Housing Slowdown Leads to Shortage - And That's the Good News

Includes: HCP, NHI, NHP, VTR
by: Andrew Snyder

Last week I wrote about the very real possibility that the real estate market has reached its bottom. This week, the headlines are proving my forecast was dead-on accurate.

Just a few days after investors were wailed by talks of gloom and doom across all arms of the economy, the situation in the real estate market is looking much, much more positive.

In fact, some experts are predicting a serious housing shortage in the not-so-distant future.

Think about it. Right now, there is not one builder out there that is certain of his future. Over the past five years, business was booming. Now, finding folks willing to invest in building a new home or fixing up an existing home is an ever-growing challenge.

Making matters worse, when a builder does find a willing buyer, the tightening of the credit market makes it nearly impossible for him or his buyers to get the needed cash to start the project.

The market mess is creating a black hole in the building industry. Construction sites are empty. Equipment is gathering dust. And weeds are growing tall on proposed building sites.

Damming the waters

With nobody wanting to build now, it means there will be no new buildings in six months, one year, or even two years. When the economy finally rebounds, the building industry will be a laggard.

That is the best news in a long time for the real estate industry, as it will create a serious housing shortage. Thanks to the market’s horrific downturn and eradication of all new building prospects, we will see a major upswing in the real estate market in less than two years as demand rises and supply shrinks.

The shortage will create all sorts of investing opportunities, especially in the industrial and commercial real estate sector, where new projects often take three years or more to complete from ground breaking to ribbon cutting.

Unless you happen to be sitting on a few hundred acres of industrially zoned land, you will have to find another way to take advantage of the coming boom.

Fortunately, real estate investment trusts (REITs) offer an easy and effective way to take advantage of industry up-ticks. Find the right one (there are hundreds of them out there) and you will get a steady stream of dividend income and the potential for the long-term appreciation the real estate industry is known for.

Is there a doctor in the house?

As I mentioned, the current halt to nearly all new building activity will be most pronounced in the commercial sector. Still, that is a huge section of the market with a lot of great opportunities and some not-so-great opportunities.

Many commercial REITs focus on the nation’s retail-store sector. These investments do great when the economy is rolling, but flat-out stink when the market slows. You can do much better in the world of REITs than investing in retail properties.

The area you need to focus on is the nation’s growing healthcare industry. The huge Baby Boomer generation is getting older. Hospitals are expanding at record paces. And more long-term care facilities are desperately needed.

It is a great opportunity for healthcare-focused REITs like National Health Investors (NYSE:NHI). The company owns over 150 healthcare facilities, consisting of long-term care, retirement homes, and assisted living facilities.

National Health is not alone in this profitable sector. REITs like HCP Inc. (NYSE:HCP), Ventas Inc. (NYSE:VTR), and Nationwide Health (NYSE:NHP) are all major players.

What makes National Health stand above the crowd, especially in a highly unstable credit market like this one, is its very low levels of debt. (Its 8% annual dividend doesn’t hurt, either.)

As of last quarter, the company has just $22 million in short-term debt on its books. Meanwhile, it has over $94 million in cash. That means you will not be hearing of emergency capital infusions or liquidity problems anytime soon. National Health has a very strong balance sheet.

As this market mess plays out and the nation’s real estate industry rebounds, investors will begin to realize there is a serious shortage of newly constructed commercial buildings. The shortage will raise prices for properties across the industry, especially in the growing healthcare sector.

Do some homework, take a look at REITs like National Health and invest appropriately. In less than 24 months, you will be very glad you did.

Disclosure: none