Vallarta Real Estate Trends Part II

June 26, 2011

This is the second part about trends currently taking place in the Vallarta and Riviera Nayarit real estate markets. The first part can be seen here.

Speculation Is Gone—At Least For a While

Speculation drove a large part of the market in years past. Today, real estate investment has to make sense and stand on its own merit, any potential upside gain considered a bonus and not necessarily a reason for buying. Single-property speculators are gone—and even the investors, to some degree—except for some bottom feeders every real estate agency reports dealing with. There’s been a shift from people buying a “vacation” property to now buying a “retirement” property. People are looking for a place to not just vacation in but to have as their primary or secondary home in the near future. This is all good long term, but doesn’t sellers and developers that want sales now.

With regard to investment buyers, Vallarta just doesn’t have the foreclosure or distress properties to the extent that can be found in the USA. Properties here were purchased primarily with cash, so unless the owner is over-extended back home, there is no need to sell at this time. This traditionally has been the case for Vallarta in other downturns in the market.

Renting More Common

There are more owners entering the rental marketplace now. Budgets are tighter and owners who would not have rented in the past are doing what they can to cover HOA and utility expenses. This is flooding what is an already saturated market. Short-term renters realize this and are bargaining, obtaining good rates. While rates will most likely go down, homeowners who wish to rent will need to offer not only better prices but also better services and extras, such as full maid service, a chef and/or bundled extras such as golf rounds, massage service and restaurant coupons.

Security a Concern

With the increase in violence in Mexico between rival drug cartels and the police and soldiers trying to suppress them, along with the coverage it has been receiving in the American press, it’s understandable that people are concerned about security. However, the violence is concentrated mostly along the border and around Mexico City and has not affected Americans or Canadians living here, especially in this region of the country. Yet, no matter how safe it may be, there is no question that the US media coverage of this, and in our opinion, over sensationalizing it, is affecting the real estate market.

Lowered Expectations

Coming out of this past recession, Americans have considerably lowered their level of expectations. The over-exhuberance, the rush to use credit, feeling richer than perhaps they actually were, is mostly over. In its place comes a more realistic prospective homebuyer who realizes that big is not always better and that they can actually get buy with a lot less in regards to their home size and still have a great second home in Vallarta experience. As mentioned earlier, buyers are now coming to the market with the idea of a price they are comfortable with investing as well as how much they can afford for monthly living expenses such as HOA fees and all that goes with owning a home. They realize they don’t really need the extra bedroom, especially when they see the difference in price, for both the purchase price and the maintenance fees. They see the extras such as gyms or concierge services at condo projects not as nice amenities but as unneeded extra carrying costs. The Baby Boomers, who continue to be a large part of second-home buyers in the region, still want a second home somewhere warm during the winter, however, their expectations of what they need are just more in line with what they can afford or should be investing.

An interesting trend that has come out of this is people are looking at what are traditionally non-tourist type properties. Not social housing but a step above. They are gated communities of usually townhouses that can provide a home of a decent size at a very affordable price, usually under $150,000. The most popular region for this is in and around Nuevo Vallarta and Flamingos.

More Diversified Market

Five years ago the tourism real estate market was comprised primarily of American buyers, with some realtors estimating as high as 75%. Today, after the downturn in the US economy and the rise in value against the dollar for both Canadians and Mexicans, its leveled out so that its evenly distributed between the three groups. In 2010 it was the Canadians and the national market that kept realtors in business. Where Canadian buyers are buying real estate in regions all along the bay, Mexicans prefer areas such as Nuevo Vallarta or the Hotel Zone highrises. They already have what many Canadians or Americans are looking for, the quaint villages with plazas and cobblestone streets back home in or near Guadalajara or in the Bajio region, they want something that looks more like Miami.

Mega-Home Market

As in the USA, 2003-2007 saw the average size of homes increase substantially, and the building of mega-homes of “McMansions”. Vallarta was no exception with some incredible homes built during this time, especially along the North Shore of Banderas Bay. Although few of these homes actually came on the market, when they did they were testing the market between $10 and $15 million. Nothing ever sold for that and for the few that did most recently, it was for a serious discount. At the current time there is little interest in this part of the market. It involves a serious investment that for those that can do it, don’t seem to be willing to do at this time. One architect I talked to recently, who specialized in this segment of the market, said its dead and does not think it will be coming back for quite some time. He’s now designing condominiums projects; with a lot less amenities involved.

The “911” Trend all over again

One realtor had an interesting take on a trend he believes is currently evolving. When 911 happened it was thought at the time that this would certainly slow down activity in the local real estate market. But it didn’t. Matter of fact, it helped fuel the largest real estate boom that Vallarta has seen. What came out of this was that Americans were shocked not just by the horrendous event itself, but some took it as a personal wake-up call–that it could have been them. Which got some thinking that they weren’t getting any younger, that perhaps instead of working more it should be less, they should be spending more quality time with the family, travel more and, perhaps by that condo they’ve been thinking about down in Puerto Vallarta.

The economic downturn that followed only elevated this sentiment. Which takes us to the Baby Boomers. They didn’t disappear, but for some their long-awaited retirement was unfortunately delayed. Now, with the economy seemingly getting back on track (the US stock market is up to nearly pre-crisis level), many have recovered any losses they incurred and can now more seriously consider retirement, or at least take further steps in the direction. Like buying a condo in Puerto Vallarta…

The realtor’s take is that a pent-up demand is being created – some people have called off buying, but many have just delayed it for awhile for reasons given early, but they still intend to buy. And each year brings even more that are holding off. But at some point, the moment is going to seem right for these buyers and there be a flood of them looking to buy real estate. Perhaps not a tsunami, but something significant.

As well, in today’s financial markets its difficult to find good places to put your money these days. So some are thinking, why not a home in a warm place where at least you can physically enjoy it, at prices that are looking quite good these days. He concludes that the recent uptick in activity he has seen is because the “demand” is now starting to come into the marketplace. We’ll be keeping an eye on this particular trend!


Vallarta Real Estate Trends 2011 – Part I

June 24, 2011

Following is the first of a two part series on real estate trends for the Puerto Vallarta and Riviera Nayarit markets, which will be featured in the summer issue of Vallarta Lifestyles.

Last year when compiling our annual real estate trends article, we saw the year as a turning point in the market, that the bottom of the cycle seemed to have been reached and it should begin to swing upwards as we moved into 2011. This seems to have been proven to be true, at least for the re-sale market. The number of sales have increased and the number of listings on the market reduced. For new product or development properties, they still seem to be working through this. But that’s natural after a downturn cycle in the market – recovery is led first by the re-sale market and then followed by new product as developers start building again.

Most realtors we talked to believe we are over the worst but it’s going to be a slow recovery continuing well into next year. The Vallarta multiple listing service, Multi-List Vallarta, seems to confirm this with average inventory levels dropping slightly 1,100 to 1,000 re-sale property listings this past season, with new property inventory (development projects) dropping slightly as well.

Below are trends we see currently taking place with regards to the local real estate market.

Its all about “Price Point”

This is the trend I hear most often when talking to realtors about the local real estate market, its no longer about price per square foot or square meter as was the custom in years past. Today, buyers have a price in mind of what they can afford or a limit to what they are willing to invest and they want to see what’s available at that price point. If they wanted two bedrooms but there’s only one-bedroom units available at that price, that’s what they’ll look at – just don’t try and get them to move out of their price comfort zone.

This has led, coincidentally, to one-bedroom condominiums becoming popular once again. You couldn’t give them away in 2007. Back then buyers wanted an extra bedroom or two for friends to visit, TV room or an office, and were willing to pay for it. Developers stopped including one bedrooms in their inventory or drastically cut back and instead started building three bedroom units. But no longer. They are popular once again as they meet the price comfort level for many. The most popular price range in 2010 was between $100,000 to $200,000. That not something a developer can provide, except with one bedroom units.

The same goes for maintenance or carrying costs for the property. Buyers also have a number in mind with what they can afford to pay monthly for the condominiums. And with one-bedrooms about 60% the size of two-bedroom unit, that means maintenance fees are 40% less. Another very good reason to consider a one-bedroom unit. Read the rest of this entry »

North Shore highway upgrade on the go again

May 28, 2011

I reported a couple of months ago that the improvements to the highway leading from La Cruz to Punta de Mita had lost funding and was not moving ahead. Well, it looks like its back on. The Nayarit congress met last Friday and voted to provide funding for the new highway. It actually will be a new highway as it will not follow the coast as it presently does, opening up  Nahui and other properties for further development. Nahui certainly has the most to gain having the road moved back a kilometer or so away from the coast.

Construction will start in July or August and the new road will basically go straight from La Cruz (alongside Alamar) and finish up at Paladium or the new part of the current highway. I understand that the new section will have four lanes. This is a big move for the North Shore, which could lead to other projects such as a medical clinic and hospital being constructed, now that the road is being upgraded. So let’s see what happens this summer…

Vallarta Real Estate Development Study 2011

May 27, 2011

In late April of this year we contacted a number of real estate developments in and around Banderas Bay to obtain information with regards to their inventory and how sales have been. Not all were as obliging as in years past to review how their sales had been in 2010, and considering market conditions, that was to be expected. However, since we knew their inventory levels from past years, we could obtain an approximate number of what their sales were.

It is always difficult to obtain clear, factual statistical information regarding real estate sales in the Puerto Vallarta region. It is difficult to substantiate information other than by comparing to information given in past years. We cannot ascertain the complete accuracy of these numbers and the statistics generated from them. We do our best to obtain the best information possible and where we have had doubts about the accuracy, we have asked through alternatives sources to confirm the information received. It is not the best system, but it is the best system we currently have to give us a portrait of the current real estate development market.

We contacted every development we could establish was open for business and came up with 136 projects. Seems like a large number, but we found that about 15%, (18) of them actually had less than ten units in overall inventory, while about 30% had between 11-50 units . Twelve of these projects had more than 100 units in total inventory, which also encompassed 1/3 of total units on the market. (Note: we had previously reported this differently, (and therefore incorrectly) that there were 44 projects with less than 10 units. For this we had calculated how many units they have in their current inventory left to sell, not their total inventory).

For these 136 projects, we calculated they have about 2,300 units actively listed for sale. This is down from a high of 7,200 in 2007. However, what needs to be taken into consideration is a “Shadow” market that exists of dormant inventory.

Since 2008 we have found that many development scaled back the size of their project, some cancelled, but many decided to only release product in phases. A good example would be Alamar. We originally included that this project had over 600 units for the market. However, they only released for three towers, and eventually even put the third tower on hold. This reduced the number of units they have on the market but this doesn’t mean this product will not be released sometime in the future. There are still around 500 units that at some point Alamar will decide to continuing building and introduce this product to the market.

We calculate that there are about 2,500 of the shadow, dormant units on the market. Fortunately they do not directly affect our market at this time, but any new developer considering starting up a new project in the region should be aware of this inventory. As much of it hasn’t been constructed yet, but the land most likely has been paid for, they have the flexibility of introducing product that is more relevant to today’s market, such as smaller units with less amenities.

As has been reported in past years, 2007 saw 53 new project come into the local market providing a total inventory of 5,400 units. In 2009 only eight new project entered the market with 200 units. In 2010 there were nine new project providing over 400 units.

In 2007 there were 1,620 new project sales (this does not include re-sale property sales). This diminished to 685 in 2008, 340 in 2009 and increased slightly to 430 in 2010. However, one project, a large one, informed us of sales substantially above the others, and we suspect that these numbers were inflated or involved trades.

When we considered where the inventory is located, 1/3 was in the Marina Vallarta/Hotel Zone region, another 1/3 in Nuevo Vallarta/Flamingos, the balance evenly distributed between the regions on either side of these two: downtown Vallarta and the South Shore, and to the north, the North Shore and northern Riviera Nayarit.

The market is particularly difficult for developers right now. They benefited heavily during the boom years but now many find themselves with product that is not what they market may be looking for, developed at costs that makes it difficult for them to be competitive. They find themselves competing with the re-sale market (which is seeing good activity) and in some cases, competing with re-sales in their own project. But more on that in a future post.

Crime Costly for Mexico’s Businesses and Economy

May 19, 2011

This article was recently posted in the Latina American Herald Tribune, following a number of other articles regarding how drug violence has affected doing business in Mexico for American companies.

 The wave of drug-related crime and violence in northern Mexico has affected key sectors of the economy and cut the gross domestic product by 1 percent, industrial security expert Alejandro Desfassiaux told Efe.
Crime is “the biggest risk factor that could limit economic activity in coming months,” Desfassiaux, who is president of the National Private Security Council, said.
The council is a trade group that represents about 200 security firms in Mexico. About 27 percent of businessmen are reconsidering their investments in Mexico, according to the latest survey conducted by the council, while 16 percent have suspended investing and 8 percent are considering shifting investment to other countries.
Some 88 percent of businessmen agree that the crime problem should be dealt with immediately, Desfassiaux, who is also head of security firm Grupo Multisistemas de Seguridad, said. Many businessmen have limited their trips to Mexico in response to the rising violence, the security expert said.
“Crime is affecting the economic performances of Chihuahua, Guerrero, Jalisco, Nuevo Leon and Tamaulipas (states), where murders related to drug trafficking have risen threefold to 18-fold,” Desfassiaux said.
The states most affected by job losses and business closings due to crime are Tamaulipas, Nuevo Leon, Chihuahua, Baja California, Baja California Sur and Sinaloa, all located in northern Mexico, the security expert said.
Only 23 companies opened in 2010, while 3,000 had opened in 2007, and many firms based in northern Mexico moved to other parts of the country, are being managed from abroad or reduced operations because of the drug-related violence, which has claimed the lives of nearly 40,000 people since 2006, Desfassiaux said.
Between 80 and 100 real estate firms closed in the border region, while in Monterrey, the capital of Nuevo Leon, the surging crime and violence “killed” medical tourism, which had been drawing from 60 to 70 foreign patients a month to the industrial city for surgical procedures of all kinds, Desfassiaux said.

“80-100 real estate firms have closed.” So far we have seen few offices close, but then we have seen very little of the violence these regions are experiencing (although you’d think differently from what the mainstream media is portraying). It IS bad in Monterrey, this is a place that has been severely affected by a major turf war taking place within the city limits.

Visits “have been reduced, on average, to one every three months,” Desfassiaux said, adding that tourism in the border region was down 10 percent. Nightlife in the border region has been reduced drastically, the security expert said.
“Patrons prefer to stay home, leading to the closings of 36 percent of restaurants and of 53 percent of nightclubs and bars,” Desfassiaux said.
The assembly plants, or “maquiladoras,” that dot the border region have also seen production fall, prompting management to try to cut costs to prevent the shifting of operations to other countries, the security expert said. Sales at shops and department stores have dropped by about 10 percent, Desfassiaux said.
“In 2010, output grew 5.5 percent in the entire country, the highest level since 2000, but the perception of crime does not just affect some sectors and the northern border, it affects the whole country,” Desfassiaux said.
Construction companies and real estate developers reduced investment in Mexico by 240 billion pesos (about $20.5 billion) last year due to the wave of violence, the security expert said.

Well, not solely because of violence. I’m sure the economic world crisis hasn’t helped any. But that’s a huge number. In Vallarta, we saw 50 new real estate projects start up in 2007, adding thousands of new condos to the market, whereas this year there were nine new products and most of these were quite small.

Vallarta Developer Real Estate Inventory

May 19, 2011

We recently surveyed many of the real estate developments around the bay to ascertain what inventory they currently have on the market and how it compares to year’s past. The graph below shows inventory levels since 2007. In 2007 it was substantially above the other months as a number of projects came online (more than 50). Also at this time, units were selling so quickly that we included total inventory for the developments and didn’t take into consideration if they were releasing in phases or not. In 2008 we did take this into consideration, which brought the number down to just over 4,000 units. It dropped further in 2009 and 2010, from sales (although not a lot), projects canceling or being put on hold.

Although developers now have less inventory on the market, they do plan to release these future phases when the market demands it. When we add up how much there is of this “shadow” inventory on the sidelines, it totals 2,500 units, nearly equal to the inventory that is currently on the market, or doubling it. Fortunately, since its on the sidelines it doesn’t effect the market at this time, but it sure should make developers who may be thinking of developing something at this time, to think twice, or at least   take at look at what this shadow inventory consists of, so they are not building something that some other developer already has future plans for.

North Shore highway upgrade on hold

April 6, 2011

At the beginning of 2010 it was announced that a new portion of the highway that leads out to Punta Mita from La Cruz de Huanacaxtle, would be re-directed to provide a more direct route to the point and also provide four-lane travel. The new departure point would be just before Alamar. Instead of making a left turn just after the light at La Cruz, you’d head to the right (with Alamar on your left-hand side) and meet up with newer section of the highway near the Paladium Hotel. The highway that now goes along the coast would only go as far as the condominium development of Aura – Arena Blanca; it would in essence now only function as an access road. By diverting the highway it would make the route more direct and shorter, but also allow for the development of Nahui, which encompasses this coastline, to have more uninhibited coastal property.

Well, it never happened. Then the project was resurrected at the end of 2010 and it was announced in early 2011 that construction would start in March. March has come and gone and the work has not begun. Last week it was announced that the funding appropriated for the highway was no longer available and it is not known when the funding could be available again.

Back to the drawing board.

UPDATE: Its a go again!