Costa Vallarta Real Estate Trends 2008-2009

I’ve been writing these articles for the past five years — five exceptional years, where the real estate market experienced rapid growth, appreciation and demand. In last year’s article, I reported that a downturn seemed to be approaching. Today, while updating and writing this report, there is no doubt that the market has slowed and the USA is most likely in recession.

Is there good news out there? I believe so. I feel that this is just a minor market downturn for Vallarta, a switch from being a seller’s to a buyer’s market, and will be only temporary.

Vallarta is fundamentally a strong market with a lot to offer second-home buyers. Although it’s been somewhat of a roller coaster up to this time, a slowdown can be a welcome trend, allowing infrastructure to catch up with private growth, although most developers would beg to differ!

Transition from Seller’s to Buyer’s Market
Between 2002 and 2007, Puerto Vallarta experienced an incredibly active market, certainly a seller’s market, as anything that came onto the market sold. The latter half of 2007 was a time of transition, as sales slowed down but inventories continued to increase. The MLS inventory grew, and new development projects continued to come online. At the halfway mark of 2008, the number of properties listed in MLS has stabilized over the past six months. And for the first time in five years, we are not seeing the announcement of new developments. Some have even scaled back their project, put it on hold if they haven’t broken ground yet, or decided to release units in phases rather than all at once.

During the past five years, there was a sense of urgency on the part of prospective purchasers in many developments. This is gone, for the most part. Buyers are taking their time before making a decision. In most cases, unless developers/owners start discounting, the unit will still be on the market next month, so they don’t have to make an immediate buying decision.

This, then, has completed the transition from a seller’s to a buyer’s market. How long will it last? It is my perception that this is just a minor market adjustment. The US credit crisis will pass, and the US election will (finally) end, but in the meantime, Canadians and Mexicans will continue to buy real estate. The fundamentals and the advantages of Vallarta’s real estate market are still there. That hasn’t changed. In some cases, as in the rise in the price of oil, these fundamentals actually become stronger, as we mention in this article.

US Credit Meltdown, Shoulder Year with US Election
The primary reasons for this slowdown have been the economic credit meltdown in the United States that started over a year ago, as well as the fact that this is an election year. It seems that there is still some correcting needed in the economic and credit markets. Hopefully, by the time the election is over at the end of the year, the worst of this credit crisis will also be over.

This all began with the now infamous sub-prime mortgage crash in the USA, something Mexico missed because there is no existing sub-prime mortgage industry, since the mortgage industry is relatively young. Nonetheless, the US crash affected real estate tourism in Mexico indirectly. Although many people were purchasing in “cash,” they frequently were using funds obtained from the equity in their US homes, through re-mortgaging, second mortgages or home equity loans. It still remains to be seen how this will play out in Mexico for Americans who refinanced and then begin to experience negative equity in their US homes. The way home prices have been falling, this will certainly happen to some recent purchasers, especially in states such as California, which has traditionally been a strong market for Vallarta homebuyers.

Canadian Purchases Increasing
The Canadian dollar has been on par with the US dollar for the better part of a year. The Canadian economy is healthy. The province of Alberta, rich in oil sands, has experienced strong growth, especially with the rise in the price of oil. Many realtors and developers say they are selling to Canadians much more today than they have in the past. Traditionally, Canadians have tended to purchase in the middle to lower end of the market, but realtors are reporting sales at all price points. Canadians have money, and many of them are Baby Boomers looking for a warm place to have a second home.

Vallarta looks attractive, since this city has traditionally been a favorite with Canadians. Additionally, other strong Mexican markets, such as Los Cabos and the Cancun region, are viewed by many as mere extensions of California or Miami Beach. Canadian purchasers tend to prefer a “more Mexican” destination. And as the slogan for this city goes, Puerto Vallarta is where “Mexico comes alive.” This is an advantage Vallarta has over other destinations, and it will certainly help real estate sales in our area as the Americans resolve their economic problems and work through their election.

National Buyers
It is not just the Canadian economy that has done well. Mexico’s economy has also shown strong growth over the past few years and, along with Canada, has not experienced the credit crisis that the USA has. The Mexican mortgage market is not overextended and is still in its infancy, mortgages just recently becoming available for Mexicans to purchase real estate.

Vallarta is a strong market for residents of Guadalajara (second largest city in Mexico) and “El Bajio” (industrial heartland of Mexico). Riviera Nayarit and Puerto Vallarta are the closest beach destinations for these two large urban regions. This is something that the other two strong tourism real estate destinations, Los Cabos and Cancun, lack. They don’t have a national market to draw from, since they are far from major Mexican cities, and one needs to fly to get there, for the most part.

An interesting national trend is that INFONAVIT, the Mexican government’s housing program, which offers financing for national homebuyers, has recently become involved in the second-home market. Traditionally, they have only offered financing for primary homebuyers; however, they are now tapping into the demand from middle-income Mexicans who would like a second home at the beach. Homex, a very large homebuilder in Mexico, whose stock is traded on the New York Stock Exchange, recently started offering tourism real estate products as well.

As the American purchaser has pulled back, Mexican purchasers, along with Canadians, have continued to be buyers for this region. This will certainly help Vallarta weather this slowdown better than other destinations, as was the case in the slowdowns in 1995 and 2001. Puerto Vallarta is a more diversified market, drawing from national, Canadian and US buyers.

High-end, Low-end and Wholesale Properties Are Strong
Realtors and developers are reporting that the upper side of the high end of the market is still relatively strong, as is the demand for lower-end properties. It’s the “in-between range” from $250,000 to $2 million USD that has been most affected, obviously a large part of the market. Developers that saw this coming, and there were a few, made changes to their product offerings by delivering a lower-priced product and are still selling relatively well. At the higher end, over $2 million, sales have never been as active, and that is a high price point for Vallarta. Although sales activity is still relatively strong, any sense of urgency is no longer applicable.

Realtors who work with large, raw land tracts say they are busy and that there is strong demand for this product. Purchasers of land are thinking more long term and considering what will happen once the current downturn in the US economy ends. When the market picks up again, they intend to be ready. This positive trend continues to take place, since very large investors are extremely bullish about Mexico and this region for the future.

Need for Administrators and Property Managers
All the real estate that has come onto the market during the past five years has been a boon for the home decoration industry, since all these homes and condominiums come unfurnished. The number of furniture outlets has increased dramatically, as has the demand for interior designers.

Another growth sector, often overlooked, has been the need for quality, professional property managers and administrators. The traditional condominium building in Vallarta was a relatively no-frills operation, with relatively few amenities and services offered, administrators being basically bookkeepers with some maintenance experience. Today, many condominium developments are being sold with rental programs, spas and business centers, etc. thus, the administration of these properties has become much more complex and demanding than ever before. Just the sheer number of new projects alone has created a strong demand for good administrators.

This is an important and integral part of the buying process and affects the overall satisfaction and happiness level of new homebuyers in Vallarta. Many will only be here part of the year, and they want to know their unit will be taken care of while they are gone and everything will be working properly when they return. And those who have chosen to rent out their unit need to be sure the units are ready for arriving renters.

Many developments prefer to separate common area and private area demands and expenses. The administrator of the HOA concentrates on the common areas. This has created a demand for property managers, who take care of the needs of the individual owners. Rather than being onsite, like the administrator, they are off site and often take care of units in multiple projects. It is not uncommon to have four or five property managers working in one particular project, each attending to the needs of individual owners. Their duties range from fundamental services, such as making sure everything is functioning well when the owner arrives, to full rental service, which includes picking up or meeting the renter, supplying food provisions, and organizing services such as massages, tours and activities. The industry has had to learn to find a way for these two entities to work together. Again, both are essential for a healthy real estate market.

Administrators now need to be much more experienced in all facets of property management (common areas), be bilingual and function in many ways more like a hotel manager than a traditional condominium administrator. This has created a demand for highly qualified people in the industry.

Developments: What’s Your Unique Selling Feature?
This was mentioned in last year’s trends article, but is even truer today. With so many new developments under construction, there have never been so many options and choices available. This is going to make it more difficult for developers, since they need to have an edge on the competition or their units aren’t going to sell, or at least not as quickly as they would like. We have seen developers offering extended short-term financing and special property amenities, such as gyms and spas, clubhouses, even a new vehicle with the purchase of a home or condo!

These amenities can certainly sweeten the deal, but it really comes down to who can best offer the style of life, the “lifestyle,” that prospective purchasers are looking for. People want more than a condo or home; they want special services that traditionally were only available at a luxury hotel. In-project concierges are becoming popular and very appealing for homeowners who are only using their properties for short
periods of time. The concierge can arrange restaurant recommendations and reservations, as well as tours and activities. Personalized service is becoming more and more important. It’s not just about the home or condo anymore; much more is taken into consideration. Some projects are offering this type of service in-house or contracting it out.

High-end hotels noticed this trend early, and many are now offering a real estate option on their properties. The Four Seasons at Punta Mita has the Four Seasons Villas and fractional ownership, and the new St. Regis also will have real estate available. Smaller boutique developers, such as El Banco, are offering a similar package of a boutique hotel with upscale real estate and the option of having all the services the hotel has to offer. It’s a strong trend, and I suspect we will be seeing a lot more of this going forward.

Oil Prices?
How does the price of oil affect real estate tourism? The price of this commodity is certainly going to affect the cost of flying. People are going to be looking for places closer to home where the cost to visit frequently won’t affect them as much. That could be a place within the USA or, at least, close by, such as Puerto Vallarta. The increase in the price of oil will have a greater effect on recently emerging real estate tourism markets, such as Panama, Costa Rica and South American countries. Thus, the rise in oil prices can actually be seen as a positive for Vallarta. Again, being so close to major US markets, and being the closest alternative outside of the USA for Canadians, is a great advantage for Mexico.

Infrastructure Catch-up Time
Anytime you have the growth we have experienced in Vallarta for a prolonged period of time, infrastructure will be strained and have a difficult time keeping pace. Currently, there is work being done to establish a strategic town plan, one that has gone through many changes over the years as the region continues to evolve but needs to be finalized and put into action.

There are plans currently in place on a state and federal level to improve the highway system in Nayarit to the north leading into Vallarta and to the south to Costalegre. A periférico, or by-pass around the city, is also planned. This would eliminate traffic that is just passing through Vallarta and would also alleviate traffic congestion along the South Shore for neighborhoods such as Conchas Chinas and further south to Mismaloya, ultimately becoming a secondary road, primarily for people who live in this region. Improvements in highways to the north and south will also make access to developing regions easier. Sayulita, San Pancho and Lo de Marcos would all be within an hour’s drive, and Costalegre will be ready for future development.

There is already major work being done on the road from El Tuito to the coast. With the by-pass, highway improvement and this road, the Costalegre coastline would be only an hour from the airport. Unfortunately, this isn’t really a trend, as most of this, except for the road from El Tuito to the coast, is just in the planning stage. Hopefully, before the market picks up again, these much needed projects will be well underway.

Need for Industry Conciliation
At the Vallarta Lifestyles Real Estate Conference in May, there was much discussion regarding how the real estate industry needs to become more united, to work with all relevant market sectors. Developers and realtors need to work together and understand each other’s wants and needs, problems and challenges. As mentioned, professional management and administration is essential for a healthy market. Purchasing real estate doesn’t end with a sale; in many respects, it just begins. People want their investments to be taken care of and at a higher level of management than has been traditionally asked for. This is a demand that needs to be met, and realtors and developers need to work with this sector to ensure their clients will be taken care of.

Thus, there are three vital entities in the equation: developers, realtors and administrators. Currently, they are working independently, for the most part. Although there is an association of realtors (AMPI) and one for administrators, there is nothing for real estate developers. And there definitely is not enough dialogue between these three stakeholders. For the industry to be healthy and successful, this needs to be addressed. Whether this will be accomplished through AMPI (probably the most logical solution) or via a new entity remains to be seen.

Perhaps with a slowdown in the market, realtors, developers and administrators will have the time to address these issues. As a united industry, they could work on issues such as marketing and public relations for promoting the industry and region as a whole, lobbying local governments regarding development issues, and providing ongoing training and education for both realtors and property administrators.

Primary Benefits and Advantages Still Strong
Although 2008 will certainly be slower than 2007, the prospects for 2009 are good. The fundamentals for Puerto Vallarta and Nayarit’s real estate market are still there, and they off er strong advantages with excellent benefits. I think they are worth going over once again.

1. Vallarta is well positioned geographically for American, Canadian and Mexican second-home buyer markets. It’s easy to get here, with service from major airlines in just a few hours.

2. Vallarta’s weather is exceptionally good, offering temperate waters, mild temperatures and sun most of the year, with rain concentrated primarily in the off season.

3. Baby Boomers, their wealth and the transfer of their parent’s wealth to their bank accounts are still a reality, and looking for a second home somewhere warm is a priority high on their list.

4. The cost of living is still well below that of the USA or Canada, and property taxes are much less expensive.

5. Although prices have risen over the past five years, providing strong appreciation, local prices are still competitive with other beach destinations. And Vallarta offers a wide range of pricing and product availability, with everything from $100,000 USD condominiums to $5 million USD homes. There are houses, condos, townhouses and fractionals situated on the beach, hillside, golf course, marina, downtown or on an isolated stretch of coastline. The variety of production, location and pricing cannot be matched.

By Courtesy of Vallarta Lifestyles Publishing Group

Published Aug 4, 2008 - (Updated Feb 11, 2009)