My unsolicited advice to all CRE monkeys is to listen to your elders. If you are lucky enough to work with a 50+ year old who is cycle tested, study under them.
It’s been a great ride, the music is finally stopping. 2023 is going to be the start of a shitshow. This is CRE’s Brave New World.
Professionals under 35 have pretty much only seen the market go up.
Professionals 35-45 think exclusively in terms of 2007-2010 when it comes to recession.
Every recession is different and the only thing I can guarantee is this one will be different than 2008.
Office is going to get absolutely crushed. I heard someone estimate that upwards of 80% of downtown buildings in a major market I cover are currently underwater. A few trophy assets will do fine as there are always law firms willing to pay too dollar, but any dated B product is already near worthless.
Multifamily might do okay as single family homes become increasingly unaffordable at such high rates and prop up rental demand, but once people start losing their jobs, bad debt will become a bigger problem.
I hear the bullish arguments that there is a ton of capital that needs to be deployed and prices can only go so low before buyers buy up from the bottom, but I’ve also heard that those who try to pick bottoms get stinky fingers…
I'm just a dirty little tenant rep guy but on the leasing side you have some insulation to whatever you want to call this current cycle due to our business being LED driven. Leases roll when they roll and a decision has to be made, so there are deals to be made.
Our capital markets team is definitely in the thick of it since the debt markets are a disaster and owners think their building will return to its value from two years ago. It’s definitely pencils down for a while. This is all office I'm talking about. Industrial rents have not softened in our market.
I’ll weigh in as someone leading multifamily ground up developments executing Class A garden style, institutional size projects in tertiary markets - although we know many companies currently in a holding pattern, we are optimistic for our niche.
Higher interest rates, construction costs and disconnect on land values between sellers and buyers are our biggest issues right now but all can be mitigated. Supply can be a drag on rental rates in select markets but that is localized and can be accounted for in new deals. Interest rates are a double edged sword as they hurt exits but they help add demand for product for those who can’t or didn’t buy a home. The land values are lagging today’s conditions but that is always the case so hopefully by the time that adjusts we will start to see some cost relief.
There are still some big potential existential risks out there such as the compounding effects of mass layoffs (if they start), particularly in areas with significant new supply and given that rents have started to level off in certain regions but overall residential rent is inflation resistant given it is a need versus a discretionary want.
As long as your firm is flexible/liquid without too many forward commitments then you should be in good shape. Speaking to other large MF developers, some feel that the deals getting tied up today might be the best of the cycle given everyone else’s big pause but that’s a hot take up for debate.
Disagree & generally don't see the train of thought
What will precipitate a recession and/or massive increase in unemployment?
Supply chain struggles and COVID shock to the economy is dissipating. Logistics are moving more smoothly, ports are less congested, the hamster wheel is starting to spin normally again. We are forecasting labour and materials to peak sometime in 2023 and likely experience some slight compression within 2023 as well (consensus seems to be that everyone is padding budgets out of fear of future, this should reduce in the coming quarters).
Barring black swan event (idk--FTX?), things will stabilize and get better. World has recently gone through a global event (COVID) and it'll take longer than a second for things to right-size. Groups that were aggressive at the top of the market will get hit hard, but if you believe in a free market, then they absolutely should.
re: office - define underwater. Cashflow negative? Below replacement value?
re: undeployed capital - some people still don't understand the magnitude. If my personal stocks went up 30%, maybe my portfolio goes from $100k to $130k. Yay, $30,000 happy days. What happens when a pension fund, sovereign wealth fund, or multi-billion dollar asset manager has to rebalance their portfolio with an extra $10B to $100B? Do you realize how much land and buildings you can buy with a warchest that size? These groups have time horizons over 30+ years. The stinky bottoms/don't catch a falling knife is a 1980s stockbroker mentality. Doesn't apply here
Re: pension funds, sovereign wealth funds, and asset managers...that effect works both ways. S&P is down 16% over the last year. Bonds are also down over the last year. So all of these large managers of capital will have to rebalance their portfolios, which means less $$ available to real estate. It's already happening. Want to hear a horror story? Talk to a REPE fund that is out in the market trying to raise capital right now. Unless you count yourself among the Blackstones of the world, it's a bloodbath out there.
Banks are going to have to start raising rates to bring in more deposits. I had dinner with a large regional bank last week and they, along with their competitors, are all seeing deposits drop.
People are generally terrible at predicting when a recession will occur and how severe they will be. Is there going to be a recession next year? I don't know. Maybe. Maybe not. Any time I think that I have a read on where the economy is heading, I re-read a Howard Marks memo.
There is a ton of dry powder in real estate right now. That doesn't mean that all of it will be deployed. If real estate is not attractive on a relative basis to other asset classes, that dry powder is going to find another home. LP's are going to put a ton of pressure on their fund managers to give back capital if they can't find attractive investment opportunities. You are seeing this dynamic playing out with a lot of VC funds right now. You don't have to give back thie money of course, but good luck raising a subsequent fund if you don't. Leverage levels have also dropped, which means more and more equity has to go into each deal. That will offset some of the dry powder as well.
As with everything, markets are complex and have a lot of conflicting dynamics. I can write a bullish thesis and a bear thesis by highlighting some dynamics and ignoring others. My general take on the real estate market is this - current property values do not adequately generate enough returns to compensate investors for the risks inherent in investing in real estate, relative to other asset classes at the moment. I'm still hoping to find select opportunities that are attractive, but I am not in favor of making a beta bet on the market right now. But I could be wrong!
I would love for you to be right but you’re not. Major retailers cancelled hundreds of millions in orders from overseas as inventories grew last year and demand shrunk. Also labor troubles at ports in Long Beach caused many shippers to reroute their supply chains to the east coast instead. Thus, the illusion that logistics are improving. Consumer consumption drives the US economy and demand is shrinking. Consumers are tapped out, savings built up during Covid has been spent, credit card balances are skyrocketing and we’re about to see record auto loan defaults and repossessions. Amazon and other large users backing away from space commitments. Multifamily collections problems are growing as well, probably a matter of months before we see home mortgage defaults start. Unemployment is a lagging indicator but it’s coming. However, it may not be in the blue collar space this time but in middle management and white collar jobs instead. Elon just showed the world that he could fire 75% of his (well-paid) workforce with few, if any, business disruptions. Don’t you think every other CEO is now looking at how to do the same? I’m old and have been through several cycles and this one feels like it could get ugly. But I’ve been wrong before and hope I am now.
You know, I was reading this and nodding my head and thinking "this makes sense" until I got to this part, and then I realized "this jackass has no fucking clue what he's talking about." And it only got worse from there
The great thing about a concept like household savings is that... we have data! And the data says you made all this up. I know that spending 5 seconds to validate a couple of your assertions is hard and really bites into your day, but just a little research will help you avoid this exact situation; namely, being called out for not having your shit together. As that link clearly shows, household savings in the US are still well above where they were pre-pandemic. Or I assume they are, since this data is from October, though I think it's a safe enough assumption that households haven't burned through an extra trillion dollars of savings in the last 8 weeks.
He did this a matter of weeks ago, and it's a massive exaggeration to say he had "no business disruptions". In fact, it's once again just flat out wrong. We know for a fact that a ton of advertisers have left Twitter since Mr Musk took over, and the reason is tied to the layoffs you mention. Mr Musk wants to turn Twitter into a cesspool of hate speech and bigotry, or rather he wants to dismantle the safeguards that keep that from happening, the moderation staff (except of course when it comes to moderating opinions and accounts that are critical of him). Advertisers don't want to be associated with a company that is implicitly supporting things like overthrowing the American government, so you can't disassociate Mr Musk's layoff decisions and the fact that Twitter's user base and ad revenue will suffer a decline from those choices.
And for all your talk about unemployment being a lagging indicator, we can only use the data we have, and that says that the employment market is about as strong as it's ever been. Every doom and gloom pronouncement you just made was based on the back of not only no evidence, but evidence that is the opposite of what you stated. Given that, why should anyone believe you?
Hi! Thanks for the post.
If you don't mind sharing, what did you study in uni?
I'm just curious about what any person who is interested in real estate (RE) did when they were in uni.