All Forum Posts by: Jonathan Twombly

www.hometownlocator.com

 Warren Buffett famously said, "Be scared when others are greedy; be greedy when others are scared."  I think it's a maxim to live by.  

Right now, there is a lot of greed in the real estate markets.

 Yes, there are opportunities out there but discipline is needed in this market and you also need to decide how much you want to bang your head against the wall trying to find opportunities.  

My big eye opening moment was when my most trusted Brokers brought me an off market deal that was right in my wheelhouse a year ago.  I knew I would need to stretch to get it and I made some aggressive assumptions that made me very uncomfortable, to the point where I was not quite sure I wanted my bid to get accepted.  No worries, the Brokers came back and said that we were 20% below what the seller wanted.  And the thing is, he was going to get that price and he knew it. There's a lot of stupid money out there, including a lot of 1031 money that's absolutely desperate for deals because they are so over leveraged that they don't actually have the cash to pay the tax they would owe.  

Again, as I said before, I'm NOT telling people they should sell.  This is not the stock market.  I'm saying it's a bad time to buy and it's also a good time to exit if that is part of your strategy. But there is no reason to sell off good cash flowing properties if you have no strategic reason to do so. 

But buying, especially for appreciation or for any strategy that requires the market to be as high or higher than it is now, is very risky at this point in the cycle.  

That's what I'm trying to point out.  

That's a valid point. The danger with REITs is that they are often subject to the foxes that move the stock market, even if their underlying assets are still sound. It's great when you're buying, because you might be able to get the REIT stock for less than its intrinsic value. But if you buy the REIT high in a bull market, you may ride it down in a bear market regardless of what's going on in real estate. Why add stock market risk to your real estate portfolio, not to mention all the management fees?

 I don't have a crystal ball and I don't know the timing.  It could be one year and it could be three.  But I do feel strongly that we're at peak pricing given that all the syndicators I know, who are dealing in smaller markets that used to be considered too risky by institutions, are being outbid consistently on deals.  And not just outbid.  Being outbid in crazy ways like going hard with deposits on day one or putting the entire equity down payment into escrow as deposit.  MF prices are now at 30% over the previous peak.  And volume is down because there is so little product available.  It's not a sustainable situation. 

We are selling.  I will blog on it as we get further along.  But this is a strategic decision for our company that has as much to do with our goals as it does with the market. 

Real estate is not like stocks because it provides cash flow.  So there is NO reason to sell your real estate now if it cash flows unless taking profits is a strategic decision. Maybe it's a good time to get rid of the dog on your portfolio because the dumb money is out there in droves.  But if you have properties that are cash flowing well and you want to hold them long term, you should stay the course. 

I just don't think you should be buying right now unless you are being very disciplined.  

@Raul R.  Did you rent this property out?

@Jay Hinrichs  Definitely talking about MF here and not SF.  MF has become more of a national market because so much money was pushed from NY, SF, LA, etc. to smaller markets over the last ten years.  When the bubble pops in those markets, the tide will rush back out from the smaller markets as well.  It won't be pretty.

The commercial property market is not correlated with the larger economy.  In 2007-08, we had a black swan event where everything was correlated, but historically speaking over the last 40 years, the economy and the commercial property cycle lack a strong correlation.  The commercial property markets are dependent on the availability of debt, primarily.  Things may be changing in that department as valuations have finally hit a level that is making the banks re-think things.

Just as an aside, there are some deals in MF that are heavily leveraged, but generally speaking, the banks don't lend more than 75% LTV on stabilized commercial deals. I have heard of some going as high as 80%, but it's not that common. Developers may go higher and put several tranches of debt on the deal to get the leverage higher. 100% cash deals are far less common than with SFR, because most larger deals are some sort of syndication where the investors need to get paid and the sponsor needs to make money and that requires leverage.

One last point is that MF properties reached 30% over the last peak this year.  So pricing is definitely getting high.  Though I don't believe that these metrics are predictive in any particular situation, historically property markets tend to rise to about this level over the last peak before cresting.

@Ceasar Rosas  I'm not involved personally, but a number of people I know are very enthusiastic about Troy, which is across the river from Albany and the home of RPI, a great university.  I did spend time looking at Albany, which never really experienced a bubble the last time around, and is anchored by the state government, SUNY, and many hospitals.  None of those anchors are going away.   I would check out those markets before running across the country.   You can get up there on the train from NYC, and it's a beautiful ride along the Hudson!

@Account Closed  Chicago leads the US in population loss, according to the Chicago Tribune, March 23, 2017.

I've been watching this trend for a few years.  Gunning for millennial renters, who supposedly all want to live in major urban cores, and fueled by cheap money and foreign flight capital, massive building has been going on, almost all in Class A assets, and in a vanishingly small number of submarkets.  Rental gluts are already starting to appear in several big cities, like New York, and that is where the crash will begin.  The giant sucking sound will then draw back capital from all the smaller markets where it has been pushed in recent years in search of yield.

On the millennial point, the Urban Land Institute did a major study on millennials a couple of years back and found that the overwhelming majority of them do not live - and cannot afford to live - in downtown urban cores.  Indeed, they are the least affluent generation in America.  And all this luxury housing is being built for them.   This will not end well.

 Not sure what you mean by "serious."  As I said in another response to you, I don't think that we are looking at another 2007-08.  That's a once in a lifetime event.  There are other people predicting that again, given all the easy money that every central bank in the world has pumped into the system over the last 10 years.  But, for the reasons that someone else in the thread said - employment is strong, lending standards are stricter, etc. - I don't think we will see that repeated.  I think we're in for a normal, every day, run-of-the-mill correction.  And, again, I'm talking about multifamily primarily.  Individual markets where the fundamentals are good and supply is constrained should continue to run - until people just can't afford the prices anymore because they accelerate too fast beyond income growth, or interest rates rise and people can no longer afford to pay.