I'm worried about the real estate market right now

[Keeton]

I agree and that why I started this thread. I don't know what we're going to do with the malls, office buildings, and stores. Do they have another life? Can they be converted to other uses? And this has far-reaching effects in our economy. It will change the land-use models in many cities. What will the zoning maps look like? Think about this -- how is it going to affect sales taxes and property taxes that support the city services?

Well, since we live in the U.S, we can probably just tear down all the buildings and replace them with fast food restaurants lol. On terms of taxes, who knows what will happen with that. The state and federal governments might have to step in and do something. because sales tax will become tricky if all these businesses just start going online. They might all move their headquarters to states that don't have state sales tax, and therefor they wouldn't have to pay any tax, and obviously that could seriously effect the states that do have sales tax. Even though I think I read somewhere that if a product is shipped out of a warehouse, it doesn't matter where the company HQ is, the company gets taxed for the product that went out of the warehouse depending on the state and city it was in.

 

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[MoneyDoc]

Yeah, investing in commercial is just not smart anymore. Unless its warehouse spaces or apartments. Most companies are going online. So there's no need for as many commercial buildings. I have no Idea what we are going to do with all the malls that have been/will be closing in the future. there's massive malls, and brick and mortar stores closing everywhere now. The commercial real estate market is on its last leg. I didn't even mention how most companies have gone remote too, So they don't even need their office buildings either.

Easy. Build condos on the lots. Few well known developers are doing this in my area.

 

[Guest-5ty5s4]

Easy. Build condos on the lots. Few well known developers are doing this in my area.

I think people are also discounting the experience value of a central place to hang out, have fun, and enjoy life.

Outdoor malls are my favorite, especially the ones with lots of bars, restaurants, fun experiences etc. It should be a simple enough transition from retail stores to more of an "experience" getaway place.

"The Domain" in Austin comes to mind, as well as a big outdoor mall area I went to in Miami (that was a couple years ago, can't remember).

Offices will exist too, they're not going to vanish completely. Investment companies, law firms, accounting firms, software companies... They generally do need a main location for people to interact face to face. Remote is a good perk, but some work you really need to be with another person, in person.

 

[Keeton]

Easy. Build condos on the lots. Few well known developers are doing this in my area.

That's also an option. However a lot of people have been moving out of the big cities and moving to the suburbs. But I guess if you build more condos/apartments. It will reduce the cost of living, and more people will move back to the big cities.

 

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[MoneyDoc]

That's also an option. However a lot of people have been moving out of the big cities and moving to the suburbs. But I guess if you build more condos/apartments. It will reduce the cost of living, and more people will move back to the big cities.

People moving out of big cities is a myth in my opinion...

People are leasing $6500 condos in downtown Toronto right now. Doctors can't leave. Lawyers can't leave. Engineers can't leave. Teachers can't leave. Most professionals can't leave.

This is all temporary. One large employer in my area was telling employees to either return to office or take a salary cut.

There's no rational justification for people moving 3-4 hours away from their workplace just because they're working from home right now.

 

[MoneyDoc]

I think people are also discounting the experience value of a central place to hang out, have fun, and enjoy life.

Outdoor malls are my favorite, especially the ones with lots of bars, restaurants, fun experiences etc. It should be a simple enough transition from retail stores to more of an "experience" getaway place.

"The Domain" in Austin comes to mind, as well as a big outdoor mall area I went to in Miami (that was a couple years ago, can't remember).

Offices will exist too, they're not going to vanish completely. Investment companies, law firms, accounting firms, software companies... They generally do need a main location for people to interact face to face. Remote is a good perk, but some work you really need to be with another person, in person.

Agreed.

The malls closing down barely had any traffic before this pandemic. So it makes sense.

Major malls aren't closing down. Retail isn't "dead". Its innovating as one would expect.

Offices are not going anywhere.

 

[Keeton]

People moving out of big cities is a myth in my opinion...

People are leasing $6500 condos in downtown Toronto right now. Doctors can't leave. Lawyers can't leave. Engineers can't leave. Teachers can't leave. Most professionals can't leave.

This is all temporary. One large employer in my area was telling employees to either return to office or take a salary cut.

There's no rational justification for people moving 3-4 hours away from their workplace just because they're working from home right now.

Oh, you live in Canada. The situation is different here in the U.S. here people are fleeing the big cities like new york and L.A. to move to smaller suburb type areas.

 

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[Kid]

Prediction:

Scare people out of big cities (Done)
Make them move outside (Happening as of now)
Make cities and owners struggle and lower prices of RE (Near future)
Anyone who has cash, buy everything they can at bargain prices (Mid term future)
People realize that its major PITA to work remotely and go back to big cities (Mid-Long term)
Those who bought the dip profit as landlords or sellers of RE (End outcome)

 

[Deleted78083]

Yeah, investing in commercial is just not smart anymore. Unless its warehouse spaces or apartments. Most companies are going online. So there's no need for as many commercial buildings. I have no Idea what we are going to do with all the malls that have been/will be closing in the future. there's massive malls, and brick and mortar stores closing everywhere now. The commercial real estate market is on its last leg. I didn't even mention how most companies have gone remote too, So they don't even need their office buildings either.

I agree and that why I started this thread. I don't know what we're going to do with the malls, office buildings, and stores. Do they have another life? Can they be converted to other uses? And this has far-reaching effects in our economy. It will change the land-use models in many cities. What will the zoning maps look like? Think about this -- how is it going to affect sales taxes and property taxes that support the city services?

I read somewhere that they were reconditioning the malls into complexes housing amusement parks, actual housing, offices (co-working maybe???), and...warehouses for online retail.

There are actually so many things you can do with malls that I wouldn't bury them too fast.

I think people are also discounting the experience value of a central place to hang out, have fun, and enjoy life.

Outdoor malls are my favorite, especially the ones with lots of bars, restaurants, fun experiences etc. It should be a simple enough transition from retail stores to more of an "experience" getaway place.

"The Domain" in Austin comes to mind, as well as a big outdoor mall area I went to in Miami (that was a couple years ago, can't remember).

Offices will exist too, they're not going to vanish completely. Investment companies, law firms, accounting firms, software companies... They generally do need a main location for people to interact face to face. Remote is a good perk, but some work you really need to be with another person, in person.

Yes thank you that is what i meant

 

[Antifragile]

I am a RE Developer in Vancouver BC and recently published an article that I think fits well in this thread:

Predictably wrong: Forecasts and real estate investment | RENX - Real Estate News Exchange

Hope you like it and will follow for any feedback.

Regards,
Volodya

 

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[Antifragile]

Oh, you live in Canada. The situation is different here in the U.S. here people are fleeing the big cities like new york and L.A. to move to smaller suburb type areas.

Actually... there has been similar push away from the cities in Canada as well.

 

[Keeton]

I read somewhere that they were reconditioning the malls into complexes housing amusement parks, actual housing, offices (co-working maybe???), and...warehouses for online retail.

There are actually so many things you can do with malls that I wouldn't bury them too fast.



Yes thank you that is what i meant

It will be interesting to see what happens. I know there's a lot of malls that structurally are already going to crap because no one is taking care of them. So if they plan on doing that with malls. They better take action quick.

 

[Keeton]

Actually... there has been similar push away from the cities in Canada as well.

oh ok, thats what I figured. I guess it just matters on the city then.

 

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[Keeton]

Prediction:

Scare people out of big cities (Done)
Make them move outside (Happening as of now)
Make cities and owners struggle and lower prices of RE (Near future)
Anyone who has cash, buy everything they can at bargain prices (Mid term future)
People realize that its major PITA to work remotely and go back to big cities (Mid-Long term)
Those who bought the dip profit as landlords or sellers of RE (End outcome)

The thing is, the people moving out of the cities don't plan on going back to them. Hell, some of them are moving completely across the U.S. from those cities, I'm not sure places like new York will ever fully recover.

 

[Determined2012]

Oh, you live in Canada. The situation is different here in the U.S. here people are fleeing the big cities like new york and L.A. to move to smaller suburb type areas.

Same is true for Chicago. The high rises in upscale River North and Streeterville areas in the city of Chicago are giving 2-3 months free rent, and or lowering monthly rent altogether to reduce and or avoid vacancies. I am referring to units that rent for $3,000- $4,000 per month! Those are massive price reductions.

 

[Determined2012]

Prediction:

Scare people out of big cities (Done)
Make them move outside (Happening as of now)
Make cities and owners struggle and lower prices of RE (Near future)
Anyone who has cash, buy everything they can at bargain prices (Mid term future)
People realize that its major PITA to work remotely and go back to big cities (Mid-Long term)
Those who bought the dip profit as landlords or sellers of RE (End outcome)

This exact prediction has been realized and going on for a long time in Chicago, even before the pandemic! The scare tactic they used was crime and violence which they started incessantly calling Chicago "ChiRaq" to push that are city is so scary and dangerous, same as Iraq.

Out of state investors and successful companies want all of our lakefront property for their employees who don't want to drive or commute via public transportation to work... but want to walk and bike instead. They acquire the most desirable properties and locations by manufacturing a reason to push everyone out.

Every one is looking to the right, where the false story is being told, while all the real and truth of what is really going on is happening to the left.

 

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[Keeton]

Same is true for Chicago. The high rises in upscale River North and Streeterville areas in the city of Chicago are giving 2-3 months free rent, and or lowering monthly rent altogether to reduce and or avoid vacancies. I am referring to units that rent for $3,000- $4,000 per month! Those are massive price reductions.

Dang, that's pretty wild. Its most cities across the U.S. nobody wants to be around people right now. even though now that we are towards the end of this pandemic. People are moving back to the cities that are open. Like Florida's real-estate is going wild right now, because they have everything open, so people want to move there. Same with Texas. It will probably take Chicago a while to recover. With them being democratic, I'm sure they will be keeping things shut down for awhile. So people don't want to move there.

 

[Deleted78083]

From Axios:

"Existing-home sales fell 6.6% in February from the previous month, but sales are still 9.1% higher than last year, per the National Association of Realtors.

By the numbers: Despite sales falling to a six-month low, the median existing-home sales price rose to $313,000, 15.8% higher than February 2020, with all regions posting double-digit price gains".

Read the article here: U.S. home sales decline but prices still rise double digits

 

[WJK]

From Axios:

"Existing-home sales fell 6.6% in February from the previous month, but sales are still 9.1% higher than last year, per the National Association of Realtors.

By the numbers: Despite sales falling to a six-month low, the median existing-home sales price rose to $313,000, 15.8% higher than February 2020, with all regions posting double-digit price gains".

Read the article here: U.S. home sales decline but prices still rise double digits

The SFR market is booming -- but for how long???? Higher taxes? IF the job growth stalls? -- those factors will affect housing sales down the line. Also, some of the cities and states (such as California) are having an exodus of citizens. Prices are all about supply and demand.
The segments of the market we're talking about are commercial, office, malls, and retail. For years those markets were the cornerstone of most bigger investor's RE and securities portfolios. That investor group especially included institutional players such as insurance companies. The NOI (net operating income) on this class of properties was considered the most reliable of all RE investments. Most tenants were rated national credit class and the leases were usually triple net, going out for many years. Therefore, the expected return $4$ was less than on the more volatile classes of RE -- but, that cash flow was like having money in the bank. We've gone from that truism to a huge question mark and a bunch of vacancies.

 

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[Antifragile]

The segments of the market we're talking about are commercial, office, malls, and retail. For years those markets were the cornerstone of most bigger investor's RE and securities portfolios. That investor group especially included institutional players such as insurance companies. The NOI (net operating income) on this class of properties was considered the most reliable of all RE investments.

I agree that institutions owned most of these asset classes but disagree with the statement that the NOI was considered most reliable. I'd think that malls and retail (especially bad retail, with a clear exception of high-streets) has been in decline for a decade +, and it commanded a cap rate (NOI/Purchase Price) premium for that reason alone. Commercial and office doing ok with a strong economy (obviously affected by the pandemic).

That said, RE is extremely location specific. We could find examples that are generally true but specifically wrong when we cover North American markets.

 

[WJK]

I just read a newsletter from the Appraisal Institute and here's a quote:

"Forty-six percent of Americans missed at least one mortgage or rent payment since the beginning of the coronavirus pandemic, and 25% missed more than one payment, according to survey results released March 11 by personal finance website GOBankingRates. The data showed that the missed payments likely were the result of layoffs and reduced work hours."

If that's not scary for the RE business, I don't know what is.

 

[Antifragile]

I just read a newsletter from the Appraisal Institute and here's a quote:

"Forty-six percent of Americans missed at least one mortgage or rent payment since the beginning of the coronavirus pandemic, and 25% missed more than one payment, according to survey results released March 11 by personal finance website GOBankingRates. The data showed that the missed payments likely were the result of layoffs and reduced work hours."

If that's not scary for the RE business, I don't know what is.

Would you be able to dive a little deeper into this report? I am curious to see if they elaborate how many Americans have taken advantage of some type of payment deferral plan that were counted towards the 46% and the 25% respectively.

With a quick google search, the statistics you quoted is in the news, but as a result of a survey: "GOBankingRates' new survey has found that a staggering 46% of Americans missed one or more rent/mortgage payments, and that 25% have missed more than one." Surveys are imperfect, as we all learned with the Trump election back in 2016.

"Missed payments and accruement of debt could be the direct result of layoffs and reduced work hours." - my emphasis on the "could". Meaning no one seems to know...

My reply in no way dismisses the hard financial reality that most of us experienced since the pandemic, I just want to highlight that it's not black and white. Media has a way to paint a picture that's dramatic (to sell their story, obviously) with statements like "half of the Americans missed mortgage payments", when in reality some or many did it to preserve cash as they had relief programs available. Here in Canada, we've seen people consolidate their debt (pay off credit card debt, borrow more from banks on their mortgages at cheaper rates) and reduce their monthly debt servicing payments overall. This led to a buying frenzy of real estate - which is scary for the RE business WJK.

 

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[WJK]

Would you be able to dive a little deeper into this report? I am curious to see if they elaborate how many Americans have taken advantage of some type of payment deferral plan that were counted towards the 46% and the 25% respectively.

With a quick google search, the statistics you quoted is in the news, but as a result of a survey: "GOBankingRates' new survey has found that a staggering 46% of Americans missed one or more rent/mortgage payments, and that 25% have missed more than one." Surveys are imperfect, as we all learned with the Trump election back in 2016.

"Missed payments and accruement of debt could be the direct result of layoffs and reduced work hours." - my emphasis on the "could". Meaning no one seems to know...

My reply in no way dismisses the hard financial reality that most of us experienced since the pandemic, I just want to highlight that it's not black and white. Media has a way to paint a picture that's dramatic (to sell their story, obviously) with statements like "half of the Americans missed mortgage payments", when in reality some or many did it to preserve cash as they had relief programs available. Here in Canada, we've seen people consolidate their debt (pay off credit card debt, borrow more from banks on their mortgages at cheaper rates) and reduce their monthly debt servicing payments overall. This led to a buying frenzy of real estate - which is scary for the RE business WJK.

I'll go back and look at the article again to see if they answered your questions. I just skimmed it the first time through. I have low to moderate-income housing and a few of my people have struggled through this last year. Most got their SS and disability checks like usual. I'll see what else they said...

Edit: They said that a lot of people have taken out additional debt over the last year -- men took out more debt and women a little bit less.
They said that most of the missed payments have to do with job/cash flow disruptions.
They said that most people who received the stimulus checks spent the money on bills or food.

 

[Antifragile]

Back in October 2020 I wrote an article that may still be helpful to you in this thread:

Note two things please:
1. I am from Canada and the article is published for Canadian readers
2. While I was not worried about inflation back then, I am starting to see the prolonged nature of government stimulus as an inflationary risk.

https://renx.ca/monetary-policy-impact-stocks-real-estate-during-pandemic/

1. Monetary Policy​

Interest rate monetary policy

The Bank of Canada lowered interest rates to stimulate the economy as one of the first measures during the pandemic.

Interest rate monetary policy increases the value of investments, causes purchasing on credit to become more lucrative, and lowers the carrying cost of existing debt burden. Interest rate policy also inflates asset values and puts money in the hands of the wealthy, focused on incentivizing spending.

Unfortunately, there are limits. One, as we approach near zero-rates it becomes less effective.

And two, the wealthy might not spend the money and instead save or invest, which drives up the value of investments such as real estate.

As a result, we have seen an increase in real estate activity. The Toronto Regional Real Estate Board says existing home sales in the GTA in August 2020 jumped 40.3 per cent from August 2019.

Average home prices are also up. Real Estate Board of Greater Vancouver reports a 36.6 per cent jump over the same period. In part, interest rate policy is responsible for this.

Quantitative easing (“QE”) monetary policy

QE policy is for central banks to buy bonds and other financial instruments, giving investors cash in return. The Bank of Canada is continuing with large-scale purchases of at least $5 billion per week of Government of Canada bonds.

When the interest rates approach zero, the interest rate monetary policy becomes less effective. QE policy has the same effect at later stages. At some point the price for assets is too high and returns are too low to motivate spending.

Other than interest rate and QE, the Bank of Canada can do little to effectively motivate institutional buyers to spend.

“Helicopter money” monetary policy

“Helicopter money” is the idea to put money in the hands of those who need it most and will spend it. Think of the various stimulus packages we have seen for the individuals and businesses in Canada.

This policy can be incredibly effective, as people who receive such money are most in need and will spend it on living, thus increasing consumption and stimulating the economy.

2. Inflation​

We see governments “printing money” for QE and stimulus packages and theory teaches us that increasing money supply without increasing production will lead to inflation.

But it is not that simple. Inflation in the short term should not be a problem.

Ray Dalio explains in his book Big Debt Crises that spending is key.

Whether one spends money or uses credit, it does not matter. As credit decreases, additional money replaces lost credit and therefore does not cause inflation. Central banks simply make up for the disappearance of credit by increasing the amount of money.

Benjamin Tal, deputy chief economist CIBC Capital Markets, explains that additional money will go to replace lost money due to this pandemic. And the cost of carrying additional debt is further offset by lower interest rates. During recovery, we will be able to correct for additional debt with growth and inflation should not become a problem.

But of course, there is a limit to how much money is “printed” and if abused, inflation can become a problem.

3. Stock markets and real estate​

Striking things happened with our neighbours. When the Fed announced zero interest rates and QE policy, the borrowed money became essentially free. Investing with borrowed money became easier and stock markets rallied. Many saw it as opportunity to buy low after an early pandemic market crash.

But the stock market recovery does not necessarily mean the economy is doing well.

When we think about stock markets, we think of indexes such as S&P 500. Indexes were driven up by technology titans like Google, Apple, Amazon and Facebook. At the same time, companies that relied on service or traditional retail suffered greatly.

Unfortunately, a stock rally without a strong economic output may be widening the wealth cap.

“When the rate of return on capital significantly exceeds growth rate of the economy, then it logically follows that inherent wealth grows faster than output and income.” (Thomas Piketty and Arthur Goldhammer, Capital in the Twenty-First Century). In short, the wealthy are getting wealthier.

In Canadian commercial real estate, investment volume and cap rates have seen some pressure.

Even with aggressive monetary policy, the CRE market has been negatively affected but we did not see a “crash.” This is in large part due to policies discussed above, and the Canadian government’s unprecedented fiscal spending on emergency economic measures.

In closing, the implementation of monetary policies has helped many of us stay employed and in business, but we are not out of the woods yet. There are many risk factors, including a second wave of C0VlD-19 and the impact of the health and political environment of our big neighbours.

We should take comfort that monetary policies seem to be working. With that, there is good reason to be cautiously optimistic about real estate markets and Canadian economic recovery."

 

[WJK]

Would you be able to dive a little deeper into this report? I am curious to see if they elaborate how many Americans have taken advantage of some type of payment deferral plan that were counted towards the 46% and the 25% respectively.

With a quick google search, the statistics you quoted is in the news, but as a result of a survey: "GOBankingRates' new survey has found that a staggering 46% of Americans missed one or more rent/mortgage payments, and that 25% have missed more than one." Surveys are imperfect, as we all learned with the Trump election back in 2016.

"Missed payments and accruement of debt could be the direct result of layoffs and reduced work hours." - my emphasis on the "could". Meaning no one seems to know...

My reply in no way dismisses the hard financial reality that most of us experienced since the pandemic, I just want to highlight that it's not black and white. Media has a way to paint a picture that's dramatic (to sell their story, obviously) with statements like "half of the Americans missed mortgage payments", when in reality some or many did it to preserve cash as they had relief programs available. Here in Canada, we've seen people consolidate their debt (pay off credit card debt, borrow more from banks on their mortgages at cheaper rates) and reduce their monthly debt servicing payments overall. This led to a buying frenzy of real estate - which is scary for the RE business WJK.

You talked about the "buying frenzy". I assume you are talking about SFRs (houses). I have seen this from time to time over the years. Most of these buying moments are followed by either a crash or a plateau. That's a good example of why good investors move against the market.
BUT, what I've been talking about in this thread is not to simply following that truism. Some of the commercial segments may not make a comeback at all. Now, that is scary. Is it a fundamental shift in the RE market that is going to be carried forward from now on? Do we need to readjust our investment thinking and land use planning?

 

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[Antifragile]

You talked about the "buying frenzy". I assume you are talking about SFRs (houses). I have seen this from time to time over the years. Most of these buying moments are followed by either a crash or a plateau. That's a good example of why good investors move against the market.
BUT, what I've been talking about in this thread is not to simply following that truism. Some of the commercial segments may not make a comeback at all. Now, that is scary. Is it a fundamental shift in the RE market that is going to be carried forward from now on? Do we need to readjust our investment thinking and land use planning?

Not just SFRs. Purchases of townhouses and any type of land (especially industrial) is absolutely on fire. There is a duality to the current economic situation, service companies took it on the chin. But the food and distribution companies made more money in the pandemic than before. Online buying accelerated.

Lower interest rates drove the SFRs and townhouse purchases, yet downtown condos did not see a drop in price, just less activity! Those who did not lose their jobs/incomes, started buying more. And this time you cannot blame the elusive foreign buyer, none of them could travel, ha.

If you think we'll face inflation, then it'll all make sense. Otherwise, we need to see very strong economic recovery to climb out of this.

 

[WJK]

Back in October 2020 I wrote an article that may still be helpful to you in this thread:

Note two things please:
1. I am from Canada and the article is published for Canadian readers
2. While I was not worried about inflation back then, I am starting to see the prolonged nature of government stimulus as an inflationary risk.

https://renx.ca/monetary-policy-impact-stocks-real-estate-during-pandemic/

1. Monetary Policy​

Interest rate monetary policy

The Bank of Canada lowered interest rates to stimulate the economy as one of the first measures during the pandemic.

Interest rate monetary policy increases the value of investments, causes purchasing on credit to become more lucrative, and lowers the carrying cost of existing debt burden. Interest rate policy also inflates asset values and puts money in the hands of the wealthy, focused on incentivizing spending.

Unfortunately, there are limits. One, as we approach near zero-rates it becomes less effective.

And two, the wealthy might not spend the money and instead save or invest, which drives up the value of investments such as real estate.

As a result, we have seen an increase in real estate activity. The Toronto Regional Real Estate Board says existing home sales in the GTA in August 2020 jumped 40.3 per cent from August 2019.

Average home prices are also up. Real Estate Board of Greater Vancouver reports a 36.6 per cent jump over the same period. In part, interest rate policy is responsible for this.

Quantitative easing (“QE”) monetary policy

QE policy is for central banks to buy bonds and other financial instruments, giving investors cash in return. The Bank of Canada is continuing with large-scale purchases of at least $5 billion per week of Government of Canada bonds.

When the interest rates approach zero, the interest rate monetary policy becomes less effective. QE policy has the same effect at later stages. At some point the price for assets is too high and returns are too low to motivate spending.

Other than interest rate and QE, the Bank of Canada can do little to effectively motivate institutional buyers to spend.

“Helicopter money” monetary policy

“Helicopter money” is the idea to put money in the hands of those who need it most and will spend it. Think of the various stimulus packages we have seen for the individuals and businesses in Canada.

This policy can be incredibly effective, as people who receive such money are most in need and will spend it on living, thus increasing consumption and stimulating the economy.

2. Inflation​

We see governments “printing money” for QE and stimulus packages and theory teaches us that increasing money supply without increasing production will lead to inflation.

But it is not that simple. Inflation in the short term should not be a problem.

Ray Dalio explains in his book Big Debt Crises that spending is key.

Whether one spends money or uses credit, it does not matter. As credit decreases, additional money replaces lost credit and therefore does not cause inflation. Central banks simply make up for the disappearance of credit by increasing the amount of money.

Benjamin Tal, deputy chief economist CIBC Capital Markets, explains that additional money will go to replace lost money due to this pandemic. And the cost of carrying additional debt is further offset by lower interest rates. During recovery, we will be able to correct for additional debt with growth and inflation should not become a problem.

But of course, there is a limit to how much money is “printed” and if abused, inflation can become a problem.

3. Stock markets and real estate​

Striking things happened with our neighbours. When the Fed announced zero interest rates and QE policy, the borrowed money became essentially free. Investing with borrowed money became easier and stock markets rallied. Many saw it as opportunity to buy low after an early pandemic market crash.

But the stock market recovery does not necessarily mean the economy is doing well.

When we think about stock markets, we think of indexes such as S&P 500. Indexes were driven up by technology titans like Google, Apple, Amazon and Facebook. At the same time, companies that relied on service or traditional retail suffered greatly.

Unfortunately, a stock rally without a strong economic output may be widening the wealth cap.

“When the rate of return on capital significantly exceeds growth rate of the economy, then it logically follows that inherent wealth grows faster than output and income.” (Thomas Piketty and Arthur Goldhammer, Capital in the Twenty-First Century). In short, the wealthy are getting wealthier.

In Canadian commercial real estate, investment volume and cap rates have seen some pressure.

Even with aggressive monetary policy, the CRE market has been negatively affected but we did not see a “crash.” This is in large part due to policies discussed above, and the Canadian government’s unprecedented fiscal spending on emergency economic measures.

In closing, the implementation of monetary policies has helped many of us stay employed and in business, but we are not out of the woods yet. There are many risk factors, including a second wave of C0VlD-19 and the impact of the health and political environment of our big neighbours.

We should take comfort that monetary policies seem to be working. With that, there is good reason to be cautiously optimistic about real estate markets and Canadian economic recovery."

Yes, the money supply and the interest rate manipulation is a big part of it. BUT, one of the biggest influences I have seen is the "creative" loans that hold the buyer's payments down and manufacture a whole new set of problems in the RE market.
When I started in 1976, we had conventional loans -- 80% first TD, 10% down with the sellers carrying a 10% second; FHA 203b, and VA loans. Period. End of story. Interest rates on those were 9.5%. Now the government has gotten into fixing things and that was the underlying problem in the 2008 melt down.

 

[Antifragile]

WJK and other readers, I apologize for the long posts by copying my own articles, it seems relevant to the discussion and saves me time. Once again, I wrote this article for Canadian readers and this is my most recent:

Predictably wrong: Forecasts and real estate investment | RENX - Real Estate News Exchange

In early 2008, the five-year default rate for AAA-rated collateralized debt obligations (CDO) was 0.12 per cent. The Standard & Poor (S&P) rating meant the predicted default occurred only 0.12 per cent of the time, but in late 2008 the default rate came closer to 28 per cent.

This gap between forecast and reality was a gigantic prediction error. In fact, the mortgage-backed securities were extremely sensitive to changes in economic conditions and their defaults triggered the global financial crisis.

At the start of the pandemic, I don’t recall hearing predictions the housing market would be as hot as it is now. In fact, most were pointing in the other direction and there was fear of the unknown.

We expected job losses to drive the economy down, and with it, some adjustment and discount in real estate. Instead, today we see overall debt levels are down (credit card debt and car loans are being paid off and replaced with low-interest mortgages tied to property), and individual debt-to-income ratios are improving while there is a real estate buying spree.

Wrong predictions aren’t new and as the old joke goes, economists called nine out of the last six recessions correctly. So why is it so difficult to make predictions? And what does it mean today for the real estate sector?

There are many reasons why we miss the mark on our predictions – too many to cover in an article, so let’s discuss just two:

– probabilistic vs. fast thinking; and

– failing to prepare to be wrong

Probabilistic vs fast thinking​

Daniel Kahneman, in his book Thinking, Fast and Slow (2011), explains two systems of thinking – fast and slow. An oversimplified way of looking at it explains ‘fast’ as quick intuitive gut reactions, and ‘slow’ as analytical evaluations or critical thinking.

Many GameStop investors recently got caught up in the ‘fast’ emotions of seeking quick riches and ignored ‘slow thinking’ fundamentals. They took a risk on the probability that stock prices would continue to rise “to the moon” based on hype that came after the short squeeze had already happened.

We make most of our decisions with heuristics and emotions and then seek to justify our decisions with a logical reason.

What makes it worse is the abundance of information we now have. The internet has exploded our access to information, social media has decentralized media, and we are now more than ever able to be selective in what information we choose to see.

If we believe in something, we just seek to confirm it by reading only information that supports our view and ignoring that which opposes our beliefs. It is known as confirmation bias.

Reddit users weren’t seeking investment advice that was opposite to their position; they were in a social media-fuelled buying frenzy even after the GameStop stock price multiplied many times over, thinking fast, and getting hyped up on becoming overnight millionaires.

I am talking here about those who saw the stock go from $4 to $300, yet still decided to “invest.”

The emotional tail was wagging the rational dog.

Failing to prepare to be wrong​

If S&P had assumed that CDOs were correlated, the impact on the financial industry would not have been as profound and maybe there would have been no global financial crisis of 2007-2008.

In retrospect, the assumption that defaults on some housing would not trigger other defaults seems obviously wrong. If the analysts at S&P had prepared to be wrong on this one assumption, their range of probable default rates would then have been too big to ignore.

And if GameStop investors prepared for an overnight reduction to their investment by 80 per cent, many would not have been in a Wall Street Journal article explaining how they plan to pay off loans they took on for an “investment” – gamble is a better word.

Real estate enthusiasm​

Across Canada we are seeing an insatiable appetite for real estate, from homeowners to investors and developers.

That appetite is based on predictions and expectations, but does that mean we could be wrong? Of course. But, it is not that simple.

Traditionally, prices increase more at the core of cities due to urbanization, and then the pressure spills out to the more rural areas. In 2021 we are seeing the opposite because of the pandemic. Urban centre condos are not doing well.

Rental vacancy in Metro Vancouver and Toronto has increased for reasons such as low immigration, remote work, and students studying virtually. At the same time, prices and sales are rising in suburbs and we are seeing a migration of people away from city centres.

We need to admit that we do not know the future of real estate prices or what economic recovery will look like. The government doesn’t know, and neither do the economists and analysts. The economy is so complex that when a butterfly flaps its wings in Brazil, real estate prices go up in Vancouver – chaos theory for real estate.

The years 2006-2007 showed us that when locals start seeing real estate as a “sure thing” investment, and the lending environment allows for speculation, at some point it tips the scales, and our “prediction” of rising prices becomes wrong. We see patterns where none exist and have a very short-term view.

Preparing to be wrong​

‘Fast thinking’ in real estate would be to follow the herd and just buy anything. ‘Slow thinking’ suggests making a more disciplined evaluation and preparing to be wrong by asking the right questions – questions that help make our predictions more probabilistic and a little less emotional.

– When are the interest rates likely to increase?

– How quickly do we expect to be back to ‘normal’ at the office?

– What impact will an interest rate increase have on real estate in general?

– What leverage can I handle with my purchase under various scenarios?

And the hard question that really needs to be asked right now is do we expect the current de-urbanization trend to continue post-pandemic?

Once again, we don’t have a crystal ball but if we look at history, we can learn some lessons and make informed decisions. According to economist Ed Glaeser’s comments in Six Hundred Atlantic’s ‘Today, Tomorrow, and C0VlD-19’ podcast episode (September 2020), despite plagues and pandemics, urbanization has been a constant since the 14th century:

“Urbanization proceeded despite the reappearance of the Black Death in the 1350s. Urbanization proceeded despite the Great Plague of London in the 1660s. All of the great diseases that spread in 19th-century America, cholera, yellow fever, the urbanization just chugged along.

“Even the influenza pandemic of 1919-1920 was followed by a tremendous decade of city building. So, I think our cities have proven to be remarkably resilient.”

As a developer, I am biased toward real estate and think it is the best asset class for my own investments.

We are constantly making predictions, and to make better decisions we rely on detailed pro-forma financial forecasts. This is how our business decides on a “go” or a “pass” for a development project.

For personal investment decisions, I recommend the same analytical approach – whether we are in a pandemic or not. Ask questions, consider many scenarios, base decisions on your financial abilities and, just in case, prepare a downside analysis.

 

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[WJK]

Not just SFRs. Purchases of townhouses and any type of land (especially industrial) is absolutely on fire. There is a duality to the current economic situation, service companies took it on the chin. But the food and distribution companies made more money in the pandemic than before. Online buying accelerated.

Lower interest rates drove the SFRs and townhouse purchases, yet downtown condos did not see a drop in price, just less activity! Those who did not lose their jobs/incomes, started buying more. And this time you cannot blame the elusive foreign buyer, none of them could travel, ha.

If you think we'll face inflation, then it'll all make sense. Otherwise, we need to see very strong economic recovery to climb out of this.

I put SFRs, condos, and small units all in the same box. They are covered under the same loan programs and treated very similarly in the market.
That's interesting about land. Land has always been outside of the box. It's not financeable under conventional programs.

 

[WJK]

WJK and other readers, I apologize for the long posts by copying my own articles, it seems relevant to the discussion and saves me time. Once again, I wrote this article for Canadian readers and this is my most recent:

Predictably wrong: Forecasts and real estate investment | RENX - Real Estate News Exchange

In early 2008, the five-year default rate for AAA-rated collateralized debt obligations (CDO) was 0.12 per cent. The Standard & Poor (S&P) rating meant the predicted default occurred only 0.12 per cent of the time, but in late 2008 the default rate came closer to 28 per cent.

This gap between forecast and reality was a gigantic prediction error. In fact, the mortgage-backed securities were extremely sensitive to changes in economic conditions and their defaults triggered the global financial crisis.

At the start of the pandemic, I don’t recall hearing predictions the housing market would be as hot as it is now. In fact, most were pointing in the other direction and there was fear of the unknown.

We expected job losses to drive the economy down, and with it, some adjustment and discount in real estate. Instead, today we see overall debt levels are down (credit card debt and car loans are being paid off and replaced with low-interest mortgages tied to property), and individual debt-to-income ratios are improving while there is a real estate buying spree.

Wrong predictions aren’t new and as the old joke goes, economists called nine out of the last six recessions correctly. So why is it so difficult to make predictions? And what does it mean today for the real estate sector?

There are many reasons why we miss the mark on our predictions – too many to cover in an article, so let’s discuss just two:

– probabilistic vs. fast thinking; and

– failing to prepare to be wrong

Probabilistic vs fast thinking​

Daniel Kahneman, in his book Thinking, Fast and Slow (2011), explains two systems of thinking – fast and slow. An oversimplified way of looking at it explains ‘fast’ as quick intuitive gut reactions, and ‘slow’ as analytical evaluations or critical thinking.

Many GameStop investors recently got caught up in the ‘fast’ emotions of seeking quick riches and ignored ‘slow thinking’ fundamentals. They took a risk on the probability that stock prices would continue to rise “to the moon” based on hype that came after the short squeeze had already happened.

We make most of our decisions with heuristics and emotions and then seek to justify our decisions with a logical reason.

What makes it worse is the abundance of information we now have. The internet has exploded our access to information, social media has decentralized media, and we are now more than ever able to be selective in what information we choose to see.

If we believe in something, we just seek to confirm it by reading only information that supports our view and ignoring that which opposes our beliefs. It is known as confirmation bias.

Reddit users weren’t seeking investment advice that was opposite to their position; they were in a social media-fuelled buying frenzy even after the GameStop stock price multiplied many times over, thinking fast, and getting hyped up on becoming overnight millionaires.

I am talking here about those who saw the stock go from $4 to $300, yet still decided to “invest.”

The emotional tail was wagging the rational dog.

Failing to prepare to be wrong​

If S&P had assumed that CDOs were correlated, the impact on the financial industry would not have been as profound and maybe there would have been no global financial crisis of 2007-2008.

In retrospect, the assumption that defaults on some housing would not trigger other defaults seems obviously wrong. If the analysts at S&P had prepared to be wrong on this one assumption, their range of probable default rates would then have been too big to ignore.

And if GameStop investors prepared for an overnight reduction to their investment by 80 per cent, many would not have been in a Wall Street Journal article explaining how they plan to pay off loans they took on for an “investment” – gamble is a better word.

Real estate enthusiasm​

Across Canada we are seeing an insatiable appetite for real estate, from homeowners to investors and developers.

That appetite is based on predictions and expectations, but does that mean we could be wrong? Of course. But, it is not that simple.

Traditionally, prices increase more at the core of cities due to urbanization, and then the pressure spills out to the more rural areas. In 2021 we are seeing the opposite because of the pandemic. Urban centre condos are not doing well.

Rental vacancy in Metro Vancouver and Toronto has increased for reasons such as low immigration, remote work, and students studying virtually. At the same time, prices and sales are rising in suburbs and we are seeing a migration of people away from city centres.

We need to admit that we do not know the future of real estate prices or what economic recovery will look like. The government doesn’t know, and neither do the economists and analysts. The economy is so complex that when a butterfly flaps its wings in Brazil, real estate prices go up in Vancouver – chaos theory for real estate.

The years 2006-2007 showed us that when locals start seeing real estate as a “sure thing” investment, and the lending environment allows for speculation, at some point it tips the scales, and our “prediction” of rising prices becomes wrong. We see patterns where none exist and have a very short-term view.

Preparing to be wrong​

‘Fast thinking’ in real estate would be to follow the herd and just buy anything. ‘Slow thinking’ suggests making a more disciplined evaluation and preparing to be wrong by asking the right questions – questions that help make our predictions more probabilistic and a little less emotional.

– When are the interest rates likely to increase?

– How quickly do we expect to be back to ‘normal’ at the office?

– What impact will an interest rate increase have on real estate in general?

– What leverage can I handle with my purchase under various scenarios?

And the hard question that really needs to be asked right now is do we expect the current de-urbanization trend to continue post-pandemic?

Once again, we don’t have a crystal ball but if we look at history, we can learn some lessons and make informed decisions. According to economist Ed Glaeser’s comments in Six Hundred Atlantic’s ‘Today, Tomorrow, and C0VlD-19’ podcast episode (September 2020), despite plagues and pandemics, urbanization has been a constant since the 14th century:

“Urbanization proceeded despite the reappearance of the Black Death in the 1350s. Urbanization proceeded despite the Great Plague of London in the 1660s. All of the great diseases that spread in 19th-century America, cholera, yellow fever, the urbanization just chugged along.

“Even the influenza pandemic of 1919-1920 was followed by a tremendous decade of city building. So, I think our cities have proven to be remarkably resilient.”

As a developer, I am biased toward real estate and think it is the best asset class for my own investments.

We are constantly making predictions, and to make better decisions we rely on detailed pro-forma financial forecasts. This is how our business decides on a “go” or a “pass” for a development project.

For personal investment decisions, I recommend the same analytical approach – whether we are in a pandemic or not. Ask questions, consider many scenarios, base decisions on your financial abilities and, just in case, prepare a downside analysis.

Very interesting article. I understand your thinking...

I've been thinking a lot about the horrible recession in Los Angeles that started around 1990 and lasted a decade. The RE world stopped for years. This moment reminds me of then. It took all that time to absorb the excess RE inventory. I'm not sure that's going to happen this time around. It may be a ground-moving market shift. I sure didn't foresee this virus pandemic coming. But, you're right that the problems in the commercial RE market have been coming on for a decade. This virus-lock-down-thing has just sped up the process.