Have seen a couple posts on here about fear of recession. Wanted to get some of you guys' thoughts on the greatest signs of foreboding in our industry. Obviously interest risks and sky-high prices in construction and assets can be worrisome, but I wanted to see what other major / minor indicators you guys look at when assessing the economic environment, and real estate specifically.
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Not really answering your question, but I personally think a small recession could be good for the industry right now. Pricing is way out of wack. A little bit of blood in the streets could create some better opportunities for those of us that are in acquisitions. Right now it is like searching for a needle in a haystack to find a deal that pencils out.
every broker that has modeled 4% growth and solving for a 15% IRR over 5 years but can somehow convince some MORON with $$$ to buy VALUE ADD in the current stage of the cycle.... some people only see CASHFLOW without looking at leverage profile, growth rates and real assumptions. Any one can get 15% IRR on paper if you use sky high leverage and growths that aren't sustainable. the fucktards buying today will be the bargain tomorrow.
We actually just did one of those. It was kind of like a WTF moment looking at the model but we had 1031 money burning a hole in our pocket and the asset was a perfect fit for our portfolio so we did it.
I agree with everyone here on the pricing/acquisitions side of things. I'm most curious to see how our industrial assets do in the downturn. This is really the first time institutional money has a significant stake in the product-type for a full cycle and I could see a couple reasons why it would get hit particularly hard in a downturn. Tenants with razor thin margins (not so much for big-box tenants), natural reduction in warehousing/cargo-processing capacity needed if global commerce slows, abundance of institutional money all chasing the same product/tenants, demand isn't as deep/permanent as multi-family, etc. There's a couple of other, more granular reasons as well that I wont bore everyone to death with, but that's what I'm curious about in the next recession.
So I don't think that industrial will get hit that hard in a downturn. Vacancy remains at an all time low (even if all the supply under construction delivered vacant, we'd still be below the long term vacancy rate), talk to leasing brokers and the tenants in the markets remain robust - demand continues to outpace supply, it is becoming incredibly difficult to entitle sites - people are taking a NIMBY approach to industrial development/trucks, relatively restrained debt/equity markets for new developments and lastly i think that a big reason for the institutional rotation into industrial is the lack of cap ex drag. Releasing an office building crushes your cash flows vs. a 2nd gen space for industrial.
There are some submarkets in the big box world that worry me (Central PA/Berks County, South Dallas, Atlanta, Chicago) but overall the market is pretty resilient. Additionally, since the construction period is so much shorter for a warehouse it is easier for people to put projects on hold. The only other stuff that doesn't make sense to me is the multi-story stuff in the NY boroughs, but maybe i'm just too simple for that.
Last point - if you look at real estate costs as the total cost operations for a warehouse its about 6-8%. So even if rents jump 10%, it doesn't move the needle in the grand scheme of things in comparison to labor/transportation.
I'm going to take a contrarian standpoint on the blood in the streets being good. Seems to me like there's so much cash sitting on the sideline hoping for 2008-2011 buying opportunities even a small blip will be fairly momentary. Unless there's chaos in which case maybe people wont wantto catch a falling knife.
I also think everyone here makes the inference that they'll be on the prosperous end of a distressed, sell-off. No one wants to consider that they may be the proverbial blood on the streets haha.
The argument is counter intuitive. If all the acquisitions guys are waiting for a slight dip in the market then there will be no dip. There is still plenty of buyers with a ton of cash ready to buy and eventually on each deal, a buyer caves in and overpays. The market doesn't dip when there is a ton of liquidity, but when it all dries up and returns are no longer attractive. I think you still got quite some time unless interest rates continually rise to the point the current caps dont make sense. Other issues could be the removal of IRS 1031, which has been a huge reason for prices staying inflated.
Typically, a recession creates a buyer’s market where cash is King. The deals and properties acquired during the down turn should serve as your sales inventory during the next economic upturn. Buy in a buyer’s market and sell during a seller’s market. You will make money, coming and going.
Fuckin A, that simple all along
Was also in school during GFC, but was working in RE internships and family was in the thick of it. Few thoughts: I'm on record above that the excesses we saw in 05-07 aren't as extreme this time around so I don't think that any pullback in the short-run will be quite as extreme. That being said, look out for pockets of risk in your industry or more specifically your firm. Most people here are investment professionals so we should be able to recognize excessive risk taking/areas for concern within our companies. Sometimes things will happen that aren't on our radar, but you should be able to tell if your firm is leveraging everything to the hilt, or if their CF is dependent on capital events. More precarious financial position your firm is in, the more likely your salary is going to be on the chopping block when we hit a bump.
At small firms - you want to be somewhere that has some fee income. Tough for them to cover your overhead if they are living off of development fees or promote and that dries up. For big firms, I would just make sure that you aren't the slowest gazelle. For the most part, big firms aren't going to have to shut their doors if/when we hit a bump. So if you can't control being at a place like Oaktree in 08 who is going to cash in on a pullback, you can definitely control your effort and value to your firm.
Regarding career progression/salary - I know that there were salary freezes at a lot of places during depths of recession, but for the people who held onto their jobs, I don't think that it was a permanent setback in their earning potential. On the contrary, many of the young guys I worked for coming out of the recession got experience beyond what would generally be available to them because their bosses were let go and they picked up significant responsibility. Keeping their jobs was their raise in the short run, but ultimately that experience was much more valuable than a couple of years of no bonuses.
Final point I'll make is to maintain your integrity (likely a little more relevant to principals and managers, but applies to everyone). Not always easy to the right thing, and can be doubly hard when things are going poorly. But valuations, salaries and careers came back (relatively) quickly, even after the GFC. 10 years later and I know a lot of guys whose reputations have not recovered.