Decades back, most of the coveted markets in American real estate were coastal. But today the hottest markets in America are located in the "flyover" states, right in the middle of the country. In this Commercial Real Estate Mastery podcast we’re going to explore how the "flyover" states became desirable and how you can harness this power to make money with commercial real estate
Episode 13: The Rise Of The "Flyover" States Transcript
The term flyover states originated back in the 1950s, and it referred to the concept that the states that were important back then were coastal. The West Coast, California, the East Coast, places like New York, and everything between those were to be looked down on. But today, the term flyover has changed. It's no longer a negative statement. It's becoming more of a positive statement. This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. We're going to talk about the rise of the flyover states and why it's very, very important as an investor that you realize that the markets not that long ago were looked down upon, suddenly are looked on very favorably.
So why did we ever think, to begin with, of the flyover states, the middle of America being lesser than that on the coast? And back in the 1950s, it is true that a lot of the action, a lot of the growth was going on in those coastal areas. California boomed during that period, as did New York City and that whole Atlantic seaboard. So many Americans came to believe that the future and all of the money was going to be pouring into only properties between the very edges of those states and the oceans, and everything in between, not so good. And what happened was, since those areas became "hot", they tended to get a reputation for feast and famine, for highs and lows, whereas the flyover states had a very, very slow but orderly growth. So they were known for just a very steady upward movement.
And it's kind of like the difference between a hackberry tree and an oak tree, because a hackberry tree grows very, very quickly, but the wood is not as strong, the shape is not as pleasing. Hackberry trees frequently crack and fall over during heavy windstorms, but oak trees grow very slowly, and as a result, they're very strong, and they can handle all kinds of turmoil without falling over. And when you're looking at real estate and you're making investments and you're betting your down payment, you really don't want to have to time the market that you're investing in. You want to time the concept of investing in that sector, but I don't really want to have to worry about the timing of it within that micro market.
Let's say, for example, you decided you wanted to invest in apartments because affordable housing is where it's at. And it's true, affordable housing is really, really hot. But in some markets right now, affordable housing is not doing well because there's been massive overbuilding. And many of the markets in California, for example, they built so much Class A apartments after COVID that they're just awash in them. Occupancies have tumbled; rents have gone down. And that's crazy, right? Because we know housing's hot. But the problem is it wasn't just about timing the generic housing, the macro housing, it was all about the micro housing on top of that. You don't have that issue in the flyover states. It's just a very steady, solid progression. You do not have to time the market; you can just time the generic.
Warren Buffett tells people, Hey look, if he was starting over, he would just put his money in a no-load mutual fund that is just basically the stock exchange, the S&P 500, because he doesn't want to pick a certain individual stock. He has no faith in that. He wants the diversification of all the stocks. And that's again the difference between coastal properties and the flyover states. The flyover states are more dependable; they're more steady. And when you invest in them, you don't have to worry about getting sucked into some overbuilding cycle that many of them suffer from all the time. Also, when you deal with the flyover states, you're not having to deal with this concept of being hot, because when you're hot, it often ends up you also are later cold.
One of the markets where you see this more than any other is Las Vegas. Las Vegas has some of the biggest peaks and valleys. Condos have shot up to $500,000, and the same condo, three years later, like $50,000 on the courthouse steps in foreclosure. How is this possible? That's what happens when you run these cycles of up and down, of high and low. Just look right now at some of the hottest home building markets and weakest home building markets. Did you notice that the ones that are weak right now were the same ones that were hot before? Don't you find that a little alarming? Isn't that a little strange you can go from the absolute top of the list, top 10 market, to the bottom 100 like that?
And again, it's an attribute we don't see in flyover states. They can't really ever have the lows because they never really have the highs. Also, the flyover states are starting to get really, really good statistics on population growth and on incomes at home prices. For example, are you aware right now that more millionaires by percentage have moved to Tennessee than have moved to California or New York in recent times? How strange is that? It's pretty strange. Because most people got to ignoring the flyover states with such a ferocity that they just turned off all sensibilities on watching those statistics. They didn't notice that Alabama became the new manufacturing capital of America. They didn't realize that Tennessee became the only non-coastal state to have no personal income tax. But today, the flyover states are hot. In fact, Tennessee is an example, is at the very top of the list for population growth, and all kinds of factors are very favorable for real estate investing.
So what does it all mean? Well, what it all means is when you're out looking at investing today, don't ignore the flyover states. Don't think that only things that matter are on the coast. Don't think, oh, I cannot invest in Tennessee. I must invest in the Carolinas because the Carolinas are on the ocean and Tennessee is not. You're going to see a transformation. You're seeing that now in the US population in the years ahead. We're seeing all of the growth is mostly going into the middle of America and even then the southern middle of America. And the way real estate works is, when you've got the growth, when you've got the people moving in, that makes the values go up. And the areas they're leaving, those are the areas where the values go down. This is Frank Rolfe with the Commercial Real Estate Mastery podcast. Hope you enjoyed this. Talk to you again soon.