The Hottest Market Is Often the One Everyone's Already Building Into

A few years ago, most investors had written San Francisco off. Rents falling, residents leaving, doomsday headlines everywhere. Austin was the opposite. Rents climbing and investors pouring in. Today they've traded places. San Francisco leads the nation in rent growth, up around 22% in a year, while Austin's rents are down about 6% with decade-high vacancy. What changed? Supply. Austin built and built until it flooded its own market. San Francisco barely lifted a hammer, so when demand surged, rents did too.

The concept is easy to agree with, but when you're actually in the thick of it, it's hard to notice the trend. The market everyone wants to be in is usually the one everyone's already building in. A deal could look great on paper and still sit half empty. Not because there wasn't demand, but because now there isn't. Ten other builders saw the same shiny opportunity and started building the same year you did, so supply overshot demand.

None of this is new to anyone. It happens in almost every cycle, and it usually ends the same way.

Phoenix: 2008

Cheap money and the belief that home prices only go up had builders racing to fill the Sun Belt with new development. Phoenix and Las Vegas most of all. Then the actual people stopped coming. News stories from back then described whole new neighborhoods that went from grand opening to ghost town. Houses no one ever lived in. Empty playgrounds. Half-finished streets. Home prices around Phoenix dropped by more than half. At the worst point, about 100,000 homes sat empty. It took close to ten years to fill it all up.

One Las Vegas builder said it straight: the market was so hot that they overbuilt everything. That was the trap. The heat is what got everyone building at the same time. And it's what killed everyone, too.

Texas: 1986 and 2008

Go back another twenty years and you see the same thing in Texas of 1986. Oil was booming, Texas was growing fast, and builders rushed to put up offices and homes for everyone moving in. Dallas doubled its office space in six years, going from 60 million to 120 million square feet. Houston built most of its downtown skyline in just the first half of the decade. Loans were easy to get, and everyone figured Texas couldn't lose.

Then oil fell from over $25 a barrel to under $10 by early 1986. The jobs left, the tenants left, and the shiny new towers sat empty. Almost 30% of office space sat empty. Houston lost around a quarter million jobs and ended up with about 200,000 empty homes. Some people just left the keys on the counter and walked away. It took years to recover.

But Texas did something about the experience. It got burned badly enough that it changed the rules so the same thing couldn't happen the same way twice. A big part of the 1980s wreck was reckless lending, banks handing out money against property like it would only ever go up. So when Texas finally let people borrow against their homes in 1997, it wrote a hard limit into the state constitution: all the debt on a home could never top 80% of its value. No cashing out every last dollar of paper equity the way people did everywhere else.

That rule looked rigid for years, right up until it emerged brilliant. In 2008. While cheap money and loose lending were pumping up home prices across the country, Texas's 80% cap quietly kept people from over-borrowing. So the same year Phoenix was turning into a ghost town, Texas barely moved. From 2007 to 2011, home prices nationwide fell about 20%. In Texas they fell less than 1%. Same crisis, and the state that had already lived through its own bust was the one that came out fine.

Phoenix is what happens when nothing holds a boom back. Texas is what happens when something does.

The opposite mistake

Building too much is one way to get burned. Building too little is the other, and San Francisco spent years proving it. For most of the last decade the city barely added housing. Construction was expensive, financing was expensive, and getting a project approved took forever, so very little new ever got started. The pipeline of new apartments stayed close to empty. Then the AI boom took off, and it happened to be centered right there. San Francisco is home base for OpenAI, Anthropic, and most of the big names in the field, so as those companies raised huge amounts of money and hired fast, thousands of high-paid workers poured into the city. They leased office space at the fastest pace since 2019 and went looking for apartments, and there was almost nothing new to move into. Rents took off. The typical one-bedroom crossed $4,000 a month for the first time ever, two-bedrooms passed New York to become the priciest in the country, and in a few neighborhoods rents jumped more than 40% in a single year. Great if you already owned a building. Rough on everyone else, and a good reminder that a tight market doesn't stay tight forever.

What it comes down to

None of this is complicated. Frenzied building in a booming market could drown its own supply, the way Phoenix did in 2008 and the way Austin is doing right now. Refusing to build at all and you get San Francisco, where there's nothing to rent and prices go through the roof. The markets that stay healthy are the ones that keep building at a steady pace and put some guardrails on the wildness before it shows up, the way Texas finally did after learning the hard way.

And the lesson to learn from all of this for all you real estate guys: Before you bet on a hot market, ask the boring questions. How much is already going up nearby? How much is waiting behind it? And who is actually going to fill it once it's done? Not long ago, Austin was the hottest market in the country, and everyone piled in at once. That's exactly how it ended up swapping places with San Francisco, the city they'd all written off.

Do your research. Don’t be blinded by the boom. Stay focused. And build for what’s real.

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Sources

The Hottest Market Is Often the One Everyone's Already Building Into

Phoenix: 2008

Texas: 1986 and 2008

The opposite mistake

What it comes down to

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