I was just in Los Angeles for the Re-convene conference hosted by Moses Kagan, where over 200 real estate professionals gathered for programming, interviews from people in the field, conversation, and candid discussion. I’ve been reflecting a lot on the main takeaways, notably that there was an overwhelming shift in the atmosphere compared to last year.
In 2021 people were bullish, interest rates were 3.5%, and there was a ton of excitement and energy in the building. The day before the conference this year, interest rates were announced to raise another 75 basis points, and last year’s confidence completely waned away. Those interest rates probably won’t go down until we see employment and housing data weaken, all in hopes of reducing inflation. It’s no surprise that interest rates impact the price of a real estate asset; 80% of the purchase price on a property will be bank debt. If the debt is cheap, you can pay more for the property, and vice versa. You can learn a ton about the basics of economic cycles like this in a video of the economic machine by Ray Dalio.
There’s a serious pity party right now among real estate professionals, 80% of the people I talk to seem very bearish and negative. There are wealthy people, big-time players that acquire over $100M in property per year, that are terrified right now. These are wealth preservers that are worrying about their asset prices. The optimists tend to be recently wealthy professionals because when you’re not trying to protect massive generational wealth you’re less worried about the market and trying to make deals.
One big player told me that it’s the first time in five years that they haven’t been able to raise enough capital for a deal. We just landed a deal and had no problem raising cash, but that’s still troubling to hear that a real professional struggled to get $20M in equity for an acquisition. When equity is tough to come by, it’s an early sign that the market may crumble.
Adding to the troubling signs in the industry, we just had a member of our acquisitions team quit this week. People are backing out of deals, brokers are calling with price reductions, and recent big listings have been taken off the market untraded. These are the early tremors that cause concern.
So am I afraid? I’m always a little bit afraid, even when things are good. In the past few years, we’ve raised over $35M in equity and built generational wealth, now we may have a crisis approaching. I’m tasked to make decisions, decisions about locking in debt, deciding what we can afford to buy, when to refinance, and how aggressive to be, and those all have huge implications. Last year I was one of the bullish new investors in the game, and I’ve already shifted to focus on wealth protection. My job is to not lose money for investors.
I’m glad that we’ve been disciplined. There’s reason to think that the tide is turning, deals are coming, and seller expectations are relaxing. I spend a lot of time thinking about how to manage risk and what can go wrong, and the investors pay me to manage that risk. Our properties are performing, we feel good, and we’re hoping that fear in the market drives opportunity.
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