Zeitgeist – Sign of the Times

Top-Performing Cities of 2015

The Milken Institute recently released its 2015 annual report identifying the nation’s top-performing cities based on factors like job creation, wage gains and tech growth. Overall, 2015’s macroeconomic story featured strong consumer spending, increased real estate development and an economic softening for cities whose economies are highly dependent on energy. We’ve included the list of the top 10 cities and highlighted some of the interesting results below:

TOP PERFORMING LARGE CITIES OF 2015

Metropolitan statistical area (MSA) 2015 Rank 2014 Rank Change
San Jose-Sunnyvale-Santa Clara, CA 1 4 +3
San Francisco-Redwood City-South San Francisco, CA 2 1 -1
Provo-Orem, UT 3 3 0
Austin-Round Rock, TX 4 2 -2
Dallas-Plano-Irving, TX 5 9 +4
Raleigh, NC 6 5 -1
Seattle-Bellevue-Everett, WA 7 11 +4
Portland-Vancouver-Hillsboro, OR-WA 8 16 +8
Greeley, CO 9 14 +5
San Luis Obispo-Paso Robles-Arroyo Grande, CA 10 24 +14
Source: Milken Institute

Western Dominance: Of the top ten cities, seven are located in the western U.S as the West continues to dominate in job growth and technology-related services. California secured six of the top 25 spaces, the most of any state.

Biggest Gainers/Losers: Las Vegas, boosted by an expansion of gambling and tourism, is among the top 25 biggest gainers moving from 144 in 2014 to 86 in 2015. Los Angeles, suffering from a decline in international trade, is among the biggest decliners dropping from 42 to 77.

Freezing But On Fire: Fargo, ND maintained the #1 position among small cities for the second year in a row due to its strong, diversified economy. (Editor’s Note: Good for Fargo! But we’re still not leaving San Diego, which moved up three spots from 22 to 19 in the large cities category)

Four Reasons We’re Optimistic about 2016

1. Good Signs for the Daily Grind – In 2015, job gains in the U.S. topped 2.65 million. According to the Bureau of Labor Statistics, the last time more jobs were created in a two-year period was at the height of the dot-com boom from 1998-1999.

2. The Renters are Coming! The Renters are Coming! – According to Zillow, the U.S. saw a 1.8 million increase in renter households in 2015 and renters paid almost $20 billion more in rent than in 2014, a whopping $535 billion for the year.

3. A Rising Tide of Confidence Lifts All Prices – According to the most recent S&P/Case-Shiller U.S. National Home Price Index released in December, home prices rose 5.2% year-over-year as of October 2015. Average prices rose in all 20 major markets tracked by the Index, indicating a wellspring of confidence in the U.S. economy.

4. The U.S. Housing Market Raises the Roof – On December 30, Freddie Mac released its Multi-Indicator Market Index (“MiMi”), which measures the stability of the nation’s housing market. The MiMi value now stands at 81.9, indicating a strong and stable housing market and a 6.3% improvement year-over-year.

Interest Rate and Capitalization Rate Correlation

Rising Interest RatesAs we all have heard, the Federal Reserve raised interest rates 25 basis points in December, marking the first increase since June 2006. Interest rates are still historically low and an uptick in interest rates does not always mean an increase in capitalization rates (aka “cap rate” – the industry standard for valuing real estate by dividing net operating income by the sales price) and corresponding decrease in real estate values. We, too, lose sleep over interest rate increases. Looking ahead, we expect the impact of interest rates to be muted as to cap rates since part of the increases are already baked in the cake by virtue of historically high interest rate/cap rate spreads. Other significant drivers such as employment and population growth trends, transaction activity and supply and demand also play a major role in cap rates and real estate values.