Preparing to capitalize on the next market collapse

Scott E. · 2023-05-03T08:00:32-07:00

Every day I spend some time in the morning getting up to speed on the latest state of the real estate market by reading various news outlets, listening to economists, looking at data around inflation/inventory/rates, etc. There are 2 things that I've gathered from the last couple of months that everybody seems to agree on: 1. Nobody knows for sure where the residential real estate market is headed. 2. Everybody seems to agree that there is serious pain ahead in the commercial real estate market. As far as I can tell, the challenges in commercial real estate are centered around a few factors: -Many loans coming to due in 2023 (about $270 billion worth), meaning owners will be forced to refinance or sell this year. -Vacancy rates are high (specifically in office and retail, also depending on the region). AND interest rates are high. Meaning that if an owner is forced to refinance when their loan matures, they will get stuck with a much higher payment on a property generating much less income due to vacancies. -Vacancy rates in office are already showing some serious blows to office valuations. It may be an anomaly but just last week it was reported that an office building in San Francisco worth $300,000,000 in 2019 is expected to sell for $60,000,000 today. Ouch. Link -The vacant office space is causing a ripple effect. If a 100,000 square foot office building is sitting 35% vacant in the heart of Manhattan or San Francisco, that is not just a problem for the office building owner. The surrounding retail shops who depend on those office employees as customers are hurting as well. And if they don't have as many customers, they are less likely to be able to afford their rent. Which is not good for the owners of those retail buildings either. -According to various reports, real estate accounts for ~25% of US banks books and as much as 65% for smaller banks. If commercial real estate owners start walking away from their buildings, these smaller banks could also be in big trouble. As of now they say most debt on commercial real estate is being paid as agreed. But this feels like a "calm before the storm" to me. Would love to hear the perspective of those who are wiser than me on what the future holds in commercial real estate. I can't help but think that we are about to experience a lot of pain and a lot of opportunity in commercial real estate.

Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

3y

Quote from @Bill B.:

What’s the old saying @Scott E.? If you can’t make the payments on a 100k loan you have a problem. If you can’t make the payments on a 100M loan, the bank has a problem.

I guess each bank gets to decide if they would rather accept the current terms and payments or accept a $10-20-$30 million loss by calling it due and trying to sell.

These battles will be fought and decision will be made waaaaay above my skill/risk level.

That's called "extend and pretend" then eventually "delay and pray." Both sides do it and it will prolong any recession for a decent amount of time.

2 Reply

Mike BybeePro Member

Investor · Member since 2018 · 9 posts · 5 votes

3y

Quote from @Carlos Ptriawan:

Quote from @Mike Bybee:

Quote from @James Hamling:

100% agree with that analysis. Also what is not mentioned, the regulators have not required the banks to mark their bond portfolio to market. That consideration isn't even in their stress test eval according to the SVB hearings from the regulators. Literally, as we speak, the community banks are all on tilt, where typically their leverage ratio was at 2-3:1 is now at 10:1 since their bonds are currently worth .50 on the $. This just reinforces your concept that only the big boys will be holding the cards when the music stops. And that is because they are too big to fail. Main street screwed again. Regional banking as we know it today, will be extinct. Much like the S&L debacle back in the 80's.

THis is the playbook in the 1920-1930s too. Remember why JP Morgan exist at the first place ? It's the exact same circumstance.
Any bank failed ? they would just sell it to JPM in one fine weekend. What happened to FRC is so predictable. Now PACW maybe in line for the next weekend to be captured by JPM.

JP Morgan was so filthy rich buying distressed business for .20 on $, he ended up giving the US Government a f-ing loan to cover their spending problem back in the day. Of course, this was before the federal reserve, thus the government could not print funny money anytime congress decided to go on a spending junket. Now, it is only corruption. The government sells JPM the cream (at a discount of course) and the tax payor gets to pick up the crap left over.

0 Reply

Jay ThomasPro Member

Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes

3y

Realtors are in a unique position to witness the changes happening in both the residential and commercial real estate markets. Based on what I've seen in the last few months, there is a lot of uncertainty about where the residential real estate market is headed. Despite this, one thing seems to be certain; the commercial real estate market looks like it's heading for some tough times.

This challenge is likely due to a variety of factors such as rising vacancy rates, high borrowing costs, and oversupply in certain markets. These issues have caused lenders to become more cautious while buyers are becoming more selective with their purchases. All these factors have combined to create an unfavorable climate for commercial real estate investment.

[email protected]832-889-5607

0 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

If they wanted to the whole situation could be prevented NOW, today, in less then 1 week. Via establishing a special "inflation impact fund" that provides a deferred off-set 7yr loan to commercial property operators that will bridge the difference in current financing rate and there new rate. This would be tacked onto the back end as a balloon payment, no pre-payment penalty. It wouldn't take that much $, about what we send Ukraine in 1 week, and it buys commercial real estate 7 years breathing room to get things sorted and leveled out. But have we heard 1-word of something like this? Anything like this? This issue has LONG been coming, everyone literally EVERYONE in commercial real estate sees this freight train coming to end of the tracks, it's simple math.

very smart answer James LOL

I guess they already make scenario like this even before. In america everything is pre-positioned/pre-configured.

So in one dinner table in 2019 Powell may speak to Chief of President blablabla "bro we have to have increase interest rate", how do you wanna do it ? The bro Powell said, I can self create a "fake inflation" by printing massive Dollar..........and then the Chief ask, and after that ? the Bro Powell said oh and then after that, there would be inflation........then what Chief said ......then I would increase the interest rate for two three years, dumping our asset and dollar would skyrocket............then the Chief ask "but that would trigger Bank collapse No ?"

Then bro powell said, yes eventually, but we have our friend JP Morgan, that would act as last buyer, to buy all those banks.... hahaha LOL

NOw Mr Powell said, in two years, I would ask Treasury to buyback our bonds again LOL

It has been written in US econonomic history since 1930, last time I read in history book LOL

there's nothing that's accidental in planet America, everything is already calculated.

think Fed is stupid enough to over money printing ? nope, it's designed that way

Yeah, this is not a matter that inflation just "went up" and that rates just "went up". Rates have nearly tripled, in just a handful of quarters. When the Fed sit's down to discuss not just raising rates, but bringing it to such a level is such a time frame, there is OBVIOUS factors such as the standing of commercial finance as it's a well known cycle and a very large amount of financed capital. For the condition of commercial finance NOT to be taken into account and discussed is like saying a group planned a mission to Mars and never discussed bringing food and oxygen.

As I have mentioned before, I hear their words BUT I LISTEN to their actions, words can be anything but actions tell-no-lies. The actions are clearly saying they know the disruption in banking and don't care, they are happy to feed J.P..

Big surprise right, the proponents of big gov. are also big corp., surprise-surprise.

1 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Mike Bybee:

Quote from @James Hamling:

Quote from @Bill B.:

What’s the old saying @Scott E.? If you can’t make the payments on a 100k loan you have a problem. If you can’t make the payments on a 100M loan, the bank has a problem.

I guess each bank gets to decide if they would rather accept the current terms and payments or accept a $10-20-$30 million loss by calling it due and trying to sell.

These battles will be fought and decision will be made waaaaay above my skill/risk level.

It's not that simple Bill.

Those commercial loans, on the books of the bank, call it a $35m loan, while performing have an effect similar to if it was cash in the vault, not exactly but much to that effect for simplicity sake.

Now say there is a major issue, it's in dystopian "snow-flake-vile" and has lost considerable monetization so owner pulls trigger on Strategic-Default. Now the bank has the property and get's it sold, but at only $15m. Here is the issue, that is a $20m "lose" the bank has to figure out how to wizard on the books. And it has a ripple effect because they operate on fractional lending, which is balanced by the books NOT actual money in the vault, so this $20m loss ALSO effects it's standing on capacity to carry and service an additional $180m or so in lending. Remember that old term of "Stress Test's", yeah, that's what it speaks to.

Now you multiply this by just a handful of instances, not tens of thousands but tens, and all of a sudden numbers are touching on a billion+. All of a sudden that "Stress Test" is going from green, to yellow, skipping orange and throwing RED RED RED.

And what happens? All of a sudden there is talk of regulators "helping" that regional lender by "relieving them" of a billion in ACTIVE serviced accounts and handing them to..... drum-role-please..... J.P. FREAKING Morgan......

Yup......

That's how I see this playing out. Nothing more then a consolidation in banking. And there isn't a darn thing those regional banks can do.

And that is how it works, J.P. doesn't take the actual problem accounts, no, were all told what a great "helpful" thing it is that they are taking a big hunk of what is working because then, at a smaller size it "mitigates risk exposure" and we gobble it up.

And then if it becomes a big enough problem they will issue out a new TARP, so WE will fund it, and again be told how it's a good thing for all of us that J.P. is getting a few trillion in additional accounts who specifically DIDN'T want to work with J.P. in the first place, and the tax payer will supplement the regional lenders to "get their house in order". Or, what's left of that house after J.P. was handed half the best parts of it.

If they wanted to the whole situation could be prevented NOW, today, in less then 1 week. Via establishing a special "inflation impact fund" that provides a deferred off-set 7yr loan to commercial property operators that will bridge the difference in current financing rate and there new rate. This would be tacked onto the back end as a balloon payment, no pre-payment penalty. It wouldn't take that much $, about what we send Ukraine in 1 week, and it buys commercial real estate 7 years breathing room to get things sorted and leveled out. But have we heard 1-word of something like this? Anything like this? This issue has LONG been coming, everyone literally EVERYONE in commercial real estate sees this freight train coming to end of the tracks, it's simple math.

100% agree with that analysis. Also what is not mentioned, the regulators have not required the banks to mark their bond portfolio to market. That consideration isn't even in their stress test eval according to the SVB hearings from the regulators. Literally, as we speak, the community banks are all on tilt, where typically their leverage ratio was at 2-3:1 is now at 10:1 since their bonds are currently worth .50 on the $. This just reinforces your concept that only the big boys will be holding the cards when the music stops. And that is because they are too big to fail. Main street screwed again. Regional banking as we know it today, will be extinct. Much like the S&L debacle back in the 80's.

EXACTLY! See, what they DON'T say and DON'T do speaks volumes to true intent. What unsaid and not done is sometimes the loudest statement.

0 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Carlos Ptriawan:

Quote from @Mike Bybee:

Quote from @James Hamling:

100% agree with that analysis. Also what is not mentioned, the regulators have not required the banks to mark their bond portfolio to market. That consideration isn't even in their stress test eval according to the SVB hearings from the regulators. Literally, as we speak, the community banks are all on tilt, where typically their leverage ratio was at 2-3:1 is now at 10:1 since their bonds are currently worth .50 on the $. This just reinforces your concept that only the big boys will be holding the cards when the music stops. And that is because they are too big to fail. Main street screwed again. Regional banking as we know it today, will be extinct. Much like the S&L debacle back in the 80's.

THis is the playbook in the 1920-1930s too. Remember why JP Morgan exist at the first place ? It's the exact same circumstance.
Any bank failed ? they would just sell it to JPM in one fine weekend. What happened to FRC is so predictable. Now PACW maybe in line for the next weekend to be captured by JPM.

Do you recall the story of how "The House of Rothchild" became the giant it is now, via the Napoleonic war?

They were very wealthy, but not in total dominating control as are now. What they did was set-up a chain of fast ride couriers, a system later used by the Pony Express actually taken as inspiration for such.

And when Napoleon lost at Waterloo, their couriers ran flat out nearly killing the horse to the next in chain, gave the info, then that one raced flat out, unto the next and so on and so fourth so that the Rothchild's were actually the first with the news of the defeat. Being the only ones with this information, they shorted the market and then "leaked" information that Napoleon had WON, and was marching on London at that moment with no forces of strength to longer stand in way of inevitable invasion and fall of London.

The market crashed, hard. And Rothchild made a mint on the short's BUT then bought up EVERYTHING, for now pennies on the dollar. And then the reports arrived from the official sources, the truth that London was safe, Napoleon was defeated.

As dust settled, Rothchild's were now the #1 wealthiest humans alive, in control of seemingly everything.

History is dotted with such events by the 2%, making such consolidation "plays" to consume power and wealth at mind boggling levels. It's the reality for the world, that we do 100% live in a Plutocracy, that's branded a democracy for public consumption.

This that's happening now with inflation, commercial finance, banking, it's a familiar tune wouldn't you say? As Cheney said "never let a good crisis go to waste".

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

3y

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

Podcast Guest on Show #222

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4 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Jay Hinrichs:

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

100%. I don't see an "opportunity" playing out in this as many are having knee-jerk reaction to of an '08' style event. I don't know why that's where minds automatically go at any turmoil.

If one could throw together a fund, maybe get a few billion together, now you got something, striking out to provide some form of bridge finance too commercial operators. Most commercial properties facing this "credit crunch" are good operating properties, I think people miss this fact. It's not all just vacant office spaces.

And for that vacant office space, say a 150k sqft high-rise, those could potentially be converted into say residential units. Or more of a mixed use type structure. I am betting many are waiting on incentives to do such, some tax-credit for conversion funding of what-not.

FYI for those not in the know; at big $ / development level when we say "tax-credits" it's not a write-off for the developer, it's a funding channel system long used by the government to provide supplemental funding for developers. They issues "tax-credits" that are then sold for $, thus limiting the investment requirement by the developer.

2 Reply

Brad Jacobson

Realtor · Ogden, UT · Member since 2019 · 338 posts · 415 votes

3y

The data point that has me most interested is inventory on market.

In 2007, there were over 4,000,000 residential homes available before the bubble burst. Today, there is less than 1,000,000 despite the high rates. That tells me the residential market is pretty secure.

Commercial properties are the opposite. There are tons of vacancies and much lower demand. I wish I had better numbers on this because my only data is only anecdotal but everyone in commercial I speak to currently worries about banks holding too many bad commercial loans that will all have their rate adjust in the next two to three years.

3 Reply

Jeff S.

Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes

3y

Great post @Scott E. and a couple other factors maybe I missed in the comments is AI replacing bodies so less need for office space AND people working from home so companies are moving from super expensive spaces into smaller places.

1 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Brad Jacobson:

The data point that has me most interested is inventory on market.

In 2007, there were over 4,000,000 residential homes available before the bubble burst. Today, there is less than 1,000,000 despite the high rates. That tells me the residential market is pretty secure.

Commercial properties are the opposite. There are tons of vacancies and much lower demand. I wish I had better numbers on this because my only data is only anecdotal but everyone in commercial I speak to currently worries about banks holding too many bad commercial loans that will all have their rate adjust in the next two to three years.

The fundamental problem with office is that many companies are moving into hybrid workplace where people only come 1-3x a week to office.
From the chart that I read, from realized PSF positioning perspective, PSF required for employee to be working in 2023 has regressed to 2002 level, so if PSF has reduced a lot, then all office ,especially the one build in 1980s, shall have valuation moved to 2002 level. This is the one that's not happening yet in private commercial.

For tech companies, it's true that for company that's solely focusing on software, most of them already moved to 90% work from home anyway.

2 Reply

Lucia Rushton

Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes

3y

@Mike Dymski yep mainstream media and those that watch are eating it up.

0 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Jeff S.:

Great post @Scott E. and a couple other factors maybe I missed in the comments is AI replacing bodies so less need for office space AND people working from home so companies are moving from super expensive spaces into smaller places.

AI seems going to replace almost everything, now in SF you see two-three phenomena: an empty office building in front of self-driving car next to homeless with feces everywhere.

I think SF is really the forefront of what's going to happen in future, less humanity and more robotics replacing human for nothing , a weird place to be LOL a sad place truly

2 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @Mike Bybee:

Quote from @James Hamling:

History is dotted with such events by the 2%, making such consolidation "plays" to consume power and wealth at mind boggling levels. It's the reality for the world, that we do 100% live in a Plutocracy, that's branded a democracy for public consumption.

This that's happening now with inflation, commercial finance, banking, it's a familiar tune wouldn't you say? As Cheney said "never let a good crisis go to waste".

300% LOL .... plutocracy in America is branded as that "democracy for public good" lol ... I guess there's no difference between plutocracy is western society and the one in most suspected country. It's just more disguised in the western world.

Sometimes our job as investor, is just to do risk analytics, when the gov. policy is giving advantage to us, and when they're going to screw us LOL

0 Reply

Account Closed

Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes

3y

Quote from @Jay Hinrichs:

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

I agree, the danger is in the banking system

Since banks don't actually have much money in the vault, (look up "fractional banking") the one thing the government can do is pre-stage pallets of money, like they sent to Afghanistan (thank you taxpayers, for your generosity) to keep the ATMs operating and to have at the ready if there is a run on the bank. People will want to withdraw their money if they think their bank is going down.

The banks could freeze your debit and credit cards until things are sorted out. Also, look up "Bail In". It is now legal to hold people's money to stabilize a bank.

But, the government won't do that. When do they ever plan ahead?

So, if you believe there will be a cash crunch, it's better to put some cash in a safe place you can access it in the event the banking system freezes for a time.

1 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Account Closed:

Quote from @Jay Hinrichs:

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

I agree, the danger is in the banking system

Since banks don't actually have much money in the vault, (look up "fractional banking") the one thing the government can do is pre-stage pallets of money, like they sent to Afghanistan (thank you taxpayers, for your generosity) to keep the ATMs operating and to have at the ready if there is a run on the bank. People will want to withdraw their money if they think their bank is going down.

The banks could freeze your debit and credit cards until things are sorted out. Also, look up "Bail In". It is now legal to hold people's money to stabilize a bank.

But, the government won't do that. When do they ever plan ahead?

So, if you believe there will be a cash crunch, it's better to put some cash in a safe place you can access it in the event the banking system freezes for a time.

there will be no banking freeze as problem is contained, they would just re-sold the debt to someone that's richer to absorb the losses.
The fact that FRC now part of JPM is just telling depositor that there's no worry that they dont need to move money around because JPM is there.
And JPM is making hell lot of money because they receive 0.01% saving account with spread as high as 5% when they re-invested into Tips.
The big guy is making money left and right , right now.

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

3y

Quote from @James Hamling:

Quote from @Jay Hinrichs:

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

100%. I don't see an "opportunity" playing out in this as many are having knee-jerk reaction to of an '08' style event. I don't know why that's where minds automatically go at any turmoil.

If one could throw together a fund, maybe get a few billion together, now you got something, striking out to provide some form of bridge finance too commercial operators. Most commercial properties facing this "credit crunch" are good operating properties, I think people miss this fact. It's not all just vacant office spaces.

And for that vacant office space, say a 150k sqft high-rise, those could potentially be converted into say residential units. Or more of a mixed use type structure. I am betting many are waiting on incentives to do such, some tax-credit for conversion funding of what-not.

FYI for those not in the know; at big $ / development level when we say "tax-credits" it's not a write-off for the developer, it's a funding channel system long used by the government to provide supplemental funding for developers. They issues "tax-credits" that are then sold for $, thus limiting the investment requirement by the developer.

banks buy the tax credits for their high net worth clients.

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

0 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Carlos Ptriawan:

Quote from @Account Closed:

Quote from @Jay Hinrichs:

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

I agree, the danger is in the banking system

Since banks don't actually have much money in the vault, (look up "fractional banking") the one thing the government can do is pre-stage pallets of money, like they sent to Afghanistan (thank you taxpayers, for your generosity) to keep the ATMs operating and to have at the ready if there is a run on the bank. People will want to withdraw their money if they think their bank is going down.

The banks could freeze your debit and credit cards until things are sorted out. Also, look up "Bail In". It is now legal to hold people's money to stabilize a bank.

But, the government won't do that. When do they ever plan ahead?

So, if you believe there will be a cash crunch, it's better to put some cash in a safe place you can access it in the event the banking system freezes for a time.

there will be no banking freeze as problem is contained, they would just re-sold the debt to someone that's richer to absorb the losses.
The fact that FRC now part of JPM is just telling depositor that there's no worry that they dont need to move money around because JPM is there.
And JPM is making hell lot of money because they receive 0.01% saving account with spread as high as 5% when they re-invested into Tips.
The big guy is making money left and right , right now.

JPM is "McLoving-it"!

1 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @Account Closed:

Quote from @Jay Hinrichs:

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

I agree, the danger is in the banking system

Since banks don't actually have much money in the vault, (look up "fractional banking") the one thing the government can do is pre-stage pallets of money, like they sent to Afghanistan (thank you taxpayers, for your generosity) to keep the ATMs operating and to have at the ready if there is a run on the bank. People will want to withdraw their money if they think their bank is going down.

The banks could freeze your debit and credit cards until things are sorted out. Also, look up "Bail In". It is now legal to hold people's money to stabilize a bank.

But, the government won't do that. When do they ever plan ahead?

So, if you believe there will be a cash crunch, it's better to put some cash in a safe place you can access it in the event the banking system freezes for a time.

there will be no banking freeze as problem is contained, they would just re-sold the debt to someone that's richer to absorb the losses.
The fact that FRC now part of JPM is just telling depositor that there's no worry that they dont need to move money around because JPM is there.
And JPM is making hell lot of money because they receive 0.01% saving account with spread as high as 5% when they re-invested into Tips.
The big guy is making money left and right , right now.

JPM is "McLoving-it"!

The Dimon guy said and you know guys, in 5 years I would be richer than Rotschild, as I spend riskless $1.00 to gain $5.00 in 5 years time , guaranteed by gov LOL

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Chris Evans

Real Estate Broker · Atlanta, GA · Member since 2023 · 38 posts · 37 votes

3y

Great post, Scott!

The current residential market is relatively predictable due to a few key factors. New household formations have outpaced new construction starts in seven of the past eight years (source: MBS Highway). The National Association of Realtors (NAR) estimates a shortage of 6.5 million single-family residential (SFR) homes nationwide. Factoring in the multifamily construction boom over the last five years, the total inventory shortage stands at around 2.5 million housing units (NAR).

Rate-based restrictions are causing buyers to wait on the sidelines. Mortgage rates are about 100 basis points higher than historical margins over the past 50 years which is due to lenders anticipating shorter loan periods before refinancing. As the Consumer Price Index (CPI) shows a decline in inflation, the margin will likely decrease, prompting more buyers to enter the market.

Over the last 80 years, the residential real estate market has experienced negative growth in six years and zero growth in one year (MBS Highway). Notably, five of those negative growth years occurred during the 2008-2012 Global Financial Crisis. Given this historical context, it's reasonable to expect a flat growth curve through any downturn, followed by increased prices and demand.

A significant factor to consider for both residential and commercial markets is the amount of equity in properties. Less than 1% of U.S. mortgages are variable, and average home equity is at an all-time high. This suggests a strong residential market that is likely to persist.

In the commercial sector, many properties also have substantial equity. However, larger Class A operations are often over-leveraged, with valuations based on pre-pandemic occupancy and cash flow. Increased vacancy rates have led to reduced cash flow and property values. For example, a mall in Georgia currently has $90 million in debt servicing and a valuation of approximately $40 million.

Many large enterprises with billions in assets employ credit default swaps (CDS) to hedge against risks like these. While banks may recognize the potential hazards, it's impossible to determine how many have mitigated risks elsewhere in their books. Consequently, the situation could be dire, but it may not be as severe as it appears. Meridian published an insightful article on CDS in commercial real estate last year:https://www.meridiancapital.co...

2 Reply

Robert Carpenter

New York Metro · Member since 2018 · 30 posts · 4 votes

3y

IMO, the future of residential real estate will belong to manufactured housing. Recall that the last time the US economy entered a protracted period of stagflation was in the late 1960s. In consequence, during the next four decades manufactured housing sales surged, the highwater mark being nearly 400,000 in annual sales. It was only when jurisdictions aggressively moved to enforce exclusionary zoning that manufactured housing sales began to decline. The incipient environment of stagflation can be expected to produce comparable effects on the housing market. Proposals to rework HUD's AFFH rule to more vigorously make use of its preemptive powers to prevent exclusionary zoning will I believe herald a new golden age for manufactured as people discover it to be the better and cheaper alternative to both multifamily and site built.

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Henry ClarkPro Member

Developer · Member since 2020 · 4k+ posts · 4k+ votes

3y

Not in a sarcastic sense but I don’t care. We don’t own an office skyscraper, our banks are secure (top 25 safest banks in the US). All three have high equity clientele and recession/inflation safe businesses (food). If a bunch of banks and even insurance companies go bankrupt someone else will pick up their assets. The fact JP Morgan or someone else’s gets rich I don’t care. The fact we the US citizens get the shaft, you get what you vote for. As a developer it’s just another hurdle. Tell me what I need to do and I’ll do it or pay it.

We are developing a 75 acre, 22 lot country subdivision. There is a shortage of houses, we are good. The more it hits the fan, we are good, people want to move to the country side. 25 minutes to 1mm metro area.

Our Selfstorage good and bad economics are great for self storage. We sold our brand new location to pull our largest debt of the table and to drag profit off the table. Decided to pull back in risk and take some reward. Took the cash and paid debt down and bought two properties to hold waiting to develop. See how the economy goes.

Our commercial loans were on 5 year balloons on 25 year terms. We refi’d them a year early. Lost 1% of lower interest for a year, within 6 months rates shot past that. Our banker without asking took us from 5 to 7 years on the balloon due to our relationship.

To me , before asking about the economy I would look at my personal position. Sell off your dogs. I would say hold the cash and don’t pay down debt unless you’re refinancing. Or redeploy into a commercial product that is a sure thing. Even in a bad economy.

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Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

3y

Quote from @Carlos Ptriawan:

Quote from @Brad Jacobson:

The data point that has me most interested is inventory on market.

In 2007, there were over 4,000,000 residential homes available before the bubble burst. Today, there is less than 1,000,000 despite the high rates. That tells me the residential market is pretty secure.

Commercial properties are the opposite. There are tons of vacancies and much lower demand. I wish I had better numbers on this because my only data is only anecdotal but everyone in commercial I speak to currently worries about banks holding too many bad commercial loans that will all have their rate adjust in the next two to three years.

The fundamental problem with office is that many companies are moving into hybrid workplace where people only come 1-3x a week to office.
From the chart that I read, from realized PSF positioning perspective, PSF required for employee to be working in 2023 has regressed to 2002 level, so if PSF has reduced a lot, then all office ,especially the one build in 1980s, shall have valuation moved to 2002 level. This is the one that's not happening yet in private commercial.

For tech companies, it's true that for company that's solely focusing on software, most of them already moved to 90% work from home anyway.

Most companies want to move away from this and go to either a hybrid (3X/week) or full-time attendance model. Right now, companies still don't have the kind of leverage needed to enforce this, but if the economy does actually reset, they will definitely have more leverage. At least that's the hope. My company is currently on a hybrid schedule but I know they're itching to return to full time. Even with the layoffs, we still have a tight labor market. We are still in a place where reversion to the norm is a long distance. But once we do get back to a dynamic where each new job opening will elicit dozens of qualified resumes, I don't see this can continue.

0 Reply

Sonny Dhillon

Investor · Sacramento · Member since 2018 · 40 posts · 10 votes

3y

Quote from @James Hamling:

Quote from @Jay Hinrichs:

Quote from @Scott E.:

Just want to say I appreciate everybody's responses above. I knew there would be some valuable perspective on this topic.

Seems like everybody is in agreement that commercial real estate is in trouble (unless there is some intervention like James described, which seems like a sound solution to me!)

Maybe it's too soon to consider ways to 'take advantage' of this pained market that we are slowly entering.

All I know is that in 2008 I was just a few years out of high school. I was in the real estate business (mortgage loan officer for Countrywide) but I was still too young and naive to take advantage of the opportunities that the 2008 recession presented.

I'm hoping that this time around I can be more prepared...

@Carlos Ptriawan @Nick Rutkowski@Account Closed@James Hamling @Bill B.@Jay Hinrichs @Mike Dymski @Chris John

I see this one more like the one in the mid 80s with the S an L debacle and the govmit setting up the Resolution Trust..

100%. I don't see an "opportunity" playing out in this as many are having knee-jerk reaction to of an '08' style event. I don't know why that's where minds automatically go at any turmoil.

If one could throw together a fund, maybe get a few billion together, now you got something, striking out to provide some form of bridge finance too commercial operators. Most commercial properties facing this "credit crunch" are good operating properties, I think people miss this fact. It's not all just vacant office spaces.

And for that vacant office space, say a 150k sqft high-rise, those could potentially be converted into say residential units. Or more of a mixed use type structure. I am betting many are waiting on incentives to do such, some tax-credit for conversion funding of what-not.

FYI for those not in the know; at big $ / development level when we say "tax-credits" it's not a write-off for the developer, it's a funding channel system long used by the government to provide supplemental funding for developers. They issues "tax-credits" that are then sold for $, thus limiting the investment requirement by the developer.

I seem to agree. Everyone is eyeing on the office space in sf or Manhattan , but that has been problem for last 3-4 years and it's a known issue and i don't see it crimpling to to other areas of real estate, it's no brainer that mega office buildings in these big downtowns will stay empty unless converted because the idea of commuting 2 hours to go to office and work all day for corporate greed is going away. I don't think office space has much of a problem in smaller cities where office space is needed. The whole culture of big city downtowns is changing , people want to actually move to suburbs and out where they can have somewhat of slow pace life, house raise family. I don't' think anyone is returning back to those mega office building in sf downtown because alot of people are moving out 1-2 hours and it's not feasible to commute anymore. Also cities like SF has a homeless problem which is destroying it's tourism as well so multiple issues . Only thing is to convert those buildings which someone will do and not build anymore big risese offices , but i do believe office buildings are needed in outskirts/ suburbs where people are actually moving and living.

1 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Robert Carpenter:

IMO, the future of residential real estate will belong to manufactured housing. Recall that the last time the US economy entered a protracted period of stagflation was in the late 1960s. In consequence, during the next four decades manufactured housing sales surged, the highwater mark being nearly 400,000 in annual sales. It was only when jurisdictions aggressively moved to enforce exclusionary zoning that manufactured housing sales began to decline. The incipient environment of stagflation can be expected to produce comparable effects on the housing market. Proposals to rework HUD's AFFH rule to more vigorously make use of its preemptive powers to prevent exclusionary zoning will I believe herald a new golden age for manufactured as people discover it to be the better and cheaper alternative to both multifamily and site built.

Manufactured (trailer) Homes is a NoN-starter in my assessment.

The vast majority of jurisdictions of any populous size have zoning exclusions for these homes still, and it's a trend that stands. Not to mention the financing issue.

To make a viable growth item once again the titling via DMV's would have to change, financing would have to change to unlock FHA because it IS "affordable housing" and FHA is "the" leading finance product of such, and then zoning "norms" would have to flip from aggressively against too pro.

Unless thinking on mass development of more parks, which has it's own whole set of issues. Namely, looking at it as a developer, for the same land and similar costs I could just as easily build townhomes, and get more units per sqft, at a much higher price per sqft, so why go the direction of lower return and harder to get approvals.

The market is simply no longer inviting to manufactured (trailer) homes. The negative connotation is too great a hurdle to surpass.

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Preparing to capitalize on the next market collapse

Preparing to capitalize on the next market collapse

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