AI-bubble? What will happen to real estate when it bursts?

Question

• Sam Altman, OpenAI CEO, stated yesterday the AI sector is overinflated, warning that billions plowed into the arms race risk a bubble akin to the dot-com crash. 
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• This brings back memories from 1999/2000 when I was investing in internet stocks and basically lost 90% of my capital (if you think only a totally green rookie could have lost that much, I would agree with you). Question for those who have been in real estate back then, what was the bursting of the dot.com bubble like in the rental property world?

AJ Wong · Answer

POV: Human Beings aren't being replaced - especially smart ones. We have been writing about this ARTIFICIAL 'Intelligence' BUBBLE on my substack for years. It is eerily reminiscent of 2000-2008. The peak of this movie is billions for programmers and $120K+ Bitcoin. This go around however- demand for RE and other hard assets could actually accelerate -particularly as rates are floored and monetary policy loosened...part of the reason Berkshire & Buffett just went long on housing.

The K shaped economy will intensify - with the truly wealthy diversifying dizzying paper gains and everyone else working to acquire what assets remain. We continue to be long: Gold, silver, natural colored diamonds and RE both stateside and internationally with positioning for non-artificially inflated equities.

Marcus Auerbach · Answer

I'm with you on the K-shaped economy. The smart ones go up, the not-so-smart ones are going to be replaced. IDK at this point if labor history is a good teacher, this is fundamentally different than the industrial revolution.

I have seen BH go long on Lennar I think it was with 800M, but at the same time I see them offer incentives to buyers like never before..

Marcus Auerbach · Answer

@Eric Fernwood , right now I am mostly thinking about the fall-out from a stock market correction that would bring P/E ratios down to historic averages. It seems like right now the market is chasing all-time highs while we see consumer spending sensitive companies like Target and USPS report weak numbers and omit (!!) future guidance.

The issue with AI replacing jobs is a separate one. Replacing keyboard jobs is phase one (next thing would be trucking and transportation in general, uber, doordash etc) which would lead to a lot of people not having much money to spend and really drive a recession. This would probably impact my tenants.

If we are going to start manual labor being replaced by robots, we will have to reinvent our entire economic model. Musk seems to think that this will happen fast, but to me that is still fantasy land, so I'll ignore that for now.

Eric Fernwood · Answer

The impact largely depends on the tenant segment that occupies your properties. If your tenants work in AI-related roles, you could see some effect on occupancy. For tenants in other fields, the impact is likely minimal (at least for the near future).

What we are seeing, however, is a broader shift. As AI replaces certain software development and rule-based, routine desk jobs, the greater risk may come from ripple effects across related industries rather than from AI companies themselves.

We have not experienced significant impact on our client’s properties. For example, during the 2008 financial crisis, our clients saw no decrease in rent and no vacancies. By contrast, properties targeting low-wage tenants were hit hard, with many multifamily abandoned and eventually foreclosed. That’s why it’s essential to understand the demographic your property attracts, the right tenants make all the difference.

Michael K Gallagher · Answer

if the big short is to be  believed the prices and rents in the bay area apparently went up during the .com bubble.

I don't think RE is immune to bubbles though, especially in specific assets, my guess would be storage and car washes are gonna be popping if they haven't already, I'm not in those so I cant say for sure, but I am out there shopping and hunting for retail dev land and some of the prices we are competing against for these uses are insane for a land basis, and while its a different business model than what we are into I'll be curious to see how they both fair long term.