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The New Normal For Real Estate??

cash flow real estate as a business real estate market Apr 11, 2021

 

Will the "new normal" make you or break you?

 

It’s 2021 and by now most of us have had to throw out everything we thought we knew about how this thing called life works.

Downtown's are empty, everyone’s moved to the suburbs, working from home and your guess is as good as mine as far as what’s going to happen long term with kids and school.

Real estate represents a huge portion of most people’s net worth so the million dollar question is are we in for a crash?

The short answer is – IT DEPENDS on a lot of factors.

Prices for houses in suburbs are gone off the charts as people scramble to get out of downtown's to either to work from home or move in with parents .With all that time at home people want more space and downtown condos aren’t doing it and virtually everywhere I look the story is the same.

Tons of potential buyers and very little inventory to choose from. Personally, I think people stretching themselves way too thin to get into the housing market and are leaving themselves exposed.

There are millions of people behind on their mortgages already and the programs to protect them will eventually run out. Interest rates can’t possibly go any lower and people can only afford to pay so much. Unemployment rates are still high (and under reported in my opinion) in many parts of the country and the job market is changing faster than ever.  FOMO (Fear Of Missing Out) and caused by limited supply is pushing prices up at an unsustainable rate.

Downtown's are a different story but not like I thought it would be at this point. Condo prices seem to be falling but not as fast as some people (including me) would have expected. There was a period there in the fall of 2020 when I thought the prices were going to start coming down and they did a bit (but not much of a discount to the pre COVID prices). I think the government programs out there giving people a break from making their mortgage payments and financial assistance programs have skewed things and made it easier for people to hold on to their properties.

Rents have come crashing down in many downtown markets as people move to suburbs or other (more affordable) markets altogether, but those lower rents don’t seem to be motivating condo owners to lower the prices to sell. You would have to assume that the owners of those condos rather pay the monthly cost to keep that condo empty or rent it out for much less rather than sell it at a discount. The other issue I can see with condo’s right now is inventory. There is not much to choose from either.

I think COVID and all the uncertainty around it has a lot of people avoiding listing their empty condos that they left when they moved or when their tenant left. No one knows when you’ll be able to go to a basketball game, concert or enjoy everything downtown has to offer so why life there unless you absolutely have to.

Thousands of retailers, restaurants and small businesses have packed it in and it’ll probably be years before the people that went broke because of it will have the money and energy to try again. That is another thing – can you see yourself going back to living life the way it was before?

I can’t. I’ve known about ordering groceries online for years and never did it. Now I do not even want to go to a grocery store anymore. I learned a new habit and rather spend my time doing other things than picking avocados and hunting down a bottle of ketchup in isle 3.

I can see myself going to restaurants but for a lot of people it’ll probably be a while before they’re comfortable and the restrictions around how many people can sit at your table make sense. I used to love going downtown to have some dinner on the strip, catch a movie and maybe get some ice cream.  All those businesses. Gone. Life savings wiped out.

So whose going to rent all those spaces? The coffee shop at the base of your old office building? The sub shop down the street. People have returned to working downtown but nowhere near what it was. That downtown coffee shop was paying an insane amount of rent per sq foot because of all that foot traffic. If they’re still even open there’s no way they can afford to pay that rent and if they’re not paying that rent per sq foot anymore than that destroys the value of that real estate.If the rent collected (if any) from those tenants drops then the lenders who lent on those buildings are going to start getting worried about making sure they get paid.

Now the big real estate companies out there have plenty of cash on hand and can afford to carry nonperforming buildings. But the question is for how long? I read the papers and see that a lot of the CEOs of those companies think that downtown's will rebound and recover and I’m not so sure. Will they come back as quickly as they hope? Some companies are talking about converting office buildings into apartment buildings or condos

Other companies are talking about taking the malls (that’s another thing we still need to talk about) and converting them into condos, seniors care homes and even turning them into warehouses or distribution centers for all that online shopping you and I are doing nowadays. Obviously, you got the Amazon’s of the world but you’ve even got companies like Nike (who traditionally did less than 10% of their sales directly) doing over 30% of their sales direct to the consumer.

Remember getting your Nike’s at Footlocker? Nike doesn’t need them anymore and can get you your Jordan’s for less because they’ll ship them to your door. That makes less traffic in malls and more traffic online and it’s driving a whole new kind of real estate demand for industrial for all those servers that power the internet. Millions of square feet of industrial buildings are popping up all over the world to make sure your shoes get to you when you hit the buy button.

It’s a different world out there today and I know plenty of people in real estate that say that what’s happening with offices, retail and malls was going to happen anyway but over 10-20 years. The pandemic just triggered it all overnight.

I bought my first piece of real estate when I was 21 and since then I’ve been focused on cash flow first, growth second. Personally, I think eventually the chickens will come home to roost on any real estate investment that can’t carry itself from the income it generates. If you’re buying real estate because you think it’ll go up in value; you’re not investing – you’re speculating.

In the case of buying a home – it’s worth as much as the amount of mortgage someone can afford. The lower the rate – the more house. As soon as enough people can’t afford to pay you’ll see prices correct.

In a broader context (aside from real estate that stands to benefit from the shift to online shopping) another sector of the market that always gets a lot of attention when recessions hit are multi family apartment buildings. As people lose their homes, a spouse loses their job or the family needs to cut back people always go back to basic rental housing. This adds a lot of pressure to the existing rental market (where a lot of people are already tenants for life reside) and increasing rents due to demand.

People will always need an affordable place to live and there always seems to be a huge increase in investment demand in this market when times get tough. Personally, this is my favorite real estate asset class because you are providing an essential service to 100s or 1000s of people who appreciate it and make it a priority to always pay.

Eventually everything comes back to what “makes sense” and I think where we’ll see the most pain in the real estate market this year is where the property can’t carry itself with income it generates.

Whatever you believe we’re definitely living in a different world today and it’ll be interesting to see how the real estate evolves around us.

Let me know what trends your seeing in your market!

 

 

To Your Success,

 
Marcin Drozdz
 
 

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