Downfall of RE
Why is no one talking about the downfall of RE after the Corona virus? Why is everyone pretending like the RE industry is going to bounce back as per usual once this virus is gone?
Why is no one talking about the downfall of RE after the Corona virus? Why is everyone pretending like the RE industry is going to bounce back as per usual once this virus is gone?
+40 | Case-Shiller Showing Higher Ratio Than Ever Recorded Before - Are We In For a Collapse in Housing? | 15 | 3h | |
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+27 | Megafund REPE Comp | 8 | 19m | |
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+20 | Is NYU Schack (BS) worth it for Commercial RE/REPE/REIB | 12 | 5d | |
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+15 | Compensation: Real Estate Development | 7 | 4h |
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Aw shit, man, you're right! I did notice there were a whole bunch of buildings on my block that just up and disappeared....
Tens of millions of people just disappeared?
This is more of a natural disaster situation, the job loss is due to imposed gov't mandates. Very difficult to forecast next steps with precision. How RE performs in the short and long run are difficult to state with accuracy (as is the path of the virus itself).
As to the usual 'bounce' you imply, real estate has actually fared quite differently after each of the past several recessions. It's all supply and demand at the end. If the economy 'turns back on' or whatever, people will still need places to rent and work. How much and what they can pay is the question, but that will be very market by market, asset type by asset type this time around. This is a very different situation than 2008.
The real question to ask, is 'will the world enter a mild recession, deep recession, or some form of depression', the results on real estate require something of that knowledge. As of now, we do not know, but the 'markets' (meaning stock equities), are betting on the milder side of the world.
If you want to bet against the Fed and its money hose, go ahead, my stomach isn't that tough!
Because it isn't going to happen.
Why is no one talking about our shoes forming a collective consciousness only to rise up and take over society?
I do not doubt that some businesses will take that approach. I do, however, have strong doubts that it will be widespread, for a couple reasons:
Office leases are typically 5 to 10 years long, if not more. Even if a business owner realizes today that they don't need that much space, they might not be able, or cost effectively able, to change that overnight.
A tremendous amount of business owners are conservative. I don't mean that in a political sense, although it's often the case, but instead in a worldview sense. While I sit here adoring the freedom work from home provides, the owners of my company are itching to get back into the office. One of the two owners ignored the shelter in place order just so that he could go to the office all day, even though no one else was there. For generations of Americans, work is sitting at their desk, and while underlings might be far more imaginative, they aren't the ones cutting the check.
There are a number of productivity concerns, both in terms of distractions and motivation. I have yet to see any studies on if there are actual drop-offs in productivity and which types or levels of employees that would impact the most, but perception can also be reality. It would be wrong to discount the paternalistic instincts of much of corporate America.
Even if business owners can get out of their leases and change their mindsets to both physical space and their employees, one of the beauties of real estate is that a building does not have to be static. Class A products in urban cores will lease up either way - even if instead of 30 tenants they now have 75 sharing the same amount of space. Lower tier buildings in urban cores, or in 80's and 90's suburban office parks, can be renovated, repurposed, or demo'ed. With the current housing crisis, this could be a tremendous opportunity for redevelopment. I'm not saying there won't be some pain from time to time, but real estate always works in cycles anyhow.
To be fair, I wonder about this too and am talking to an ex-Hines guy who now runs his own office firm this week about it. I've been playing around with a move from apartments to office a lot lately and I can't say that I'm not intrigued by what some leaders in the space have to say about things.
This is obviously someone’s first downturn...
We all remember our first.....
Yah cause that's not happening right now or anything.
Are people not going to use real estate after this? Are we all going to move back to the forests?
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It's all relative. Use WHAT specifically? Pay as much for WHAT specifically? Office? Probably not. Hotel/retail will come back as soon as people a) hit the point of 'fuck it' and want to live life and/or b) there's a reliable mitigation strategy implemented/discovered (whether that comes in the form of contact tracing, etc.). Industrial/Multifamily will need to be there as long as people need things and physical space. Look at what's been going on with e-commerce/supply chain the last couple of months. What everyone is talking about specifically relates to the office sector. There are a lot of other real estate assets out there.
I'm going to be starting a Cave Development Opportunity Fund here soon.
Downfall? Just a blip (huge blip) that will pass. Institutional money isn't going anywhere. Our partners are super fucking bullish. That said, they are a little more cautious and not nearly as interested in retail as they once were, but industrial in our markets is hot and multifamily is not too far behind. Not all is doom and gloom.
It's still pretty early.
If you do not think this will have a long term impact on UW guidelines for capital providers you are insane.
Everyone is going to vacate their homes, condos and apartments to move to the forrest...
Bullish on Hobbit-holes and The Shire submarket.
Thanks for the insight prospect. How old were you in the last downturn? 8?
To say real estate is dead is too simplistic however I believe bid ask spreads will widen and things could get bloody. However what were darlings in the past I’m sensing uncertainly. This could be good, right. “Tension” creates a market: bulls and bears. Previously say Bay Area real estate “will always go up” so cap rates went down down down. Some tension is healthy and I am seeing it:
West Coast multifamily, a sector I rode through most of the past decade was already facing record low cap rates, 20% YOY hard cost growth, and plateauing rent growth; has been hit with continued tenant protection threats. Depending on who you ask, pricing guidance is lowered and retrades are occurring. However sellers know their worth. There are some difficult conversations and absolute positioning right now. The stare down - like at the Big Game (Cal-Stanford).
Having gone through the GFC and now COVID, I think it’s very hard to start a firm or new division during a downturn. I feel it favors incumbents with the dry powder and proven track record. More so because lenders get more conservative. Land values for development are the most volatile.
Things change quickly. I’m bullish San Francisco will bounce back faster, for example. My barometer for that is the ease of flexibility in the labor markets (WFH available?), overall household savings, and propensity for people to help others (mask wearing).
My wife owns a retail store. I think the 15 year march of e-commerce destroying brick and mortar retail will continue. There will be pockets of resistance from a growing Buy Local movement. Just like COVID might have help further expose the downsides of over reliance on a competitor country (starts with C); this dress rehearsal of the future also shows the world of no retail, no jobs, Main Streets going “dark.” Delivery apps taking too much commission from mom and pop restaurants, and the backlash. I tip the restaurant employee who is processing my takeout. Although this more OFF topic, I hope retail, particularly locally base retail will win more fans. That there is a hidden cost to lowest price and convenience.
as Real Estate bros we have an interest that the Tech bros don’t break every law/rule that gives real estate its unique value. I am quite the Luddite but Uber breaking rules on taxi supply is like someone diminishing the Value of your entitlements you spent 4 years obtaining for a development. Same with AirBnB, etc. These are the everlasting threats to real estate not as an asset but to the values today. Why the F would I invest millions of dollars if people are breaking the rules rampantly.
population growth and immigration: when I was an analyst I was at our company wide conference in at a resort in Florida and I pulled aside the head of research for the company (PERE top whatever). I was inquiring about an international transfer and then the conversation went towards why the US market is the place to be. Population growth. Anyways, Real Estate bros should be pro-Population Growth. If that is materially reduced, that’s a threat. How will a post-COVID world affect family formation, children, and immigration (particularly chain migration and green cards)?
Anyways sorry for what has become a rant
A commercial real estate research guy recently said on a podcast, regarding office: - working from home is not ideal - desired sf per person will go UP bc of this (these things may have been touched on this thread elsewhere)
Even me, personally. I want a BADASS office some day with antique guns on the wall and people closing deals and kicking ass. And I do not want that office to be inside my residence. The rest of you fucking cowards can shuffle to your couch to rip bong hits in your pajamas in between zoom calls drowned out by screaming kids. Do you see world leaders doing that shit? Fuck no.
"When you're in the middle of a crisis, you tend to overestimate the permanence of its effects" is a quote that recently caught my eye. And I am guilty of doing that in the last crisis until an old bald REPE fund manager gave me some words of wisdom.
I'm not going to pretend I have a crystal ball, but I think the article takes too many liberties when extrapolating ideas and small data points to make sweeping predictions.
The title alone is absurd. "The office is dead" and "Get ready for the commercial real estate apocalypse" are alarmist for clickbait purposes. The actual institutional studies I'm reading are projecting slightly higher cap rates, slightly lower deal flow, relatively flat rent grown for 2020, marginal rent grown for 2021, and then strong rent growth for 2022.
"It’s something no one could have foreseen three months ago," in regards to remote work is also wrong and makes me wonder how in tune the author is with the industry. Remote work isn't a new idea at all. The crisis has expanded it and normalized it, but it didn't create it. Further, while many like me enjoy the practice, many others do not - or at least not permanently. Cities are also not "losing their sheen" and I complete reject the idea that this crisis will cause Americans to migrate to the middle of nowhere in droves.
Will vacancy rise across the board? Yes. Will rents be stagnant for a while? Yes. Will there be changes in the office market brought on by changing attitudes to work? Yes. None of that implies death or some sort of real estate apocalypse though.
Residential here, been waiting to chime in until all the May rents rolled in to see if there was any difference from last month. As a residential landlord with mixed class units, things are relatively normal. Subs are hungry for long term work right now too, better rates.