In the heyday of 1999, the world partied with an eye toward a new millennium, but if you recall, the world was terrified of Y2K. This was the anticipated collapse of the digital world because everything was programmed with the year 19XX instead of XXXX.
The fear was when the clocks turned to 2000, computer programs, security systems, mainframe systems, etc. would all come screeching to a halt sending society back to the dark ages.
Ultimately, the new year came and went without much fanfare.
Fast forward to today, and the sentiment in real estate investing mirrors the dawn of the 2010s—an era ripe with opportunities for those ready to seize them. Investors and banks alike were not investing in real estate, but those that had the courage and ability to do so, looked like Nostradamus 5 years later.
Investors are currently waiting on the sidelines for interest rates to come down and property values to increase. The problem with this strategy is prices will likely skyrocket when this happens, causing the investors of today to look like the geniuses of tomorrow.
Those who invest when it is a buyers’ market like it was in 2010 rather than the sellers’ market it will become again when interest rates come down and real estate prices go up are the ones who will reap the rewards.
This is the essence of Neal Bawa’s recent conference talk, where he offered transformative insights into the current state of real estate, drawing parallels to the potential that 2010 held after the financial crisis.
1. Inflation and the Real Estate Market: Shifting Perspectives
- Bawa challenged the audience to move past the inflation narrative, highlighting its global presence and the need to look beyond domestic policies. Many countries have seen (or are seeing) inflation higher than the U.S., even though they didn’t print money like the U.S. did.
- He emphasized that the real focus should be on deflation, a looming concern following the Federal Reserve’s interest rate hikes. Most of the time when the core inflation goes below the fed funds rate, you get deflation and enter into a recession.
- This shift in focus is reminiscent of the early 2010s, where understanding and adapting to economic shifts was crucial for successful real estate investing.
2. The Impending Office Real Estate Crisis: A Call for Caution
- The dramatic transformation in the office sector, propelled by the widespread adoption of remote work, paints a picture similar to the post-2008 real estate landscape. Bawa’s stark warning about plummeting office space values, especially in major cities, is a reminder of the vulnerabilities within certain real estate sectors.
- This crisis is concentrated within the office space, and everyone sees that. What isn’t as easily recognizable is the secondary effects from this – other businesses being affected by decreased office occupancy, decrease of property tax revenue for large cities, changing of downtown city dynamics, etc.
He likened this to an “urban doom loop“, impacting not just office buildings but also surrounding businesses, similar to the ripple effects seen in the last financial crisis.
There’s a fundamental shift in office demand that we haven’t seen before. This could be a 10-year slump within office real estate.
3. Short-term Distress in Multifamily Real Estate: A Window of Opportunity
- Bawa pointed out the impending short-term distress in the multifamily sector, attributing it to various factors like overleveraging. However, he remains optimistic about its long-term prospects, drawing a parallel to the recovery and growth opportunities that emerged in the early 2010s.
- There are three large governmental funding agencies Freddie Mac, Fannie Mae, and HUD whose sole mission is to provide funding for housing. This is very important for the future prospects of multifamily housing.
- According to Yardi Matrix, there is about 30% of MF deals that were purchased with bridge debt in 2020, 2021, and 2023 that are experiencing a DSCR of 1.05 or less. By July of 2024, this is expected to increase to 40%. It sounds like a large percentage but that’s only 2500 properties or $75B out of 105,000 properties in the U.S. To put it in perspective, in 2008 there was $8,000B worth of properties at risk.
- Fundamentally, there is nothing wrong with multifamily. 2024 will be the peak of new inventory coming online. This combined with higher interest rates and lower cap rates will create some great buying opportunities.
Furthermore, there will be a significant lull in new builds for 2026 creating enormous upward pressure on rents, creating great returns for investors who have the wherewithal to be buying when others are running away.
Bawa’s personal reflections added a layer of authenticity to his message. Acknowledging his own misconceptions and learning experiences over the past two years, he is encouraging us to adopt a forward-looking approach, reminiscent of the post-crisis mentality of 2010.
Neal Bawa’s insights provide a roadmap for investors to navigate the current real estate landscape with the same vigor and strategic foresight that marked the beginning of the last decade.
The comparison to partying in 1999 and investing in 2010 is apt—both are about embracing change, overcoming challenges, and looking forward to a future brimming with potential.
As we stand at this pivotal moment in real estate, the lessons from the past guide us toward making savvy investment choices, much like the golden opportunities that emerged in the early 2010s.
To Your Freedom,
Chad and The CSQ Properties Team
