Why Cities Reliant on Tech Might See the Biggest Housing Correction

  • Origin Investments outlined five cities that look promising for real estate investing.
  • The technology industry plays a role in the each city’s economic growth.
  • But real estate consultant Nicholas Gerli says that cities tangential to tech might dive the most.

Five of the top US cities that offer the biggest opportunities for multifamily real estate investing, rent growth, and development are all located in the southern Sun Belt, according to Origin Investments, a real estate private equity firm managing $1.4 billion in assets.

In a recent report, the firm examined the potential rental rate growth of different US markets by evaluating metrics like historical rental rates, housing affordability, supply and demand, recent migration, and growth of local jobs, income, and population. Out of the total 150 US markets considered, Origin found that Phoenix, AZ; Tucson, AZ; Las Vegas, NV; Austin, TX; and Nashville, TN were five cities with promising income, employment, and population growth potentials.

“All are mid-sized cities with room to grow and suburbs that give residents plenty of options in terms of lifestyle and location,” the report reads. “Three of the cities are state capitals, and all have strong university presences that are shaping the kind of quality workforces the areas want to attract and retain.”

The five cities each include diverse and robust job markets frequently tangential to the

technology industry

, said Origin.

Tech manufacturing is one of the biggest industries moving into Phoenix, AZ in recent years, while Origin expects jobs and wages in Nashville, TN to rise as more technology jobs are added. Caterpillar’s 2017 move of its mining technology regional headquarters to Tucson, AZ brought about 600 jobs to the city. Las Vegas, NV, which already looks attractive due to a lack of state and corporate taxes, set forth recent plans to attract new industries like financial services and information technology. And technology firms are even more integral to the market in Austin, TX, where companies like Oracle, Tesla, Samsung, Apple, and Meta have moved their headquarters or plan to build new campuses.

Origin further pointed to each city’s rapid rebound against pandemic-induced challenges as a sign of strength. The firm cited data from the Bureau of Labor Statistics showing that average rent grew by 3% in the five years before the pandemic. Using this metric as a benchmark, Origin believes that the growth potentials in these five cities, at least through 2023, will far outpace the 3% figure.

“While we understand that real estate markets are always evolving, we look for places where employment and demographic trends point to future opportunities,” Origin explained. “In these five cities, we see plenty to be optimistic about.”

Are these cities overvalued?

Within the backdrop of the heated real estate market, it’s impossible not to wonder if these staggering housing growth predictions are leading towards a bubble on the verge of bursting.

A recent analysis conducted by the NPR based on data from Moody’s analytics revealed that Origin’s five cities to watch — Phoenix, AZ; Tucson, AZ; Las Vegas, NV; Austin, TX; and Nashville, TN — rank respectively at 21, 155, 22, 36, and 16 on the list of most overvalued metropolitan areas in the US.

While Origin highlighted a connection to big tech as an asset for cities’ housing growth, these same cities may be overly reliant on the tech workforce which means they are some with the highest risk in the case of an industry downturn, said Nicholas Gerli, the CEO of real estate data analytics firm Reventure Consulting. In a recent interview with Insider, Gerli warned that many tech firms are still unprofitable, despite investors flocking to them like moths to a flame.

“Tech employs a relatively small amount of people in the US economy compared to all the other industries, but they dominate an exorbitant amount of wealth and housing demand,” Gerli said. “Now that stock prices are crashing and we’re starting to see layoffs, that’s a big economic risk factor for these housing markets.”

Furthermore, he believes that justifying the phenomenal appreciation of leading metropolitan cities because of past growth is a “backward looking viewpoint.”

“The areas that were the beneficiaries of [tech] over the last five to 10 years are going to see less growth from them going forward, at best,” said Gerli. “And at worst, they’re going to see economic pain.”

Gerli particularly believes that Austin, TX is currently facing a housing bubble. That’s because the city’s annual housing costs have nearly doubled in the last two years, versus only a 7% wage growth and 24% rent growth over the same period.

On the other hand, Redfin’s deputy chief economist, Taylor Marr, asserted in a recent interview with Insider that the migration patterns of higher-income earners are enough to justify the price appreciation in cities such as Austin.

“One of the most convincing things that I’ve seen is when you look at metro areas that are really leading the country in terms of price appreciation, if you compare them to local incomes like in Austin, or Phoenix, or maybe even Nashville, it might seem like home prices are far outpacing income growth in those areas,” he explained.

Marr continued: “But once you factor in that a large size of the pool of homebuyers in those metro areas are actually come from these more expensive coastal cities, and bringing with them higher income or even higher cash from selling homes in those coastal cities, these migrants typically have much larger budgets, and are really able to save money on housing relative to what they were leaving.”

With that in mind, the five cities Origin highlighted are listed below, along with commentary for each city.


pevita pearce

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