Here’s a sneak preview of my real estate trends article that will be published in Vallarta Lifetyles next month. Appreciate any comments, as there’s still time to make changes to it before we go to print.
I’ve been writing this article for the past five years, five exceptional years where the market experience rapid growth, appreciation and demand. With last year’s report I touched on the trend that a downturn seemed to be approaching. Today, while updating and writing this report, there is no doubt that the market has slowed and the USA is most likely in recession. Is there good news out there? I believe so. I believe that this is just a minor market downturn for Vallarta, a switch from being a seller’s to a buyer’s market, but this will be only temporary. Vallarta is fundamentally a strong market with a lot to offer second-home buyers. Its been somewhat of a roller coaster up to this time, a slowdown can be of welcome for some, such as for allowing infrastructure to catch up with private growth. Although most developers would beg to differ!
Transition from Sellers to Buyers Market
Between 2002 and 2007 Puerto Vallarta experienced five years of an incredibly active market, certainly a seller’s market for as anything that came onto the market, sold. The latter half of 2007 was a time of transition as sales slowed down but inventories continued to increase. The MLS inventory grew and new development projects continued to come on line. So far, as we reach the halfway mark of 2008, the number properties listed in MLS has begun to stabilize and for the first time in five years, we are not seeing the announcement of new developments. Some have even scaled back the project, put it on hold if they haven’t yet broke ground, or decided to release units in phases rather than all at once.
For the past five years, for many developments, there was a sense of urgency on the part of prospective purchasers. This, for the most part, is now gone. Prospects are now taking their time before making a buying decision. In most cases, the unit they may be interested in, unless developers/owners start discounting, will still be on the market next month so they don’t have to make an immediate buying decision.
This, then, has completed the transition from a seller’s market to one which is now a buyer’s market. How long will it last? It is our perception that this is just a minor market adjustment. The USA credit crises will pass, the USA election will (finally) end, but in the meantime Canadians and Mexicans will continue to buy real estate. The fundamentals and the advantages of Vallarta’s real estate market are still there, this hasn’t changed. Actually in some cases, as in the rise in the price of oil, these fundamentals, as we mention in this article, become stronger.
USA Credit Meltdown, Shoulder Year with USA Election
The primary reason for this slowdown has been the economic meltdown in the United States that started over a year ago, and as well, the fact that this is an election year. It seems that there is still some adjusting that needs to take place in the economic and credit markets, hopefully by the time the election is over at the end of the year, the worst of this credit crises will also be over.
This all began with the now infamous sub-prime mortgage crash in the USA, something Mexico missed as there is no existing sub-prime mortgage industry, there is barely a mortgage industry. However, it effected real estate tourism in Mexico indirectly for although many people were purchasing in “cash”, for many the funds we being obtained through the equity in their homes in the USA, through re-mortgaging, second mortgages, or home equity loans. It still remains to be seen how this will all play out in Mexico, if people who did refinance begin to experience negative equity in their homes in the USA, something that will certainly happen to some the way the home prices have been falling, especially in states such as California, which is traditionally a very strong market for home buyers for Vallarta.
Canadian Purchases Increasing
The Canadian dollar has now been on par with the USA dollar for the better part of a year. As well, the Canadian economy is relatively healthy. The province of Alberta, rich in oil sands, has experienced incredible growth and wealth, especially with the rise in the price of oil. Many realtors and developers have expressed that they are now working and selling to Canadians much more today than they have in the past. In the past, they have tended to purchase in the middle to lower end of the market, but realtors are reporting sales at all price points. Canadians have money, they also have baby boomers that are looking for a warm place to have a second home, and Vallarta looks attractive. And Vallarta has traditionally been a favorite with Canadians. Other strong Mexican markets such as Los Cabos or the Cancun region, are seen as just extensions of California or Miami Beach, they prefer something more Mexican. And, as the slogan for Puerto Vallarta goes, Puerto Vallarta is where “Mexico comes alive”. This is an advantage Vallarta has over other destinations and it will certainly help real estate sales while the Americans work out their economic problems and work through their election.
It is not just the Canadian economy that has done well, Mexico as well has shown strong growth over the past few years and, along with Canada, has not experienced the credit crisis that the USA has. Their mortgage market is not overextended, its actually still in its infancy as mortgages have just recently become available for Mexicans to purchase real estate. Vallarta is a strong market for the Guadalajara (second largest city in Mexico) and “El Bajio” (industrial heartland of Mexico). Riviera Nayarit and Puerto Vallarta are the closest beach destinations for these two strong markets. This, again, is something that the other two strong tourism real estate destinations, Los Cabos and Cancun, lack. They don’t have a strong national market to draw from, as for both destinations, they are far from major Mexican cities and for the most part, you need to fly to get there.
An interesting national trend is seeing INFONAVIT, the Mexican government’s housing program that offers financing for national home buyers, recently has become involved in the second-home market. While traditionally they have just been offering financing for primary home buyers, they are now tapping into the demand from middle-income Mexican who would like a second home at the beach. Homex, a very large home builder in Mexico, whose stock is traded on the New York stock exchange, recently also made the move to start offering tourism real estate products as well.
So as the American purchaser has pulled back, Mexican purchasers, along with Canadians, have continued to be strong buyers for this region. This will certainly help Vallarta weather this slowdown, at least better than other destinations. And this has certainly been the case in previous slowdowns, such as in 1995 and 2001. Puerto Vallarta is a more diversified market, drawing from both national, Canadian and USAbuyers.
High End and Low End are Strong, as is Wholesale
Realtors and developers are reporting that the upper side of the high end of the market is still relatively strong, as is the demand for the lower end of the market. Its in between, from $250,000 to $2 million that has been most effected. That is obviously, a large part of the market. Developers that saw this coming, and there were a few, and who made changes to their product offerings by offering a lower-priced product, are still selling relatively well. With the higher end, over $2 million, sales have never been that active as that is a high price point for Vallarta. But sales activity is still relatively strong here, although any sense of urgency, as mentioned, is no longer applicable.
Realtors who work with large, raw land tracts say they are still busy and that there is still a demand. Purchasers of land are looking more long term, what will be happening as the current downturn in the USA ends and when the market picks up again, they want to be ready. This is still taking place, which is positive – very large investors are still very bullish about Mexico and the region for the future.
Need for Administrators and Property Managers
With all the real estate that has come onto the market these past five years, it has been a boon for the home decoration industry as all these homes and condominiums come unfurnished. The number of furniture outlets has increased dramatically, as has the demand for interior designers.
Another growth sector, often overlooked, has been the need for quality, professional property managers and administrators. The traditional condominium building in Vallarta was a relatively no-frills type operation. There were relatively few amenities and services offered. Administrators were basically bookkeepers with some maintenance experience. Today, with condominium developments being sold with rental programs, spas, business centers, etc., administration has become much more complex and demanding. Just the number of new projects alone has created a strong demand for good administrators.
This is an important and integral part of the buying process and for the overall satisfaction and happiness level of new home buyers in Vallarta. For many they will only be here part of the year. They want to know their unit will be taken care of while they are gone and that everything will be working properly when they arrive. For those that have chosen to rent out their unit, they need to be sure the units are ready for arriving renters.
Many developments prefer to separate common area and private area demands and expenses. The administrator of the HOA concentrates on the common areas. This has created the demand for property managers, who take care of the needs of the individual owners. Rather than being onsite, like the administrator, they are offsite and often take care of units from multiple projects. It is not uncommon to have four or five property managers working in one particular project, each for individual owners. Their services range from basic services, just making sure everything is functioning well when the owner arrives, to full rental service. They pick up or meet the renter, supply food provisions, massage service, tours and activities. The industry has had to learn to find a way for these two entities to work together. Again, both are essential for a healthy real estate market.
For administrators, they now need to be much more experienced in all facets of property management (common areas), bilingual, and function in many ways more like a hotel manager rather than the traditional condominium administrator. This has created a demand for highly qualified people in the industry.
Developments: What’s Your Unique Selling Feature?
This was mentioned in last year’s trends article, but is even truer today. With so many new developments in construction, there has never been so many options and choices available. This is going to make it more difficult for developers – they need to have an edge on the competition or they aren’t going to sell, or at least not as quickly as they would like. We have seen developers offering extended short-term financing and special property amenities, such as gyms and spas, clubhouses, even a new vehicle with the purchase of a home or condo!
These can certainly sweeten the deal, but it really comes down to who can best offer the style of life, the “lifestyle,” that prospective purchasers are looking for. People want more than a condo or home, they want special services to go with it, services that you traditionally would find only at a luxury hotel. In-project concierges are becoming popular and very appealing for homeowners who are only using their properties for short periods of time. The concierge can arrange restaurant recommendations and reservations, as well as tours and activities. Personalized service is becoming more and more important; it’s not just about the home or condo anymore; much more is taken into consideration. Some projects have taken to offering this type of service in-house or contracting it out.
High-end hotels noticed this trend early and many are now offering a real estate option on their properties. The Four Seasons at Punta Mita has the Four Seasons Villas and fractional ownership; the new St. Regis also will have real estate available; and smaller boutique developers, such as El Banco, are offering a similar package of a boutique hotel with upscale real estate and the option of having all the services the hotel has to offer. It’s a strong trend and we suspect we will be seeing a lot more of this going forward.
So how does the price of oil effect real estate tourism? Well, the price of oil is certainly going to effect the cost of flying. People are going to be looking for places closer to home where the cost to visit frequently won’t effect them as much. That could be a place within the USA, or at least close by, such as Puerto Vallarta. The increase in the price of oil will effect more the recently emerging real estate tourism markets such as Panama, Costa Rica and South American countries. So the rise in oil can actually be seen as a positive for Vallarta. Again, being so close to major USAmarkets, and the closest alternative outside of the USA for Canadians, is a much advantage for Mexico.
Infrastructure Catch-up Time
Anytime you have the growth we have experienced in Vallarta, going on for a prolonged period of time, infrastructure will always have a difficult time keeping pace. Currently there is work being done to establish strategic town plan, one that has gone through many changes over the years as the region continues to evolve. There are plans currently in place, on a state and federal level, to improve the highway system in Nayarit to the north leading into Vallarta and to the south to Costalegre. As well, a periférico, or a by-pass around the city, is also plannned. This would eliminate traffic that is just passing through Vallarta. This would also alleviate traffic congestion along the South Shore for neighborhoods such as Conchas Chinas and further souch to Mismaloya. This would become a secondary road, primarily for people that live in this region. Improvements in highways to the north and south will also make access to developing regions better as well. Sayulita, San Pancho and Lo de Marcos will all be within an hour’s drive, and Costalegre will be ready for future development. There is already major work being done on the road from El Tuito to the coast. With the by-pass, highway improvement and this road, The Costalegre coastine will be only an hour away as well from the airport.
Need for Industry Conciliation
At the recently Vallarta Lifestyles Real Estate Conference, much of the discussion revolved around how the real estate industry needs to become more united, to work with all market sectors. Developers and realtors need to work closer together and understand better their wants and needs, their problems and challenges. As mentioned, professional management and administration is essential for a healthy market. Purchasing real estate doesn’t end with a sale, in many respects it just begins. People want their investments to be taken care of and at a higher level of management than has been traditionally asked for. This is a demand that needs to be met and realtors and developers need to work with this sector to ensure their clients will be taken care of. So there are three important entities here; developers, realtors and administrators. Currently, for the most part, they are working independently. Although there is an association of realtors (AMPI) and for administrators, there is nothing for real estate developers. And there is little dialogue taking place between these three entities. For the industry to be healthy and successful, this needs to be addressed. Whether this will, through AMPI (probably the most logical solution) or through a new entity, remains to be seen. Perhaps with a bit of a slowdown in the market realtors, developers and administrators will have the time to address these issues.
As a united industry, they could work on issues such as marketing and public relations for the industry and region as a whole, lobbying with local governments regarding development issues, and ongoing training and education for both realtors and property administrators.
Primary Benefits and Advantages still Strong
Although 2008 will certainly be slower than 2007, the prospects for 2009 are strong. Puerto Vallarta and Riviera Nayarit have a lot going for it. The fundamentals are still there and they are strong advantages that offer excellent benefits. I think they are worth going over once again:
1. Vallarta is well-positioned geographically for American, Canadian and Mexican second-home buyers markets. Its easy to get here with service from major airlines, in just a few hours.
2. Vallarta’s weather is exceptionally good, offering temperate waters, mild temperatures, sun most of the year with rain concentrated primarily in the off season.
3. Baby Boomers, their wealth and the transfer of their parent’s wealth to their lifestyle, is still a reality. And looking for a second home somewhere warm is a high priority on their list.
4. Although prices have risen over the past five years providing strong appreciation, prices are still competitive to other beach destinations. And Vallarta offers a wide range of pricing and product availability. There are $100,000 condominiums up to $5 million dollar homes. There are homes, condos, townhouses and fractionals situated on the beach, hillside, golf course, marina, downtown or on an isolated stretch of coastline. The variety of production, location and pricing cannot be matched.
5. The cost of living is still well below that of the USA or Canada and property taxes are much less expensive.