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Sunday, October 5, 2008

THE COMING U.S. RECESSION

by Bruce Greenberg

Technically, the United States economy is not yet in an economic recession, which is defined by two consecutive quarters of economic contraction/negative economic growth. However, many economic indicators are already indicating that, at the very least, a significant slowdown is in place.

Compounded by the values of homes decreasing and US consumers facing a liquidity crisis, their financial reaches have been reduced significantly. So we must pause and ask the obvious question: How will tourism-based real estate in Mexico be affected as we enter the current economic slowdown?

THE AFFECT ON MEXICAN REAL ESTATE
With a weakened US consumer, México is entering a period where affluent Mexican Nationals, Canadian buyers, and in some markets Europeans, will increase their influence. However, tourism from the US will remain strong increasing the demand for hospitality services. México’s attractiveness to US tourists only continues to increase as the Peso remains affordable, the Euro overwhelms the US dollar, and the cost of flying to Europe or Hawaii becomes more prohibitive.
Second-home buyers in México transition through various phases within a real estate life cycle. For many buyers, purchasing a timeshare or fractional interest is their way of transitioning from being tourists into purchasing a property outright. During the current economic slowdown, some low-end buyers are more likely to invest in time-shares or fractional ownership than full ownership during this recessionary cycle.

With the downtrend in home values in the US, it will be increasingly difficult to attract this low-end demographic to purchase until the market improves. Through the duration of the US economic downturn, time-shares and fractional ownership will be strategic products that allow for continued capture of historical/traditional US investment. When the US buyer regains liquidity and the dollar regains its strength, this demographic of US buyers will be in a perfect position to purchase condominiums and homes.

It is important to distinguish among buyers in “drive-to” markets, such as Puerto Peñasco, Rosarito Beach and San Felipe, and the buyers from the rest of the Mexican tourist markets, or the “fly-to” markets. These drive-to markets cater to a demographic of buyers from the Southwest, with different characteristics from the majority of buyers in the other “fly-to” markets.

In the past growth cycle, Puerto Peñasco and Rosarito Beach both experienced rapid increases in the number of new developments. Since the market peaked in 2006, absorption in these locations has declined significantly, and they are somewhat oversupplied with condominiums. This rapid increase in the number of developments was due to speculation on the part of investors and unsafe real estate practices of developers. These speculators mimicked the condominium trend in Miami, Phoenix and Las Vegas, and allowed developers to continue with projects based on short term demand. Developments that accepted speculators reservations and were never built have created a publicity nightmare for Mexican real estate.

The fly-to markets, in contrast, have a much different dynamic. The most important distinction to be made among the fly-to markets is that they have the most diversity with regard to international buyers, and the most exposure to high-end buyers. This is extremely relevant in the current cycle. Due to the strength of the Peso, the Euro, the Pound and the Canadian Dollar, these markets can offset the weakness of the US consumer by shifting the marketing focus to other demographics.

In many markets, developers will be competing on price more than any other factor. The effect of this, especially in markets with considerable inventory of product, will be a downward trend, or at the very least, stabilization of prices. However, in order for this to occur, developers will have to accept smaller profit margins on completed projects that are on the market, and proposed projects that are already in the pipeline. Well-established developers with proven track records and name recognition will gain an advantage during a difficult market.
In addition to competitive pricing, projects that offer a wide range of amenities will be a key driver of competition. Once prices have been adjusted to meet the current market, buyers will look to amenities in making their purchase decisions.

Bruce Greenberg of Valuaciones Montana Verde. They provide market studies and feasibility studies that ensure developers achieve maximum success.