The stock market is selling off in a major way. The fed told us last Wednesday they’re not going to stop until there is serious pain from an employment and housing perspective in 2023.
I attended RE-convene in Los Angeles last Wed-Fri hosted by Moses Kagan. 280 real estate investors were in attendance. And we’re not talking about your local realtor or mortgage banker – we’re talking about folks with $100m real estate portfolios who are deep in the business of managing risk and acquiring real estate.
We stayed at the Proper in Santa Monica – click here for an interesting discussion on the numbers behind that piece of real estate and its $223 million of in-place debt which costs over $1m per month to service.
This email is a semi-organized brain dump of what I learned about the market sentiment around real estate right now.
A quick sponsored note before we dive in:
Tax season is right around the corner and the folks at RE Cost Seg just let me know their fall / spring schedule is filling up and they’re considering raising their prices. They’ve already delivered 1/2 my cost segs this year and the depreciation is mouth watering. Reach out if you’re in the market – the proposal is free.
Professional engineering reports you can count on, and they do virtual visits to turn them around even quicker. Not sure what a cost seg is? Check out this thread.
Who is a bull and who is a bear?
A bull = someone who has a positive mindset about the future.
A bear = someone who thinks the sky is about to fall.
I had conversations with about 100 people over the 3 day period. 80 of them were overwhelmingly bearish and fearful for what is to come. They think it will get painful and have locked their debt, been careful about what they are buying, and are super risk-off right now.
20 of them were in growth mode and still conducting business as usual. Bullish or some semblance of being bullish. No talk of rates, fear, recession or otherwise. Most of them were operators deep in the weeds of some kind of value add strategy, so many had the liberty to not worry as much about macro values or the economy.
Almost all of them were frustrated with their own asset class. “It has been really hard to deploy capital recently.” This is a stark difference between the vibe last year at the same conference in September 2021 when everyone was buying and bullish at that time. I had 11 properties under contract to close last September. I have 1 right now.
The rich people who have been rich for a while are bears. They see pain coming and they’ve been preparing for it.
The rich newcomers are bullish. Business as usual – lets growwwww!
I definitely left with a feeling that the market sentiment is shifting negative in a major way since this recent run-up in interest rates.
(Why do interest rates matter for real estate and the economy? Leverage fuels the value of almost all of our assets. This is a great video explaining this in further detail.)
Here is the chart of the 5 year treasury over the past 9 months:
In mid-June – during the last run up in rates after a particularly bearish fed meeting, the fear started to show up on social media. The perma-bears were of course calling for the sky to fall but the smart people I spoke to were still trying to make sense of it all.
They were still buying real estate and were still hanging on to the fact the fed CAN’T just keep rates really high for a really long time. They thought the economy was healthy and the fed wouldn’t be willing to ruin it during an election cycle. They would ease up soon and rates would drop back down.
This run up in rates feels much different. The bulls have turned into bears. The real estate is sitting on the market. Housing interest rates are 7% and transaction volume has slowed WAY down. Self storage brokers are encouraging me to submit offers even when we say we’re coming in MILLIONS of dollars below the asking price.
One of the biggest fish at the conference, a guy who buys $250 million worth of real estate each year, said he is struggling to complete a big raise for the first time in 5 years.
Things are about to get interesting. I can feel it this time.
How am I handling it?
We locked in our debt sub 6% with flexibility (no prepays and no fees). We’ve been extremely disciplined in what we are buying over the past 8 months. The slower acquisition pipeline has allowed us to focus on hiring / firing / managing and organizing our operation. It has been a much needed lull and we’re capitalizing on the downtime and investing in the future.
That doesn’t mean it isn’t scary and hard. I spend a lot of time thinking about and working through some very hard decisions that I’m tasked with making.
When do we lock debt? What terms and what rate? What do we buy and how much do we pay? When do we refinance?
Am I scared? Of course! Its hard not to be a bit uneasy when we could be on the verge of a serious recession!
It is hard out there. I take managing risk very seriously. I know I’ll make some bad decisions and some mistakes. But I’m damn near positive I won’t let any of them sink me.
We look forward to acquiring a lot of great assets and operating them better than anyone else in the business over the next few years!
Onward and upward,
Nick