Making predictions is a fools errand. The odds of being correct are low so the odds of you looking like an idiot are high. Let me preface this by saying this isn’t investment advice.
In the real estate business it’s all about protecting the downside. Your job as a real estate sponsor (somebody who raises other people’s money to buy properties) is to make sure you don’t lose properties.What I think will likely happen and what I need to prepare for are two different things. I can think America will grow and life will get better and the economy will improve over time while simultaneously preparing my portfolio and my holdings so that I can survive the worst case scenario.So I spend a lot of my time thinking about the downside. I spend a lot of my time thinking about high interest rates and lower values and navigating a real estate crisis. After all, my investors don’t pay me the big bucks to be an optimist. They pay me the big bucks to protect their capital and manage risk.So why make predictions?This newsletter is my personal diary. I’ll be able to look back on these notes and see where my mind was at and how I navigated the world as it came at me. How I built my empire or where and why I failed. It is challenging to try to predict the future and it requires a lot of thought and critical thinking. So I’ve done the work to predict what I think will happen and we’ll be able to look back and laugh a year from now.This tweet got over 1.4 million impressions and almost everybody called me an idiot. Time will tell!
My 2023 predictions:
1. Commercial real estate will drop 30% in value from all time highs
The run up in values was unprecedented. Super low rates made the risk free return on capital basically nothing. You had to FIGHT to find yield in the market in 2021.
Today, the best companies in the world (GOOGL, AAPL, MSFT, AMZN, META) are 40-60% off all time highs. Treasuries are yielding 4-5% risk free. Savings accounts are offering 3-3.5% interest. Real estate investors are borrowing at 7-8%.
The capital now has the leverage. If you have cash, you can find yield in so many places. There are good deals all over the place to park your capital. Real estate is just one competing section of the economy that attracts capital investments. But a 5% unlevered return on capital (a 5 cap) in an illiquid real estate investment with operational risk isn’t as sexy when you can get 3.5% in a savings account, is it?
The high rates will work their magic and real estate will see some pressure. Some operators will lose properties. Some loan maturities will cause big problems. And values will drop.
2. Home prices will drop 30% in value from all time highs
Same story as above. The rates will take their tole and home prices will continue their recent fall. Second homes will be hit even harder as the capital crunch takes hold.
3. Development will come to a grinding hault
With lower values and higher debt costs the folks who build buildings will face serious stress. Homebuilders will build way less homes in 2023 than they did in 2021 and 2022. I’d say 50% less or more. Commercial real estate will see similar trends and the countless cranes littering the major metro skylines will be moved into storage.
4. Rents will drop in 75% of US metros
The cost to rent an apartment or a house will drop in 2023 in most cities. A weakening consumer and strained developers competing for tenants will force the hand of real estate owners. Our self storage rents will likely drop, too!
5. Unemployment will go north of 6%
Less capital means less investment and less purchasing. Less companies will grow. Many of them will lay off employees and unemployment will rise for the first time in a long time.
6. Inflation will reach 2% or less by September of 2023
The fed will pull off the W in the fight against inflation and prices will even out on everything from fuel to housing to groceries. A recession will be full swing, but it’ll be necessary.
7. Crypto will drop another 50% in 2023
Web3 isn’t solving any real problems and crypto has proven it isn’t a hedge against anything. Why own bitcoin when you can own Google stock or buy real estate at 30% off?
8. Tesla stock will drop another 50% in 2023
Fuel is cheap. Full self driving is a pipe dream. Competition is strong. The rich people who buy teslas for status symbols and fast acceleration are losing a lot of money so they won’t spring for a luxury. This one could get saved by growth speculation as inflation decreases and unemployment increases upon the prediction that the fed will begin cutting rates.
9. Electric vehicle adoption will miss projections in a major way
Charging infrastructure sucks and is WAY down the priority list when the grid can’t even handle this week’s cold snap without serious human suffering. Fossil fuels are too plentiful and too cheap. I filled up my vehicle with 15 gallons of gas for $40 yesterday and it took 6 minutes. This is a “nice to have” for folks and this recession will force folks to focus on their needs instead.
10. 20+ public growth companies will go bankrupt
Carvana will go bankrupt. Blue apron will go bankrupt. A lot of the other companies with a ton of debt, no profit and a flawed business model will cease to exist. Basically everything Chamath shilled to retail investors in 2021. It’ll be a really healthy purge of incompetence in the long run and the world will be better for it because all of those smart people will go back to adding real value to people’s lives.
11. The narrative on Elon will change as Twitter thrives
Twitter will finally find a way to serve targeted ads to its users and will become profitable – but not after a bit more pain. The debt gets restructured in 2023 and Twitter goes public in 2024/25 at $50b+ valuation. Elon wins again.
12. Rates stay high
The fed knows if they drop rates in the slightest inflation will rocket forward once again and the economy will overheat. Rates do not drop in 2023 but they don’t go up much either. The over-leveraged folks have a seriously stressful 2023 as the recession deepens.
13. The best companies in the history of the world go up 30% or more
The profitable tech giants (AAPL, GOOGL, MSFT, AMZN) rebound from being seriously oversold. Their business models are not flawed and revenue does not decline noticeably in 2023. They lay off a TON of employees, however and profit GROWS.
The stocks go up 30% or more despite the economic troubles and high rates. As soon as the economic data shows decreased inflation these stocks begin to soar – along with some other growth companies without flawed business models (NVDA, AMD, NET, BILL).
14. META thrives and stock goes up 50% or more
The stock was down 70% despite revenue being within 2% of where it was before the Apple advertising updates. The business model is great, more people use Facebook than the tech idiots on Twitter care to admit, and they’re going to cut serious costs.
They’ll figure out the advertising on iPhones and they’ll continue to grow. I’m hearing rumors from advertisers this is happening already and spending is increasing.
15. My firm, Bolt Storage, buys $75 million worth of storage in 2023
After a frustrating year, the deals begin to appear and we buy a ton of great assets at good prices in 2023. Our team continues to grow, our operations continue to improve, and we fight through the recession and end up well positioned for the next bull run, whenever it comes. If you’re interested in seeing our deals as they’re released, get on our investment list. (accredited investors only)
16. Life will improve for almost everyone in the world despite the media circus
The news cycle will still scare everyone who watches it. They’ll say the world sucks and it’s getting worse. They’ll stay depressed.
In reality, like the last 50 years, life will get better every year for most people. Medicine will get better. Lives will be saved. More people will escape poverty.
Life is good. That is the bottom line. Turn off your computer and TV and walk around your town if you disagree with me.
Where do you think I went wrong? Where do you agree? What blindspot am I missing? Reply and let me know.
A note – before you take this advice and invest behind it or get fearful, remember something important:
I made a ton of money in the past two years. I added 8 figures+ to my net worth. I now have a lot to lose. Its only natural for me to focus on wealth preservation and be a little more bearish than somebody with nothing to lose. Take my advice through this lens and ignore it if it doesn’t apply to you!
Nick
P.S. 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.