New Urbanist Investing Philosophy
Sunday, July 20, 2008
New urbanists have been around since the early 1980s. The goal of new urbanists is to reform the way we use develop and use real estate. If you've ever played the video game Sim City, you know that there are three options in the game for developing land: industrial, commercial, and residential; the three can not be mixed. New urbanists do exactly that: mix different types of real-estate to create neighborhoods where you can live, work, eat, shop, and walk everywhere - no car required. This type of lifestyle is already becoming popular, and will continue to grow in popularity and necessity. I believe there are three trends that will develop and I have a few ideas for investing profitably based on them.
Suburbs will slowly decline - the first trend is the move of people out of suburbs and into urban areas. The decline of suburbs will be attributed to a number of factors, including declining home values on the fringes and increasing energy prices. Living in a big home in the suburb means you need more fuel to heat it in the winter, electricity to cool it in the summer, water and gasoline for the lawn, and fuel to commute long distances every day. Companies that rely on fringe suburbs for growth like Centex (NYSE: CTX) and Pulte Homes (NYSE: PHM) have already suffered and may never recover. Centrally located shopping malls will probably decline and eventually disappear, replaced with shops in urban neighborhoods. REITS like Simon Properties (NYSE: SPG) and General Growth Properties (NYSE: GGP) will have a difficult time maintaining growth and profitability.
Car culture will erode - General Motors (NYSE: GM) is trading at 30+ year lows, and some on Wall Street think one of the big three automakers will fold in the near future. Public transportation usage is up and will become a major growth market. Since transit systems are almost exlcusively owned and operated by governmental organizations, there will be little ability to invest directly. New urbanist neighborhoods can and should be planned around transit systems, using cities like Arlington, Virginia as an example. Companies like Zipcar and U Car Share will continue to grow subscribers as individuals opt for short-term rentals rather than full car ownership. It is very possible that automakers are grossly over-estimating the demand that Generation Y will have for car ownership (domestic demand for cars likely peaked in Generation X and is on its way down).
Demand for housing rentals will increase - credit will be increasingly difficult to obtain, especially in light of the trouble at Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and fewer will be able to afford to purchase homes or condos. As the housing market becomes less liquid and individuals are less willing to take on the risk of owning a home, they will opt for rentals instead. Apartment and mixed-used REITs in urban areas like Post Properties (NYSE: PPS) and Camden Properties (NYSE: CPT) will benefit. Picking stocks in that industry is slightly tricky because some have more competent management, better balance sheets etc. and frankly I haven't done a great job examining them yet.
These are trends that will occur over the next decade or more and therefore should be considered long-term investments. The scenarios probably will not play out exactly the way I describe, but I am confident that they will prove mostly true. As always, some companies will perform better than others, but diversifying or using ETFs will get you a good cross-section of an industry.
Posted by Rob Pitingolo 8:11 PM
