I'm worried about the real estate market right now

[Guest-5ty5s4]

That's true for single-family homes and small units. I have seen banks make borrowers pay down commercial loans for commercial properties and multi-family units when the market values fell. It depends on what kind of loan you're talking about.

Yup, ours has lots of covenants that are nit-picky and dig into the business's finances/operations as well as the owners' personal financial situations.

The bank can "call the loan" at any time if these covenants are in violation, and while they were agreed to originally (they shouldn't have been), they are what I would consider...arbitrary and predatory. The bankers actually have modified and moved the goal posts to help us be in good standing over the years because they know how BS these are.

But we are trying to switch banks to renegotiate. Current bank knows this and have been again trying to win back favor, but during COVID they got really aggressive with us despite never missing or being late on a single payment in decades (as well as, you know, the global pandemic and huge economic downturn that took place from stopping all economic activity).

Yes, this is all big commercial stuff, nothing residential.

-------------------------------------------------

I'm probably WAY oversharing, but this is just to highlight the issues that business owners face - non business owners think it's all a walk in the park. Forget that! It's harrowing.

 

[WJK]

happening in reverse where I live (Lancaster county, PA)
land prices are way up

neighbors house went on the market on Thursday, signed a contract on Tuesday (higher than asking price, according to rumor)

another neighborhood property was out for rent, never even listed it, a small time realtor knew two candidates that were looking, they signed someone who made a good offer. the one offer that they had included 3 months of advance rent if they could get the place, not sure on the conditions that they signed on but I'm sure it favored the owner

what's driving prices up? our theory is that people are moving out of the cities and into the country

Yes, the SFR (single-family residential) market is going crazy. People are fleeing the big cities and moving to small towns. The question is how they will settle in -- are they going to bring their big city ideas and politics?

 

[Guest-5ty5s4]

I knew I was concerned. Today's news says that the Feds are too...

"The Federal Reserve warned of significant risks of business bankruptcies and steep drops in commercial real estate prices in a report published on Friday.
'Business leverage now stands near historical highs,” the central bank said in its semi-annual Monetary Policy Report to Congress. “Insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable.'”

Correction: the Feds report was present to Congress and dated February 19th. It came out in one of my journals today.

They planned this.

Theres no way they expected businesses to take on billions in PPP loans and manage to retain full employment based on END OF FY2019.

It almost feels like a scam.

Edit: make no mistake, we will power through this and take cuts to keep it together, but wow talk about a ripoff of a program, terrible solution. Fuel to the fire!

 

[WJK]

They planned this.

Theres no way they expected businesses to take on billions in PPP loans and manage to retain full employment based on END OF FY2019.

It almost feels like a scam.

I agree. We just went through a period of time where everyone was using OPM (other people's money) and leveraging as much as possible. It was like the 1980s all over again. They kept the interest rates artificially low so no one could get a decent return on their money except by playing the Stock Market. Wall Street was raising the money for RE loans by packaging them into securities and not following the normal lending guidelines. What did they expect?

And now they are fussing about inflation. The Feds have been printing money like a drunken sailor expanding our money supply. This is textbook, Economics 101 stupid moves.

 

[Lyinx]

I agree. We just went through a period of time where everyone was using OPM (other people's money) and leveraging as much as possible. It was like the 1980s all over again. They kept the interest rates artificially low so no one could get a decent return on their money except by playing the Stock Market. Wall Street was raising the money for RE loans by packaging them into securities and not following the normal lending guidelines. What did they expect?

And now they are fussing about inflation. The Feds have been printing money like a drunken sailor expanding our money supply. This is textbook, Economics 101 stupid moves.

unless your playing chess, and the other players don't know the endgame

 

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[WJK]

I believed that we were crashing in Feb/March 2020 when the covid craziness started, laid workers off for 2 weeks (paid vacation). I KNEW the market was going to crash, and crash hard.
Guess what?
Business boomed, we hired new people (plus the old ones stayed on) and we are busier than ever.

In some sectors that is true. I'm starting to look for secured paper that I can buy. I think it's prime time again to start the bird-dogging program.

 

[WJK]

Only specific types of companies CAN go online.

If you broaden your perspective to the whole economy, you will see what I mean.

I can't build you a new roof over a Zoom call, for example. You also can't refine oil digitally, or extrude plastic with remote workers.

You're right about manufacturing and industrial space. There are segments that still need their space. BUT office buildings, malls, and retail space are for the most part vacant. And there's very little prospect of them getting good quality tenants in the near future. In the meantime, there are mortgages & taxes to pay, and maintenance to do on those structures. Without a clear path to a reliable income stream, the owners of those properties are toast. So are the investors who hold the paper. The last time that this happened, starting around 1990, it brought down the whole Saving & Loan and the Thrift industries. That was all private money and they lost everything. This time, the secondary market (government-backed) and Wall Street own that paper. How are they going to handle these losses?

 

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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.

 

[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]

Smart developers would buy office buildings, remodel them with a more "social interaction" focused design instead of "cubicle" design. For example, large open space atrium in the lobby.

I'm not sure about that. I've seen some trends against the open space floor plans by some of the corporate users. The tech users were really hot on the open space idea. There is some pushback against it. And the failure of the We Work empire further complicates it.

I sitting on the fence about the future of the office market segment of the RE business. We had "see-through" (vacant) office buildings in Los Angeles throughout much of the 1990s. It took that decade to absorb all that inventory and market to recover. That was the moment when the Japanese stock market failed and they dumped their Class A properties in that LA downtown market. And the PC (the personal computer) and the new invention of voice mail first made their marks on that market. Those vacancies cascaded through all the classes of the office market.

I wouldn't go into the office building market unless I had a very strong Plan B to back me up.

 

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[MoneyDoc]

Your real challenge would be to find the tenant. Then they would dictate the tenant improvements that they need for their business. The trend toward remote working has me spooked on office space. I don't know how many companies will bring their employees back to a centralized office setting. Before the pandemic, it was more of a concept rather than an in-your-face reality. We're going through a similar change in the retail space market because of online shopping. I'm not sure if all of these changes are a mire reset or structural change in how we allocate land uses.

The only problem I see with the trend for remote working is that burnout is clear. Social interaction is absolutely crucial to human development. That’s the idea behind the open space. Work that can be done at home stays at home. Meeting with clients, employees, etc. can be done at the office.

For me, I don’t know how anyone can work from home. Hell, I have my own businesses and I’ve been working from home for over 12 months now. I hate absolutely every minute of it. There’s a mindset issue for me. Getting out and going to my own office just makes me feel so much better. Makes me feel like I’m “doing” something.

And unless corporations are monitoring screens for employees, there’s going to be a huge trust issue for employers. I have friends that brag on how they use auto-clickers to make it seem like they’re working.

 

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[WJK]

For me personally, I think it's the perfect time to acquire dying plazas and rezone to mixed use residential and sell the site to a larger developer. One of my friends is in the business. He purchased a dying plaza (all tenants deferring rents) for an extremely competitive price, successfully rezoned it, and is set to make over $5m just from the rezoning to a mixed use residential.

I just keep thinking about all those acres and acres of paved parking lots that come with the shopping centers. Alternate uses could get very interesting.

 

[WJK]

The only problem I see with the trend for remote working is that burnout is clear. Social interaction is absolutely crucial to human development. That’s the idea behind the open space. Work that can be done at home stays at home. Meeting with clients, employees, etc. can be done at the office.

For me, I don’t know how anyone can work from home. Hell, I have my own businesses and I’ve been working from home for over 12 months now. I hate absolutely every minute of it. There’s a mindset issue for me. Getting out and going to my own office just makes me feel so much better. Makes me feel like I’m “doing” something.

And unless corporations are monitoring screens for employees, there’s going to be a huge trust issue between employers and employees. I have friends that brag on how they use auto-clickers to make it seem like they’re working.

I agree. Yes, I have a home office, but every day I go to my little office on the highway. It gives me a chance to meet with my tenants and business buddies. I sure don't want them to come to my house.

You're right. How can the corporation make sure they are getting their money's worth of work?

 

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[WJK]

Well, this is the problem. People who own a business or manage one and think everyone else is like them. What works for you might not work for someone else. Social interaction might be important, but so it is empathy and understanding that not everyone is an extrovert office mouse and not everyone can do their best work in that environment.

Many people suffer for years in an office environment, specially in those open office schemes. Too many people moving around, too much noise, someone jumping on your shoulder and side-tracking you after 15 minutes of building up what you are working on, etc. That's a productivity killer that many other folks don't get. I'm not saying that remote work works for every company or for everyone, just that working in an office doesn't work for everyone either.




The butt in the office chair culture instead of the get the stuff done and add value to the company one. Not having an actual way of measuring results and progress rather than hours of butt in chair sounds like a management flaw. If you don't trust your employees, what's the point in even having them in the first place. Not surprised fully-remote companies are so picky when hiring, specially managers.

Having said all the above, every one runs their business as they please in the same way everyone is free to apply for companies that align with their preferred ways of working where they can thrive.

There's two sides and sometimes three -- to every issue and question. Yes, I like privacy to get things done. And people do come in and stop my "flow" at times. I remind myself that they are the reason for me sitting there in the first place. The core of my business is to serve them.

 

[WJK]

Me neither. I was talking to my friend today about that and tbh, I wouldn't want to own ANY piece of real estate right now.

My bet one year ago was that cities were going to go through a rebalancing.

Big cities with tiny apartments would see the elite leave and go to smaller cities with bigger apartments for a lower price and better access to nature.

The difference in RE prices between smaller and big cities would decrease.





I think a bunch of these could be transformed into "experience" places.

Eg:

- Gyms
- Skate parks
- Thermal baths
- Museums
- Art schools
- Studios (movie, music)
- Event venues (concerts, etc)
- Open spaces

I said some weeks ago that I was actually bullish on mainstreet. Since people will spend more time at home, they will want to go out more (and they are likely to buy less online).

To attract these customers, shops and malls central to cities should go through a redesign to become more entertaining (shop + experience).

Eg: a cafe inside a book shop, with an aquarium to watch fish.

The only question is: will there be enough people left to go to all of these places?

One of the biggest challenges is to replace the sales tax dollars that have been lost due to the vacant space. Many communities were really dependent on the revenue streams from those properties.

Some of them are large enough to support a mixed-use community with commercial and residential spaces. I was thinking of a specialized community maybe for seniors or specific training/education. It's definitely a balancing act with a lot of different interests that must be considered.

 

[Kid]

We're just about to see the results of the Federal and State lockdowns on the real estate market. The hot single-family housing market is still with us in many markets. I'm not sure if 2008 will repeat itself in that market segment. But, it sure feels like it could be a bubble again. If it a repeat of history, it will get personal for a lot of people really fast.

With all the disruptions in the commercial and office market, there's going to be a lot of pain coupled with many opportunities available. The path forward won't be well marked. That uncertainty will cause a lot of confusion and missteps. A few people will come out on top either by dumb luck or well-calculated guesses and gambles.

It indeed might end up like this.
People will stop receiving stimulus checks and overall happiness from helicopter money will end.

The only difference i spot now is a few trillion dollars printed and injected into economy, making higher house prices less higher in reality (purchasing power).

 

[Kid]

Didn't know that it's repeat of history rather than something new!

Based upon that truism, the commercial markets were totally over-built during the 1990s with OPM (other people's money). Adding the recent virus lock-downs to the mix is tipping the scale toward a segment wide disaster

I brought this topic while casually chatting with my father's boss, once.
He concluded akin to "so there are no safe businesses".
By his voice tone and calm look on his face , one could tell that it wasn't a first time he thought about it.

 

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[WJK]

Didn't know that it's repeat of history rather than something new!


I brought this topic while casually chatting with my father's boss, once.
He concluded akin to "so there are no safe businesses".
By his voice tone and calm look on his face , one could tell that it wasn't a first time he thought about it.

Been there. Done that. Have the T-shirt and my ticket stub. This is continuing cycle...

 

[WJK]

My opinion:
I am not wealthy enough to hedge myself. People with "diversified portfolios" with under 50 million in the bank are pussies

I don't own because if I'm still stuck in the same house for more than 3 years my life is growing to slowly. Last year was 1900 a month for my place. This year it's 3200. In a few years I'll be living in Medina but I'm not going to purchase a home. The only property I'm buying will be for the business. My landlord thinks he's a genius. I think he's a moron. He's twice my age and has to listen to me complain about how the dishwasher is making a noise. That's no way to live. If I had his amount of equity/net worth/access to capital I would be doubling my money every year with a business, not getting little puny rent payments. And I am doubling my money. We're twice as big as before and will be twice as big next year.

Supplementing a mortgage or rent payment: I told my girlfriend to get a job or start a business. Brings in another 3k a month that I put towards rent and food.

The business automation is 1. You get a recurring client that pays monthly with autopayments. 2. You hire other people to do the work. (For location-dependant business only: 3. You build a great single location and then franchise it) There's gonna be management issues, little problems here and there, etc. It's not fully automated by any means. It certainly beats having a job though.

I understand your business model. I hear your comments about your landlord. Best of luck with your plans.

 

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[WJK]

The real estate SF is on fire right now as well as MF. A lot of people in my area are buying million-dollar homes by the dozen. Multi-family is the best in my opinion because the less chance of a total vacancy. You can either stay on the sidelines and watch opportunities pass you buy or get in the game and become smart in the process. It depends on how hungry and driven you are. People make money in a down market as well. Just get ready to pivot yourself and ride the wave.

Yes, the SF market is on fire. And yes, the MF market isn't far behind. Is it a bubble? Is it all going to crash? Is it worth the risk right now?

MF, starting at 5+, are funded by commercial loans and subject to loan calls IF the market value declines. The lending rules are totally different from SF and small units. This time reminds me of around 1990.

Good luck.

 

[WJK]

There are lots of commercial RE markets, and they are not all in the same situation...

Sure, office and retail are in a bad place. But, if you own self storage, industrial or flex space, you've probably made a killing this past year, and will likely make a killing over the next couple given industry trends.

The nice thing about commercial are that there are a lot of non- and negatively correlated asset niches. So, it's not difficult for investors to diversify in a way where the the blended risk is low, but with long-term upside.

You're right. There are some "golden niches". My mobile home park for low to moderate-income tenants is one of them. I also have some RV spaces that I usually rent in the summers. The tourists didn't come this last summer so those were mostly down. My sleeping rooms in the back of my office have also been quiet. We're in a very rural area and isolated from a lot of the chaos.

It just depends on what part of the market you are looking at. In our towns here, the retail spaces have a lot of vacancies. The self-storage market now has some strong competition. U-haul took over an old big-box-store space and converted it to heated self-storage units. They are very predatory. They are sure giving all of the little guys a run for their money.

I'm so glad I'm not in the major city's markets where the We Work empire imploded.

 

[Determined2012]

@WJK A lot of your posts age really well!

It is so refreshing to see! It speaks to just how knowledgeable you are about the things you remark upon. I have enjoyed reading your posts on this forum!!!

 

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[WJK]

@WJK A lot of your posts age really well!

It is so refreshing to see! It speaks to just how knowledgeable you are about the things you remark upon. I have enjoyed reading your posts on this forum!!!

Thanks, this is my 45th year in RE. I'm just trying to pass on some the knowledge I've gained over the years.

In terms of residential real estate, it seems like inflation, cheap money, and supply problems are causing the market to explode to the upside. I just looked at a new build in the Park City area (Utah) and the builder confirmed what I was seeing visually with prices... the cost to build (labor + materials) is skyrocketing -- and it is causing prices to go up, literally monthly.

A house that I considered for $3M was gone in four days. If it survives the market for two weeks, next month the price goes up $3,250,000.

I've never seen anything like it.

My lumber and materials prices have just about doubled during the last year. You're right about the prices of the materials. I'm glad that I own a sawmill. I just ordered 2 semi-truck loads of logs for us to mill this spring.

About the residential prices, I have seen those markets and they are scary. I've also seen them fall flat after their big run-ups. I'm head shy about that market too as well as the commercial sectors. Usually, this time of the year, I'd be out looking for privately owned (OWC) trust deeds to buy. Right now I'm just sitting on my strutting money, waiting it out, to see where things go. I have the itch to go "bird-dogging" and make a deal or two -- BUT...

 

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[Raja]

Similar to source.

 

[Raja]

Yes, it's one cycle after another. But, trying to predict and act on those peaks and valleys will make you crazy and keep you broke.

@WJK thank you for the sound reply.

not trying to time the market, I just not earn that high enough at this time to invest in real estate at this time.

right now, just keeping an eye on the market. because my credit is non-existent in the USA I'll have to be ready to have at least 50% as a downpayment.

 

[Kal-El1998]

I think a lot of people are worried about it as well. The thing though is that real estate does create a lot of wealth for a lot of people besides just investors. I remember kris krohn did a video about this though and explained it pretty well. Now that being said, I don't put it past the gov to potentially F everything up though. Especially considering we have a dude with dementia in right now, but I digress. Personally though I've gone virtual with the real estate business model and find it to work better.