Opportunities in Real Estate

 Finding  opportunities in Real Estate 

Times of crisis reveal new opportunities. The pandemic, high inflation and changing consumer habits have shifted the real estate landscape.

Few sectors received as much attention as real estate during the pandemic. The stark changes—empty malls, offices and hotels—stirred panic in some. But Robert Merck, global head of real estate and agricultural finance at MetLife Investment Management (MIM), which manages $110 billion in private real estate assets, took things in stride and saw opportunities amid the crisis.

https://partners.wsj.com/metlife-investment-management/how-we-see-it/finding-opportunities-in-real-estate/?dclid=CMPE8qL92fgCFW3uGAIds0UNJA

“Although the pandemic was definitely different, I’d say how we navigated it was similar to other downturns,” he says.

Dealing with the impact of the pandemic required the same process of analysis and decision-making as other crises, Merck says. It’s important to have that process in place to manage existing investments and identify new opportunities. After a tumultuous couple of years, the dust is starting to settle, revealing a changed real estate landscape.

“Many institutional investors are only targeting one or two property types, and that’s a fairly significant difference from how capital markets worked before the pandemic.” — Will Pattison, Head of Real Estate Research and Strategy, MetLife Investment Management

“There was a strong bifurcation in performance between property types, and that’s something that never happened during prior downturns,” says Will Pattison, head of real estate research and strategy at MIM. Rapid e-commerce growth drove increased demand for warehouses, while offices, malls and retail spaces saw a precipitous drop in demand.

That’s created changed investing patterns. In the past, real estate investors might focus on several property types. “Many institutional investors today are only targeting one or two property types, and that’s a fairly significant difference from how capital markets worked before the pandemic,” Pattison says.

Hedge against inflation

Inflation has been top of mind for many investors, and that could be beneficial for real estate. Commercial real estate historically outperforms other sectors during inflationary periods. With inflation currently at a 40-year high of 8.5%, real estate is in an unusually attractive position, which MIM expects will draw more inflows into the sector.

“Insurance companies usually focus on fixed income investments, but I think you’ll see more of the insurance companies investing in direct real estate through acquisitions and development. More capital will come into the sector from the insurance side because of the recently lowered capital charges,” Merck says. Insurance regulators recently lowered the amount of capital that insurers are required to hold for real estate investments. The change effectively increases the pool of capital that insurance companies can invest into the sector.

A focus on apartments and warehouses

One of the best inflation hedges in real estate is apartments. Apartments typically have short-term leases, which are ideal during inflationary times because owners can easily adjust to the short-term impact of inflation by resetting the lease. MIM estimates that apartment rents will increase an average of 3.2% a year through the current decade. Migration out of certain metropolitan areas—such as from New York to Florida—accelerated during the pandemic and will impact supply and demand and housing prices in various markets.

Another sector to watch is warehouses, which are benefiting from enormous e-commerce growth. “I don’t think the market fully understands that online order delivery speeds have been at least as important as the total number of goods being purchased online,” Pattison says.

A few years ago, order fulfillment might take seven days. Today, it’s closer to one or two days—or even a few hours in some markets. That faster fulfillment means e-commerce companies can no longer rely on a handful of supersized regional warehouses. Instead, there’s a need for smaller warehouses located in all major cities. These infill warehouses, or last-mile delivery centers, range from 50,000 to 200,000 square feet, compared to regional or super regional warehouses that are often a million square feet.

Shifting habits: office space and retail

The abrupt shift to remote work during the pandemic and the increasing popularity of hybrid work led to uncertainty about the future of the office. But Merck says these reports overstate the matter. Remote working has diminished demand in the short term, but MIM does not expect significant long-term impact. If anything, the pandemic reversed a long-standing trend toward shrinking square footage per person. Offices are getting bigger, even as fewer people go in.

“People want a little bit more space. They don’t want to share space or use hoteling to reserve a desk. I think COVID helped solidify that,” Merck says.

Longer term, Merck doesn’t see a significant impact from the growing acceptance of hybrid work. MIM estimates that 9% of the traditional office-using employment sectors will become fully remote, up from about 5% before the pandemic. But lessening demand for office space will be partially offset by a slowdownin new office construction. As a result, office leases today in most markets are being signed at pre-pandemic prices. While companies with offices in markets such as New York or San Francisco, which rely heavily on public transit, are more likely to downsize in the near term, MIM believes the impact will be temporary. Not only that, but some of the markets seeing the worst short-term impact may also see the strongest demand over the next decade.

Another real estate sector that saw many vacancies in the last two years was retail, which struggled even before the pandemic due to e-commerce growth and overbuilding. The pandemic accelerated the closing of retail centers that likely would have closed anyway. Of course, not all properties are the same. Merck says there’s been a flight to quality, with higher-end malls with strong sales per square foot bouncing back. “We’re starting to see that play out in a positive way,” Merck says.

In any time of crisis, new opportunities appear. “Real estate has made a really good comeback, both in 2021 and especially this year,” Merck says. The last two years were tumultuous for some parts of real estate, but buoyed by high inflation and rising consumer demand, overall the sector’s outlook is bright.

Real Estate stocks?

 Material price declines have turned these fast-growing REITs into attractive investment opportunities:

https://www.fool.com/investing/2022/07/01/2-hot-real-estate-stocks-that-are-on-track-for-maj/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article

When an asset is described as "hot" on Wall Street, it suggests that investors are buying it hand over fist. But nothing goes up or down in a straight line, so there is always an opportunity for those with a focus on the long term. Right now, Prologis (PLD 2.03%) and Innovative Industrial Properties (IIPR 1.49%) are out of favor. But don't let that fool you: They have rewarded investors well, and have plenty of growth opportunities.

Where the action is:

Prologis' core business, owning warehouses, is among the most boring in the world. They are just a way station for products as they travel across the world. Still, the supply chain doesn't work without warehouses, and this real estate investment trust (REIT) not only owns a lot of them, but they are generally very well located. To put a number on that, Prologis owns 1 billion square feet of warehouse space spread across four continents and 19 countries. Most of these assets are located in key shipping hubs.

The stock is down around 30% so far in 2022. That's an opportunity to add this long-term growth story to your portfolio, though -- and note that it is still up more than 100% over the past five years. Where's that growth going to come from? A major acquisition in the near term, development over the long term, and rent hikes all along the way.

Prologis is in the process of buying smaller peer Duke Realty (DRE 2.33%) in an all-stock transaction. Prologis expects the deal to be $0.20 to $0.25 per share accretive to core funds from operations (FFO) in the first year.

Meanwhile, it estimates that it has nearly $28 billion worth of development opportunity on the roughly 10,600 acres of development land it owns. That should provide a steady stream of investment opportunity for the REIT.

Buying opportunity?

 

Trump’s Billionaire Neighbor Warns U.S. Economy Is In An “Omnibubble”

Jun 30, 2022,06:30am EDT

Jeff Greene

 

THE PALM BEACH POST/ZUMA PRESS/ALAMY

Jeff Greene, who made his first fortune shorting subprime mortgages during the Great Recession, sees trouble ahead for real estate and no relief for crypto or tech stocks.

During the last major recession from 2007 to 2009, a little-known entrepreneur named Jeff Greene

made billions of dollars by buying credit default swaps on subprime mortgage-backed bonds as the housing bubble collapsed.

Now Greene, a Palm Beach-based real estate mogul with an estimated $5.1 billion fortune, thinks the economy is going through another bubble in assets ranging from crypto and SPACs to overvalued tech stocks and real estate. "We've been in an omnibubble, there's no question about it," Greene, 67, told Forbes in a phone call from his Hamptons estate, something he’s been saying for months now. "If you spend trillions and trillions of dollars in every advanced economy in the world and have coordinated fiscal and monetary stimulus, obviously you’re going to create bubbles and inflation."

Asked when he thinks a recession will hit, Greene guessed it might come in the first or second quarter of 2023. "Next spring [we'll] definitely be in a much slower economy,” he said. “If this recession really happens, you'll have all kinds of people stopping their construction projects and laying people off and [you’ll] start to see unemployment creep up quickly.”

More than a decade ago, Greene made a fortune from the wreckage of the housing market and reinvested some of his profits into apartments and condominiums, eventually building a residential real estate empire concentrated in south Florida and Los Angeles. But despite skyrocketing prices for real estate across the country, Greene thinks the boom will soon turn to bust. “The real estate market is in a bubble,” he said. “We’re way overbuilt and you’re going to see a lot of people have problems with their real estate developments,” he posited, referring to residential real estate.

He also sees a parallel between the subprime mortgage crisis of 2007 and the booming stock market and crypto wave of 2021. “It's like when I was doing the subprime short [betting that the value of subprime mortgages would fall] and I remember saying, 'Who's on the other side of this trade?' These mortgage-backed securities had almost no possibility of being paid back,” he said.

"It's the same thing with people saying, 'Well I have to buy equities because I don't want to make one percent [return with low interest rates] so I'm going to put my money in something that's highly inflated,” Greene said. “And they bought crypto, SPAC shares, houses to flip, equities and private equity investments at unprecedented multiples of revenue with no prospect of earnings whatsoever.”

While he still invests in a range of stocks and private equity, he told Forbes he’s now more risk averse than he was a decade ago, with little debt on his real estate projects in Florida and New York, where he recently finished construction on a 30-story residential building in lower Manhattan. He’s also turned down several offers to sell his buildings for cash or invest in highly-valued private companies in early funding rounds. (He won’t say which particular companies have approached him.)

Unlike his successful bets against the housing market in the Great Recession, Greene isn’t shorting anything this time around. Asked what he would do if he was more open to taking risks, he outlined a potential strategy. "If I were more aggressive, because I saw this [bubble] happening, I would have sold more at the top. I would have built a war chest and been sitting here waiting for opportunities [to buy at lower values],” Greene said. “The kinds of deals that people were bringing to me to invest in some of these tech companies, I was getting calls [saying] ‘I can get you into this special round at a billion dollars, the company is doing $40 million in sales.’”

He found those offers to be overpriced: Greene thinks many of those tech companies are bound to run into difficulties as the stock market continues to drop and the economy enters a recession next year. "[I’m] thinking, 'Who's doing this?'” he said, referring to investing in startups at sky-high valuations.

“I have friends who are very smart people that were doing this and everybody thought they were going to be the next Zoom. A lot of these companies lose money and now they’re cutting expenses and trying to make it through this period,” he said. “You can be sure that there are companies that are going to be up against the wall. You'll be able to get into some of these—what I call 'science projects' [because] they're just sort of ideas that are unlikely to become huge—at very favorable terms. And people will make a lot of money, one of them will be the next Google or Amazon. In those spaces, there’ll be opportunities.”

Still there is no doubt that Greene is a beneficiary of the bubble. Greene, who’s lived in Palm Beach since 2009, pointed out the increasing exodus of billionaires and wealthy investors leaving northern states to relocate to south Florida, where property prices have soared since 2020. And it’s not just billionaires who are moving to the Sunshine State: rents in Miami rose nearly 26% on a year-on-year basis in the second quarter of 2022—higher than all major U.S. metro areas—and demand for apartments is near record levels, according to Marcus & Millichap.

“There's just extraordinary migration to our area, which has put tremendous pressure on [real estate] values,” said Greene, who cited the recent announcement that billionaire Ken Griffin plans to move his hedge fund Citadel from Chicago to Miami as providing yet another boost to the local economy.

The influx of the superrich to Palm Beach has also increased enrollment at the Greene School, a nonprofit pre-K-through-high school in Palm Beach that Greene founded with his wife, Mei Sze, in 2016. There are now 150 students enrolled at the school, up from 123 in the 2019-2020 school year.

"The kinds of families who are moving into our town and putting their kids in our school, it’s like the all-star team,” he said, citing a pre-K class with parents including several Ivy League-educated hedge fund founders. “These are people that will create all kinds of jobs and businesses that are going to juice the Palm Beach county economy. I'm very bullish long-term on the economic growth and the value of my holdings there.”

Greene estimates that he owns “virtually all of the remaining high-rise development sites on the water” in Palm Beach, much of which he acquired after the housing market crash in 2009 when land values were cheap. But even if the property market in south Florida is still booming, Greene sees dark clouds ahead if, as he expects, the economy tips into a recession in early 2023—particularly for real estate investors who are highly leveraged.

Even among fellow billionaires, Greene has seen the impact of recession fears on their high-spending lifestyles. “I was at Hotel du Cap with a bunch of superrich people [two weeks ago], one of the most expensive hotels in the world in Antibes, France, and everybody’s saying ‘Oh my god, I’ve lost 30% of my net worth.’ But they’d already booked the hotel,” he said. "Those days are going to be over this winter. You’re going to start seeing people spending less money and the recession will kick in.”

Rent increase

It's time to pull out Jimmy McMillan's slogan for his 2010 New York mayoral run: “The rent is too damn high.” But today, the slogan applies across the country as renters feel the squeeze.

https://news.yahoo.com/housing-york-city-board-votes-150343830.html?contentType=VIDEO

The median monthly rent in May hit $1,849, a 26.6% increase since 2019 before the pandemic, according to Realtor.com’s Monthly Rental Report.

“Single-family rents continue to increase at record-level rates,” Molly Boesel, principal economist at CoreLogic, said in a statement regarding its Single-Family Rent Index (SFRI) report. “In April, rent growth provided upward pressure on inflation, which rose at rates not seen in nearly 40 years. We expect single-family rent growth to continue to increase at a rapid pace throughout 2022.”

During the pandemic, rent moratoriums and rent assistance programs helped renters who were laid off stay in their apartments. With the expiration of those programs, rent affordability is becoming a crisis with rising inflation.

Where you live will determine the amount of your rent hike. In Miami, rent increases are averaging 40.8% with Orlando seeing increases of 25.8% and Phoenix 17.8%.

“Rent and for-sale listing prices are closely correlated,” according to Realtor.com’s report. Therefore, it’s not surprising that rents are high in Miami and Phoenix, as both cities typically lead in S&P CoreLogic Case-Shiller national home price 20-city index.

New Yorkers are complaining about 40% rent increases, with the average rent on a (non-subsidized) apartment in May was $4,975 a month, a 22% from last year.

For rent-subsidized New Yorkers, the New York City housing board voted to increase rent for rent-stabilized homes 3.25% for one-year leases and 5% for two-year leases.

“There’s no question that renters are facing sky high prices. And with rising inflation reflecting price jumps for both rents and everyday expenses, many renters are feeling the strain on their finances,” Danielle Hale, chief economist at Realtor.com, said in a press release. In a bit of good news for renters, last month’s prediction of rents surpassing $2,000 sometime this summer is going to take longer to materialize.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government.

Follow her on Twitter @writesronda Read the latest personal finance trends and news from Yahoo Money. Follow Yahoo Finance on Twitter, Instagram, YouTube, Facebook, Flipboard, and LinkedIn.

Home prices surge in April

https://finance.yahoo.com/news/home-prices-record-high-april-2022-131118002.html

U.S. home prices climbed to another record high in April, as inflation continued to run hot across the housing market in the spring.

The latest S&P CoreLogic Case-Shiller index released Tuesday put the annual increase in the cost of a home at 20.4% in April, down slightly from the prior month's upwardly revised jump of 20.6%.

The pace of increases slowed marginally for the first time since November in a potential sign home prices may be beginning to cool, but many cities across the country continued to see prices soar at a quickened pace.

“April 2022 showed initial (although inconsistent) signs of a deceleration in the growth rate of U.S. home prices,” Craig Lazzara, managing director at S&P DJI, said in a statement. “We continue to observe very broad strength in the housing market, as all 20 cities notched double -digit price increases for the 12 months ended in April. April’s price increase ranked in the top quintile of historical experience for every city, and in the top decile for 19 of them.”

Cities that saw the biggest price accelerations were Tampa, Miami and Phoenix, with year-over-year home prices gains of 35.8%, 33.3%, and 31.3%, respectively.

Moreover, S&P CoreLogic Case-Shiller’s 10-city composite registered an annual increase of 19.7%, climbing from 19.5% in March. The 20-city composite saw an annual gain of 21.2% compared to 21.1% during the prior month.

Today's interest status

 As Dan Rawitch, the great bond analyst states:

Bonds are once again under pressure. The ten-year has risen above the 3.20 level and appears to be headed toward 3.30. The MBS is sitting on a critical support level of 97.50. It needs to hold or we risk 97.20 at a minimum. The news today was mixed. Consumer confidence was once again hammered and I give this the most weight. Perhaps later the market will agree with me. This pullback seems more technical than fundamental and it needs o run its course. Thursday is a massive news day, lets hope it bring us favorable bond news.

https://www.ratewatch.com/ratewatchnow.html

Weekly economic update

 This week we update you on what happened last week with the economy and how it will impact the markets this week.  We also share some of the stocks we are eyeing between now and Friday the1st of July:

https://s3.amazonaws.com/kajabi-storefronts-production/sites/53576/themes/2150983770/downloads/MoKGGmPRnSG0HbPLAidp_Market_Mentor_June_26.mp4