How Would Economic Depression affect Small Cities Compared to Big Cities?

[Nir]

Hello Everyone,

How do you think an Economic Depression would affect a Small city compared to a Big city?

(Assuming, for comparison purpose, all other factors are equal - meaning both cities depend on the same industries, etc. only difference is the big city has population say 10 times larger than the small city)

Will depression affect them:

- The same way/extent?
- Small cities more affected?
- Big cities more affected?

WHY?

THANKS.
PS. We`re currently in a recession but some people predict Depression in like 5 years. As it is related to our investment strategy, I thought it can be an interesting topic for discussion.

 

[Thomas Beyer]

QUOTE (investmart @ Feb 9 2009, 11:17 PM) - Small cities more affected?
- Big cities more affected?

WHY?
similar or more ..

why: if one industry, say forestry, is the main staple and it tanks, this small town will be hammered more severely ...

if small town and diversified, similar to big city .. but harder to finance unless CMHC insurance is used !

 

[Nir]

Thanks Thomas. I was hoping to see more responses as I thought it is an interesting topic for discussion considering today`s situation. guess i was wrong. Cheers.

 

[Thomas Beyer]

QUOTE (investmart @ Feb 12 2009, 07:45 PM) Thanks Thomas. I was hoping to see more responses as I thought it is an interesting topic for discussion considering today`s situation. guess i was wrong. Cheers.
CAP rate = yield = function of risk

CAP rates are usually higher in small towns because risk is higher !

That`s why a comparable property with the same income in Calgary costs more than one in Edmonton than in Okotoks than in Brooks !

 

[greg12]

The cycle in small towns will be way bigger for sure, and this is already happening. Take Fort Mcmurray for example. If you look up places for rent, there are pages and pages of vacancies. This was unheard of for many years. By my estimate, the average rent for a condo/town house has had to come down by about $500. Each small town though has its own personality and will need its own unique strategies. The profile of the average renter in Fort Mac again has changed from the high income, short term migrant to averaged income non-oil families looking for 1+ yr leases.

 

[Nir]

Interesting.
However, since prices in the big cities are much higher than in small cities for the same property, isn`t the opposite true in a depression in a way? meaning - the risk is that everything will go down significantly in a depression and since in big cities properties were purchased for/are currently worth MUCH more, don`t you think they will also be THE ONES LOSING MUCH more value? In other words where is the risk higher in a depression - in a big city that appreciated more in past years or in a small city that appreciated less to start with but may lose more proportionally (%)?

The specific aspect I actually wanted to focus on (which I now see I did not mention in the original question) is the effect depression has on POPULATION - small city VS. Big city(?)

I`m guessing more people move to big cities but not sure about the extent - if anyone has statistics from the 30s would be great The reason is buildings don`t move therefore change in population affects vacancy rate directly which in my opinion is one of the most important factors to consider when investing in RE.

Example:
Year: 2015 - assume beginning of an economic Depression in Canada. (no worries guys, no one is predicting Depression just a theoretical discussion)
Barrie population: X
Toronto population: Y

Will Y probably increase and X decrease? by 5% in 5 years? 25%?

Regards & Thank you,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Feb 12 2009, 10:42 PM) The specific aspect I actually wanted to focus on (which I now see I did not mention in the original question) is the effect depression has on POPULATION - small city VS. Big city(?)

Barrie population: X
Toronto population: Y

Will Y probably increase and X decrease? by 5% in 5 years? 25%?

Barrie would be "somewhat" more affected .. depends on jobs, # of retirees, # of universities, hospitals ..

in bad times sometimes more folks go back to school .. and even if unemployed people do not move necessarily ..

 

[Nir]

Thanks Thomas. The interesting thing about it is that total population does not change. Hence EVEN during depression some places will have more tenants and others less.
In other words, vacancy rate going down in some places will strengthen rental businesses even in tough times (obviously there are other aspects to consider).

 

[Thomas Beyer]

QUOTE (investmart @ Feb 17 2009, 11:58 AM) Thanks Thomas. The interesting thing about it is that total population does not change. Hence EVEN during depression some places will have more tenants and others less.
In other words, vacancy rate going down in some places will strengthen rental businesses even in tough times (obviously there are other aspects to consider).
yes, but collections also drop in recessionary times .. so the suite might be occupied .. but you can`t collect !

 

[Nir]

QUOTE (thomasbeyer2000 @ Feb 17 2009, 06:25 PM) yes, but collections also drop in recessionary times .. so the suite might be occupied .. but you can`t collect !

Hi Thomas,

Yes, but not being able to collect due to depression, is by itself not a reason to prefer one area over another. It`s a general problem.

In other words, a city that DUE TO DEPRESSION in the country has:
1. LOWER vacancy rate (people moving from other areas) and therefore also has:
2. More collection issues (because, still, it`s a depression)
is not worse than a city with less tenants proportionally and therefore less collection issues

so as you can see, this specific collection issue is a result of something positive - lower vacancy rate.

Therefore, a collection issue in one area is not a reason to prefer buying in another area in times of depression (again, neutralizing other factors for the purpose of the discussion)

Regards,
Neil