Question:  With the recent change in the housing market, where is the growth right now?  What types of properties should I be looking for as an investor?

Answer: The real estate market shifted dramatically in the last 18 months. And I think it really just serves to highlight the old adage, the more things change, the more things stay the same. Even after last year’s phenomenal growth I continue to be bullish and excited about Arizona real estate. Have my buying criteria changed? Yes. I think the recent growth presents some new and different opportunities that weren’t there two years ago. I do, however, still feel that single-family homes are the bread and butter that should form the bulk of the average investor’s portfolio.

Follow the Money

Three significant changes have occurred over the past year, however, that I think warrant mentioning. First, so much wealth was created in real estate last year that I think there will have to be a new outlet for that wealth through real estate. I know quite a few of my investor clients and partners realized several million dollars of growth last year. That new wealth base, combined with the amazing growth of Maricopa County over the past few years has led to a new age of commercial investors.

These commercial investors are taking advantage of ownership and acquisition flexibility that didn’t exist just a few short years ago. Office condos and other opportunities such as TICs have made high-end commercial investments available to a smaller investor. And the smaller investor has greater resources than ever following last year’s value increase.

That’s why I recently refocused much of my personal portfolio into high-quality commercial projects. I believe that the right commercial investment will be my highest performing assets over the next 4 or 5 years. It’s been a while since commercial values really jumped in the Valley, and I think we are at the very tip of that movement after last year’s residential run.

Plus, we finally have the local wealth base to fund the commercial growth that is so overdue. Even those homeowners that don’t directly invest their newfound wealth into more real estate will indirectly contribute to the new commercial growth. More and more consumers are refinancing their homes and taking equity out for consumer spending. And while I’m not a huge fan of this practice, it is helping to drive local commerce and creating expanded business opportunities for new and existing business. This, again, supports the commercial growth I project over the next 4-8 years.

Hot Spot, Anyone?

A second interesting trend I am watching closely and invested in heavily are some of the very attractive satellite markets to Phoenix. My absolute favorite of these markets is in Prescott. Just and hour away and much cooler, there has been spectacular growth in the Prescott Valley. More and more Californians and Arizonans alike are purchasing primary or secondary residences there.

Those are all great indicators. Add to that the fact that the area is surrounded by forest service and BLM land that cannot be developed and I can’t help but think that Prescott could be our next Sedona. Look at what happened to property values in Sedona once they ran out of available land to develop. The value surge was spectacular. I envision that Prescott will follow a similar path as development space and resources become more limited.

For now Prescott is a briskly growing community with very attractive fundamental indicators. It’s still ahead of the curve, however, because once the land starts tightening up the values should spike dramatically. It’s a good value if nothing changes. It’s a home run if I’m right.

Follow the Money, Part II

The last change in what I’m advising my clients to acquire is directly related to the value growth of the past year. As home prices grew it created something of a dead spot in the market at the low end of middle class housing. This is the area of housing that was most affected by investors in the last two years. Lots of smallish single-family homes are sitting stagnant on the market right now because there is so much product available and not enough buyers to take up the slack.

I think a lot of people are disappointed with what $200,000 – 275,000 buys them these days in a single-family home. Housing values have grown significantly, but right at that median home price you have a segment of the market where their wages haven’t caught up yet. And that’s why I have changed my investing criteria at that level.

I am still investing in quality-single family homes above the $400,000 price point. I think they will continue to do well. However, at about $325,000 and below I think a higher-end condo will outperform a similarly priced house for the next several years. Combine that with other factors, such as rising fuel prices, and some of the nice condo developments with great locations become even more attractive.

In the past I’ve always held that I’d rather have a quality single-family home and have never invested in condos at a high level. Recently I see a large gap in the market that can only really be filled by the luxury condo market segment. And I like it. I am, however, much, much more particular when condo investing.

Money Where My Mouth Is

To be clear, I am firmly of the opinion that real estate investment in quality properties will continue to be a very lucrative investment. It will be different from the past few years, but you just have to know what to acquire.

I am acquiring Class A office condos in strategic locations, quality single-family homes $500,000 and up in Maricopa County and Prescott and higher-end condos below my single-family threshold. It’s a strategy I think will return phenomenal results for the next phase of the real estate market.