Real Estate Update 2005 - 2006
By John Youden
Summer-Fall 2005

The growth of the Vallarta real estate market continues to be very strong, with sales tripling for the local real estate association’s MLS (Multiple Listing Service) and doubling for developers compared to the 2003-2004 season. This type of growth is unprecedented for Puerto Vallarta and their doesn’t seem to be an end in sight. If anything, as many realtors and developers state, there are strong reasons to believe it’s here for awhile. “This is just the beginning of something really big. We haven’t even got going yet,” says Wayne Franklin of Tropicasa Realty and the president of the Vallarta real estate board.

In 2004 there were an estimated $300 million USD in new construction sales and nearly $100 million USD in sales for the MLS service. That total of $400 million is destined to be surpassed in 2005, with $250 million in sales already registered by developers and realtors as of the beginning of June. Roughly two-thirds of this new development is condominiums. Larger projects of 150 or more units are being built around the bay, with smaller boutique projects scheduled for the South Shore as space and availability allow.

Strong demand has created a weak supply of both homes and condominiums in the $300,000 - $400,000 USD price range. Most condominium developments’ starting point for view properties is now at or above $400,000. The increase has been driven by a demand for larger units and better quality construction and finishing. Units with more than 3,000 sq. ft. are now common, whereas 10 years ago it was a 1,500 sq. ft. cookie-cutter, two-bedroom standard unit. Buyers now expect full ensuites, Sub-Zero appliances, marble flooring, a third bedroom and perhaps a TV/study, as well.

Although the strong Mexican economy has created a market for national buyers once again, the buying that is taking place is predominantly by Americans, especially on the North Shore, Nuevo Vallarta and along the hillsides of the South Shore. The new condominium towers in Marina Vallarta and now in the Hotel Zone, however, are the preferred real estate choice for the national market.

Across the board, most realtors say the buyers they are working with today are more sophisticated, less intimidated by the trust/purchase system and ready to make a buying decision quickly. Today’s buyers come into the office with a good understanding of the market, so less time has to be spent explaining how purchasing real estate in Mexico takes place. They have a lot of confidence in the Puerto Vallarta real estate market and are ready to make a buying decision.

Why is the market so strong?
There are many reasons the market is so strong. It can be attributed to hurricanes in Florida and tsunamis in Indonesia. The 9/11 disaster is partly responsible for making people think about their future, about having a vacation home somewhere warm, where they could drive back home if need be. The burst of the Internet bubble and crash of the stock markets have people looking for alternative investments. The size of the US debt, social security issues and an out-of-control trade balance have people concerned about their financial future.

In Mexico the economy is surprisingly robust. The budget deficit has been reduced each of the past four years, and a balanced budget is expected in 2006. Economic growth is well on track, expected to exceed 3.88%, and inflation should drop below 4%. So far this year, the peso has proven itself to be stronger than the US dollar.

Why Puerto Vallarta? The variety of real estate available by price, type, area and location make Vallarta very desirable when compared to other destinations, such as Los Cabos and Cancun. But the primary reason is the people. Carl Timothy of Timothy Fuller & Associates explained this very well, “When you are in large cities, such as Los Angeles or New York, you feel that people just want something from you, the people are takers. In Puerto Vallarta it’s the opposite; the people are giving, and you can feel that throughout the community.” Therefore, it is primarily the people of Puerto Vallarta that make it such a wonderful destination for tourists and second-home buyers.

Trends for 2005-2006

#1 Younger Buyer Profile
There is much talk about the aging Baby Boomers and how they will be spending their time and money as they enter retirement. And their numbers are remarkable: There are 70 million of them, and they control more than $7 trillion USD in wealth in the USA – 70% of the total. They are the most financially wealthy generation of mature consumers the world has ever seen.

And what do they want? Well, a second home in a resort area seems to be high on the list. We have experienced their influence with the development of condominiums consisting mostly of three-bedroom units. Ten years ago the mix was basically just two-bedroom units. A good example is Marina Vallarta, where it is difficult to find a three-bedroom unit. Very few were built, and the few that do exist are the result of purchasers joining together two units to create a three- or four-bedroom condominium. Today, projects such as Punta Vista, Hacienda de Mita, Shangri-la and many others are nearly exclusively three-bedroom condominium projects. The Baby Boomers are traveling, and when they do they like to take the family with them.

An interesting trend is evolving regarding how Baby Boomers are living their lives, especially the younger Boomers who are still in their 40s. With life expectancy surpassing 75 years, they are not waiting until their 60s to begin some form of retirement. In the past, aging patterns have been linear, following a set trend of raising a family in the 20s and 30s, building investments during the 40s and 50s, and retiring in the 60s. Today, we are seeing Baby Boomers deciding to “semi-retire” early, but to continue in the work force in some manner.

This trend, which was recently written about in the “Harvard Business Review” by Ken Dychtwald, who has a book about the subject coming out soon, is exactly what is being reported by realtors. Their buyers are younger, in their 40s, and are perhaps financially capable of retiring or close to it, but have no intention of doing so quite yet. So they do a preliminary semi-retirement, spending more time at a second home or perhaps even moving the family to the second home for a year or two for a cultural experience. The kids pick up a second language, while dad commutes back and forth. And while they are in Vallarta, they continue to be active with further real estate investing. For others, it involves taking a few years off to build a home and enter the job market later on, perhaps returning to their past employer on a part-time basis or as a consultant.

“They’re looking for different blends – three days a week, for example, or maybe six months a year. Many want or need the income, but that’s not the only motivator. People tend to identify strongly with their work, their disciplines, and their careers. Many wish to learn, to grow, try new things, and be productive indefinitely, through a combination of commercial, volunteer, and personal pursuits.”

This quote from Dychtwald’s article is basically how local realtors describe their buyers recently. They are not retiring in the traditional sense, but are taking a mid-life break to try something different, perhaps to return to work later on, although most likely in a different manner than before.

#2 Downtown is Trendy
In the late ‘80s and early ‘90s, when Marina Vallarta sales were going strong, sales for the downtown neighborhoods of Los Muertos, El Cerro and Gringo Gulch were adversely affected. These markets remained quite stagnant right up into the late ‘90s. Today, the downtown areas are hot, described by Silvia Elias of PV Realty as “trendy.” “There is such a lack of supply that we have a list of people waiting for good properties to come on the market.” Despite the strong demand all around the bay, the downtown area has not been negatively affected, rather the reverse – the market is stronger than ever. People are buying up older homes to renovate or whatever lots are still available to build. With traffic congestion getting worse for Vallarta, the downtown area has the advantage that you can park your car at home and walk to many restaurants and shops.

#3 South Shore Niche Market
There are fewer and fewer good building lots available in Las Amapas and Conchas Chinas, as most have been picked up by developers for small condominium projects. One of the more successful developers in this area is Terra & Mare, with La Cima and Horizon condominiums. Modern, larger and very chic, their style is now being copied by others, not just in this area but all around the bay. One of their newest developments, Avalon, has not even broken ground as of this date and already half of the project’s condominiums are spoken for. The steep terrain and lack of large building sites have held back larger condominium developers, which has added to the uniqueness of this area. The real estate that is available tends to be single family homes or condominium projects with less than 50 units.

#4 Nuevo Vallarta/Flamingos Popularity
Twenty years after its initial launch, the mega-development of Nuevo Vallarta is finally becoming what its original developers had hoped for. With a large marina, three golf courses, the longest beach in the bay and plenty of developable land, today it is the most comprehensive real estate development inside the bay. Prospective real estate buyers can choose from oceanfront, golf course, marina or canal condominiums, homes or home sites – something no other development can presently offer. The driver of this growth is predominantly Paradise Village and the Sovernigo family. Along with first-class real estate options, their amenities are very complete, with a full-service spa, El Tigre golf course, a shopping center, a beach club and the recently opened Sports Club, which offers an incredible array of activities that cannot be matched by any other regional development.

#5 North Shore Growth
Sixty-five percent of the new construction in 2004 was in Nayarit, primarily in Nuevo Vallarta and along the North Shore. That trend will continue into the future, as this is where land is available to build the larger, higher-density developments. Access is certainly better now with the four-lane highway and the widening presently taking place on the road from Costa Banderas to Punta de Mita. And with the announcement of FONATUR’s (Mexico’s federal resort development sector) mega-development in Litibú, outside the bay just north of Punta Mita, the back coastal highway that leads to Sayulita is also being upgraded from a gravel road to a wide, paved highway. These improvements mean that Punta Mita is less than 40 minutes from the airport and open up access to the incredible coastline that stretches up to Sayulita.

To get an idea of how strong growth has been, Tierra & Armonia, developers of Punta Esmeralda and Real del Mar, sold 100 properties in the first four months of 2005, and Punta Mita matched their 2004 sales just midway through 2005.

#6 Condominium Towers
Bay View Grand started it all a few years ago with their 14-story condominium project in Marina Vallarta, and then following it up with 15-story Porto Fino. Extremely successful, BVG sold out in just over two years, proving there was a strong demand for these types of developments. Shangri-la soon followed with 18 floors, and now two projects have pushed the envelope even further with 24-story towers breaking ground beside the Holiday Inn. Although these two projects are just getting started, they have already generated more than $25 million USD in sales. With this kind of success, it seems the trend will be for more towers in the future.

#7 Price Appreciation
Appreciation has been a strong trend for the past three years and quite consistent over the past 15. We are still below competitive markets like Hawaii and Los Cabos, so this trend should continue, especially for beachfront properties. Average condominium and home sales in the MLS showed a 25% increase since 2002; however, this increase would be even higher if it included the recently constructed projects, which have selling prices above the MLS resale market. Strong demand will continue to drive up prices, at least until supply can begin to catch up, which doesn’t look like it will happen anytime soon.

#8 Multiple Property Buyers
In active real estate markets, it is common for people to take advantage of quickly increasing appreciation by buying multiple units in condo projects and then doing what is commonly referred to as “flipping” the units. This practice was very popular while Marina Vallarta was being built up, for example. Today, buyers are again purchasing more than one property, but in a different manner. They are buying a home for themselves and then a second or third property that may consist of raw land or a home that needs to be fixed up. The difference is that the buyer of the past did it purely as an investment, a passive investment. Today’s buyers are pro-active. They are buying the properties so they can be involved in the construction process of building or renovating. It follows another trend: People are moving to Vallarta to live, but not to do so passively by spending time on the beach, tennis court or golf course. They want to be kept busy, and real estate development is an interesting outlet for them. It has also proven to deliver a much better return than they have traditionally earned in the money and stock markets.

Financing
For the past 10 years, I have written regularly that accessible financing is just around the corner. Well, financing is still not available after all these years, although there are certainly many large lenders and banks that are trying to make it happen. With the market we currently have, with waiting lists and multiple offers on properties listed, we really don’t need financing! The market is doing just fine on a cash-only basis. With financing coming online, the market may just start moving faster than would be best for it. Therefore, I’m of the opinion that if it takes a few more years to get easily accessible financing here in Puerto Vallarata that’s just fine, and I’m hoping that will be the trend for 2005 and 2006.