Calling everyone...Biggest 2018 Takeway
What has been the biggest lesson you learned this year in your RE career? Has anything surprising occurred or any interesting moments/events/trends you’ve come across at work and witnessed in the estate field? How other players are reacting to the market? 1st year at your current job or industry that stood out to you that you wouldn’t have realized before?
Any insight/advice that we can all chime in on for everyone in the industry? Whether in acquisitions (REPE), development, AM, debt, leasing, brokerage etc. Thanks.
Hoping to hear what everyone has to say.
2018 = Development Spreads Compressing, Construction Costs Increasing, Interest Rates Rising. 2019 = Clench your butt holes.
Wooo! Perfect time to be graduating from UG
Same boat as you. But if manage to ride it out, you get better experience. A lot of people I meet with started around or in the wake of 2008 and they talk about how it shaped their careers.
2018 onward = Lawyers continue to suck.
Hah, the more things change...
2018 = A lot of people realizing their market rent growth models for core assets are complete bullshit (NYC specifically)
You mean rents won't grow 3% - 5% year over year into infinity? Blasphemy.
Most interesting topic i've followed this year: lenders absorbed treasury rate moves from early 18, but did not absorb the august rate hike, but now rates are back to pre-august levels. it'll be interesting to see what happens when rates move up again. it's worth being aware that if lenders aren't absorbing the next round of rate increases, then property valuations will be impacted.
As a lender, I can tell you we can absorb some treasury moves, then the lenders decide it isn't profitable and our spreads move up accordingly, then things get competitive again and borrowers get back to squeezing our spreads.
2018: Construction pricing is hilariously expensive. Garden deals cost as much as 5 story wrap deals should. 2019: Hope you don't have expensive floating debt!
Do most developers try and enter into an interest rate swap to change their floating rate debt to fixed? If you had kept floating debt over the past 8 months, it would have been beneficial, but no one expected rates to move lower.
Many times, though not always, it’s not a choice to swap or not to swap (or get some form of derivative product). Generally, your loan docs will require you to swap, or purchase an interest rate cap. This will protect all parties in case rates go too high.
Developers are getting overly-aggressive in their rent / expense assumptions. Construction pricing has compressed spreads a ton. Suburban MF still good. Urban, not so much.
Biggest takeaway though is that office acquisitions are so absurdly over-priced it's ridiculous. Tons of people buying new deals at 25%+ over replacement cost. 1980s deals trading at replacement cost. Silliness.
What do you mean my deal doesn't work unless I have a 22% expense margin on MF????
Desperate liquidity
Get into what you are most interested in and stay there. Pivoting from development to the financial intermediary space to get to REPE was a very tough road. Brokerage is much more about salesmanship and grinding than intellectual prowess. It was a wake up call to watch Marcus and Millichap experienced brokers with little understanding of JV's, structured finance, and development agreements leap over an ivy league educated coworker because they knew the game of building and maintaining a network.
On another note, way too much dumb money piling into the crowd-sourced equity space. Also, (re)development yield spreads got pinched hard due to unrealistic construction budgeting and realizable rent premiums. You might as well just add 20% construction cost contingency to every pro forma and keep this scenario as a conservative benchmark. Wayyy too many Chiefs and too few Indians in the construction space. Experienced skilled tradesmen and superintendents are in too short supply. Many don't want to admit it, but most of the development yield spread in growth markets is created on the back of cheap imported labor from Latin America.
Too much new housing has been built to unrealistic prices. Home absorption in the $400-600K range has slowed dramatically. Middle class families in America are unable (or unwilling) to afford homes in the $400K+ range; rising interest rates further exacerbates this issue.
A large bid–ask spread is developing in the land market. The big urban wrap multifamily development wave is over - the suburbs are back in vogue due to lower land costs. Millennials who wish to start a family are beginning a large migration to the suburbs. The live/work/play wet dream of Marxist urban planners is unsustainable and dangerous.
Great response, but what specifically are you referring to by this? Those mixed retail/residential areas popping between urban and suburban areas?
Urban planners are prioritizing mixed-use development with small unit sizes at high rent $/PSF instead of affordable residential development (think $200-300K home prices). Municipal design demands on single-family residential at this price range is far too restrictive, therefore we have a national shortage of homes at this price point in rapidly growing areas. American home ownership is a large part of what made this country exceptional because home ownership is the primary way families build wealth. Municipal planners hubris and smug surety in their commie-block live/work/play high density development is a major hindrance to suburban growth in America (the areas which used to have the highest upward mobility before commute times to the skilled employment centers become ridiculously unreasonable).
Thanks for the clarification, +1
Sure, happy to give my two cents. The TLDR version is that smug out-of-touch urban planners, like central bankers, are destroying home affordability in the US and other countries by promoting crowded density which raises prices.
Really odd hard on for urban planners there.
Developers are delivering on density and mixed-use because the market, aka people, have a high demand for it. Mixed use development isn't some leftist conspiracy driven by someone making $40k a year out of a cube in the city government office and density doesn't inherently raise the price of anything except for land basis.
Building single family homes in urban areas is poor land use. Also, small unit sizes at high rent $/SF are still affordable for the average consumer on a sticker price basis. Renters don't rent on a PSF basis. Finally, homes in the $200k-$300k price point exist - so I'm not sure what you're on about there.
Municipal design demands vary wildly from municipality to municipality, so you can't make blanket statements like that. Also, if an area is rapidly growing, that means it is desirable, which means housing costs will go up. Desirability and the laws of scarcity are driving up home prices in "rapidly growing areas" - not design demands.
How did that work out in 2006-2008?
Again, there is nothing "communist" about developers creating mixed-use assets that are highly desirable, highly profitable, and better for the fabric of a city (aka long term investment and job growth due to desirability) than sprawl, misplaced single family homes, highways, and big box stores with acres of surface parking.
...what in the world?
There is a direct correlation between bureaucrats and Marxism, because Marxism is how they justify being paid ridiculous pensions and rising salaries without having to compete in the marketplace.
Have you ever had to listen to a planner pontificate for an hour on what they demand developed on your land/capital? I see you are in development...
Because densified real estate development isn't damn near pure capitalism right?
Not when it is mandated and/or funded by municipal money through tax increment financing or infrastructure cost rebates. I do not believe municipalities should be able to pontificate what is built where on private property - the market will naturally sort this out.
For example, municipalities require retail all the time on the ground floor of multifamily where the storefronts will have limited visibility, access, parking, and signage. This stupidity just drags down the economics of the project and can actually result in a loan default. Many of the loans are made by GSE entities (Fannie/Freddie) which the taxpayers (you and I) have to backstop.
Something that I've known for a long time became really crystallized for me in 2018--genius is 1% inspiration and 99% perspiration. I've got endless great entrepreneurial ideas (mostly but not solely surrounding real estate), but in terms of implementing those ideas I'm paralyzed. My 9-5 job is too cushy and well compensated, which makes the risk of entrepreneurship high for me; I don't know how to get from zero to one even though I know what one looks like; and I lack the confidence.
In other words, I'm like 95% of Americans. Ideas are cheap. Show me a person confident enough to fail and a shitty salaried job--that's the person who has a future so bright he's got to wear shades.
This plus preexisting financial responsibilities. Entrepreneurs talk about not taking a salary for a year or more. Well, when your student loan payments are X, you're putting Y away every month for retirement, your mortgage is Z, and you want to have kids in the next 5 years...
American dream right there.....
College degree, house, kids and living life.
(Debt... debt... debt... more debt)
This thread took an interesting turn.... lol
My post became a land use forum...
You have plenty of 2019 takeaways now
I had to go smoke a cig after this thread, completely exhausted...
And yes The Duke of Wall Street my butthole is thoroughly clinched after reading this digital opera
You never know enough. Spreads are thin. Returns are low.
This thread is telling me returns may be too low, the mental masturbation occurring here tells me people are not excited to buy assets. Back on topic: Biggest takeaways from 2018 is the future continues to be unpredictable and deals that we bought in 2017 that I thought were on the cusp of too expensive I would now murder my first born to be able to buy more of. So I think there is always money to be made you might just have to work harder for it and stick to real estate instead of socioeconomic political analysis.
come back in a year or two and read this, too much money paying too much money creates the appearance of success, until dumb money runs out and smart money comes in when the dumb money cant take it anymore.
Also, I doubt you have a first born, otherwise you might not say something so crass
well there goes my lunch break... nice screen play though: "Battle of the Builder's"
Please tell me CRE or InVinoVeritas is named Bob. Would make the screenplay even cooler lol. Bonus points if it's both.
Sorry to disappoint
Thanks for the read guys.
My biggest takeaway working on the GP side: "It's not what you know, it's who you know."
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