D.C., and San Francisco. Non-coastal markets have not attracted the same degree of interest from large institutional investors or foreign buyers. In smaller markets, which are more dependent on banks and CMBS lenders, accessing credit has also been more challenging.

The market has been shifting, however. As prices have continued to climb for cardinal markets’ most coveted assets and as investors have grown bolder, they have had to look elsewhere. While not without risks, the Texas markets have attracted attention because of their stronger underlying economies and momentum in the job market — trends we do not see in most other parts of the country. Particularly in the apartment sector, occupancy is tightening as part of a dynamic adjustment in the wider housing market. The latest data show that the potential for a strong supply response, where we undertake too many new apartment building projects, is a risk in some parts of Texas. Austin is amongst the markets where builders are clearly responding to the apartment sector’s robustness. In the short term, renters can expect to see their housing costs rise. But that trend will moderate if the full set of Austin’s planned and under construction projects result in new inventory additions beginning largely in 2012 and 2013.

ABJ: I had a look at your graph from the Federal Reserve Bank    in Dallas. It looks to me that Austin appears to have seen the most growth and activity among the Texas cities.

Chandan: Measures of business cycles show that Austin’s growth trajectory outpaces the national trend and other, more mature, Texas markets as well. The convergence of a high-quality labor force and strong agglomerations in the education and technology sectors are important drivers. Nonetheless, it’s not a market for investors in search of long-term cash flow stability, or for fickle investors with malleable exit timeframes. For many of the same reasons that the market has grown quickly, it also exhibits larger swings over the course of a business cycle. Downturns in Austin can cut deep; especially in the property sector where new supply has not always been well-timed.

ABJ: Here in Austin, we’ve seen, and are about to see more, multifamily and hotel construction — especially downtown. But I haven’t really heard much about new vertical office. Why?

Chandan: There are several factors underlying the tilt in new construction towards apartments. Improving fundamentals have been a feature of the apartment market for over a year now, allowing developers and their lenders — the latter group supported by the government-sponsored enterprises, Fannie Mae    and Freddie Mac    — time to consider and ultimately pursue development opportunities. In the office sector, the trends are more mixed. While Austin is clearly outperforming its peer markets in its job trajectory, not all of the new jobs fit neatly into traditional office-using categories. At the same time, bank development financing for office properties remains relatively more constrained than for apartment. Apart from an approaching office construction boom in Manhattan and upticks in activity in a few other markets, the office sector’s national profile is clouded by the extraordinarily weak recovery in jobs and the downside risks to the expansion.


Written by codylyonreporter

January 28, 2012 at 1:32 am

Posted in Uncategorized

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