“The Cycle is Trying to Age Gracefully” or “What the Heck do I do with my Money Now?” Part I of II

I was lucky enough to attend a real estate conference recently, and this is what I heard:

There are a lot of investment observations in this long blog, almost all made by other people. I am not making any investment recommendations here, and have no financial interest in the success or failure of any of these speakers, though I may in the future, and many of the speakers are friends, or professional acquaintances.

Note: many quotes are approximate and may even qualify as alternative facts.

 There was so much good stuff here that I cut it into parts: Keynote here in Part I, and the rest of the speakers in Part II, coming later.

 Keynote Here’s a look inside the mind of a smart and really successful real estate owner-operator and investment manager who likes Trump. I’m reporting on statements made after the election but before the post-inaugural clown car pulled into town.

Trump represents a reorientation toward growth and deregulation, very positive scenario for US and the world. Clinton never had to govern. Too much “husband entitlement”, not focused on what people need.

We’ve seen a low in interest rates. And doesn’t think we benefit from low rates (!). Quoted Jim Grant: “Interest rates are like the shot clock in basketball” (you need to fill out a form to get to this article), meaning that low rates simultaneously allow lenders and borrowers with a problem to procrastinate while forcing people with fresh capital to invest higher up the risk spectrum because low rates remove cash as an alternative. The biggest question is “where will demand come from?” If demand is there you don’t need low rates. Slow growth is a result of central banks “pretending and extending instead of confronting reality.” “Obama wasn’t pro-growth”.

Claimed to like investing away from the coasts, and did best in Toledo, Ohio because you can get the best competitive position – “I was the only guy investing there”. Made twice the yield and return vs. investors in the gateway cities. “If I can’t have a monopoly, I’ll settle for an oligopoly. Competition is destructive.” See Peter Thiel’s similar views. Figure out where you can get a superior competitive advantage.

Asked as we all are, what happens to core portfolios when rates rise. He thinks ten-year rates are going to exceed 3%, compared to core cap rates at 3% today. Cambridge Associates is telling one of their clients the same thing (this article is behind a pretty expensive paywall. I don’t make the rules….) Rates were at 2.4% at the time of the conference following a pretty steep run-up, and about 2.6% as of this writing.

He perhaps cynically observed that there is such a thing as a difference between a requirement to invest and a desire to invest. I heard this same speaker observe once that the manager of a >$10B private equity real estate fund is pulling in ~$100 million+ of revenue annually before getting out of bed in the morning and that such a compensation structure could skew investment judgment. So he has his views.

He described a very famous and well-timed sale that he made and said that the transaction price exceeded the internal valuation by 35%.

What inning are we in? Some of his answers focused on the structural, not the cyclical implied by the baseball analogy: Office, “in almost every renewal of the last five years” in NY, SF, LA & Chi the tenant shrank by 20%, and it could keep going – average US usage is 250sf/per employee vs. 90sf in HK. Doesn’t think repeal of Dodd-Frank will be enough to help office in Manhattan. Everyone is thinking about efficiency. Law firms have 7% more people but 20% less space. And calculates that Hudson Yards and Downtown are bringing 12-15mm sf to market. Dodd Frank repeal won’t offset that decline in demand and increase in supply. Multi, “enormous” new supply. Hotels, NY and Chicago are building 20% more hotel rooms retail, less. Everything will be replaced with e-commerce except Triple A malls and strip centers (I noticed that the barbell of his projection for brick and mortar retail real estate mimics income inequality: silk designer dresses and packs of Marlboros and not much in between, so there are more sources of trouble at work in retail than just technology). Thinks you should accumulate cash at this point in the cycle (Wow! Other than that Mrs. Lincoln, how’d you like the play?)

Demographics will exaggerate the problem: deferral of marriage, more intense utilization of space, lower disposable incomes, and different priorities: apartments used to mean garden apartments near big highways, now they mean walkability scores.

Cynic on idea that that things have dramatically changed. Millennials have only deferred moving to ‘burbs, not permanent.

WeWork is interesting, but not new. Works in tight markets, fails in weak.

On Emerging Markets, our expert concluded that we’ve just lived through a volatile time, and that ex-currency these markets have done well. But don’t overweight poor results of the last ten years: emerging markets are where the growth is.

He closed by observing that he worries about the United State’s position in the world, and about world stability. He sees more potential for headwinds than at anytime in his life.

And he wasn’t born yesterday (and he wasn’t alone in his view as you’ll see in Part II).

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>