RE Industry During Downturns
This is a really dumb question, but can someone tell me what’s wrong with the following logic:
Aren’t recessions a good thing for the real estate industry? It seems like (in general / from a macro perspective) everything is very overvalued right now. With a recession, wouldn’t there be a correction in prices? With that correction comes more opportunity. In that sense, does hiring increase during times that the economy is in a recession?
I am currently a sophomore and I’m terrified of being unemployed when everything comes down. I’m just grasping at straws at this point, but I figured it may make an interesting discussion.
I lived through the '08 downturn, which is not a "typical" downturn and was very severe for RE. What happens is that deals fail, banks fail (or at least stop lending to RE), and system just stops. Lots of jobs lost in RE and finance and hiring was basically nothing in many markets. Many people who graduated in 09/10 had to basically work internships for years (I knew several people who did). Lot's of BKs (personal and business). I even knew a few people personally who committed suicide after going down. That's the downside.
The upside comes with the recovery, which will occur assuming the world keep running. Firms with capital can win and get deals, it can a be a great time to start. This is because all the entrenched players are stuck with their "legacy" assets. Big gains can be made for sure.
It's all a matter of perspective as to good or bad. I won't dwell on my personal story, but it ended up being very good for me (sucked at the time, made very little money those years). Everyone I knew who stayed and fought it, or even started in it, are doing well. Still, there are people who left and never came back. I still see a guy who was a mortgage broker working as a server at a very high end steakhouse, I think he may do resi mortgages on the side now but not full time (FYI, a server at this place may get close to six figures with tips, not worst job in the world).
Personal advice, don't go into debt, incur massive expenses, or other dumb shit. If you can build liquid reserves (cash) you can be very well positioned in any cycle. You also sleep better at night!
In his book Margin of Safety, Seth Klarman approvingly mentions Warren Buffet's view on value investing: that although the idea is simple, most people are constitutionally incapable of doing it. Arguably people who can pull it off successfully are psychologically abnormal in some way.
Most people are herd-minded. When the market is skyrocketing they're enthused and willing to invest, and when it crashes they freak out and run for cover. In retrospect, Q2 2009 was a fantastic time to invest, but it sure as hell didn't feel that way at the time. Prices were hitting new lows, unemployment was through the roof, and lots of people were predicting things would get much worse.
So much of short-run economic trends are driven by sentiment. In a recession banks are afraid to lend and LPs are afraid to invest. As a result, even the RE investors who aren't afraid of the market often can't access capital. Which means they can't do as much...which means they don't need as many employees. And some of the ones who are investing still are worried enough that they don't want to increase their overhead.
It should be a great time to invest, but capital raising becomes very difficult.
This is why a lot of large firms have started open ended core funds over the last decade. They want to have the dry powder ready during a downturn.
Real estate industry is a broad term; recessions are good for some and bad for others.
For example, a leasing broker might struggle to find deals since companies won't look to upgrade spaces in a downturn. An investment sales broker might see extra action if REITs/PE are buying cheap.
You're thinking about it the right way, but I definitely wouldn't count on hiring to increase during recession. Your best hedge is to network like crazy.
And brokers who survive come back to be some of the biggest in their market product type after the fire settles down.
A lot of the big power brokers right now made names for themselves in 2007-2009 but most left the industry.
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