2020_06_15 — “These Are Not the Real Estate Bargains You Are Looking For”

FINANCIAL & ESTATE PLANNING, INVESTMENT PHILOSOPHY

These Are Not the Real Estate Bargains You Are Looking For

SUMMARY

  • Real estate bargains emerging from the pandemic crisis will not be as plentiful nor as steep as investors hope
  • Lower interest rates will change the investment math on capitalization rates
  • — — — A 5% capitalization rate in a new lower 1% world is more attractive than a 5% cap rate in a 4% world
  • — — — Lower interest rate financing costs can also make up for lower occupancy and rent growth
  • Relatively safe income producing real estate (also known as core real estate) could be a fixed income substitute for more investors willing to give up liquidity
  • Real estate returns and opportunities will depend, as they usually do, on the asset type and location
  • — — — Industrial properties (warehouses, storage, shipping and fulfillment centers) as well as multifamily properties (apartment buildings), and rentable homes are in high demand
  • — — — Hotels, malls, and senior housing are out of favor; price declines may be steepest here

DETAILS

  • Real estate is not nearly as levered as it was during the great financial crisis, nor is it the cause of the current economic crisis; less leverage means less chance of default because of non-payment of debt interest or principal
  • Lower interest rates change the investment math — what I colloquially call real estate gymnastics — and increase the attractiveness of real estate cap rates
  • — — — If borrowing rates fall, then an occupancy and rent drop from a fall in rental demand doesn’t necessarily decrease values. There is a limited supply of core real estate for sale and an avalanche of capital chasing yield; so as long as safe real estate provides a few percent above T-Bills, it is golden
  • Value add projects become even more crucial as interest rates decline; e.g., a solar project that adds 5% to the bottom line is worth much more in a low 1% interest rate world than in a higher 4% world because lower interest rates increase the net present value of a project
  • Real estate returns and opportunities will depend, as they usually do, on the asset type and location
  • — — — Industrial properties (warehouses, storage, shipping and fulfillment centers) as well as multifamily properties (apartment buildings), and rentable homes are in high demand
  • — — — Hotels, malls, and senior housing are out of favor; price declines may be steepest here. Look for conversion opportunities, for example re-permitting and redesigning a mall into a mixed-use industrial property
  • — — — Expect slower growth in occupancy and pressure on rent for longer in offices and retail spaces
  • Tax advantaged opportunity zones can still be a good place to put fresh capital to work

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Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm

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Michael Ashley Schulman

Michael Ashley Schulman

Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm

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