It’s morning coffee time and my thoughts have been percolating since dawn. Last week I shared my views on four macro issues that I believe should be of paramount concern and taken into account as we speculate the future in our changed world. My letter was light on real estate, for two reasons: 1. The situation is fluid, and some of the themes I talked about will take a while to actualize and fully be understood for real estate investments and 2. If I had gone down that path, my letter would have gone on for days.
Here is how I see things starting to shape up:
Property owners continue to get squeezed by the lack of government support. Yes, protecting tenants from eviction and from having to pay rent is a good public service at this time, but at what cost?Property owners cannot service their debt and pay their property taxes without sufficient rental revenue. This hit might have been survivable for a month, or even two months, but reality has started to set in. Increasingly, property owners small and large are unable to pay their property taxes or their lenders. If relief isn’t provided soon, the domino effect could be harder and harder to stop. Just take a look at how bank stocks have fared compared to the bump in values of companies which have been recipients of stimulus support. So why is there no stimulus for the banks? This is a leadership failure. The Federal Reserve and Treasury folks believe that banks have sufficient cushion this time around. As past history has demonstrated, our government struggles to keep up with the clever ways of the banking business. There is tremendous stress, and the cushion isn’t quite overstuffed with feathers. As more loans become delinquent and interest revenue drops, lenders suffer exponential losses. Banks may become the largest owners of real estate in the coming months as they foreclose or otherwise take possession of their collateral. For investors, this may present the best buying climate since 1991 or the Great Depression.
As loan defaults mount and property owners stop paying their taxes, lenders will pay the taxes to avoid being wiped out. How so? Property taxes are generally a lien on all properties in superior position to the lenders. So, the good news is that government revenues from property taxes will not immediately suffer. However, a note of caution. Since property taxes are based upon perceived values as determined by the taxing authorities, revenues will decline with value. This presents the risk of municipal defaults and the likelihood of future tax increases.
Vacancy in all property types is on the rise. Yes, I have read the reports that multi-family housing is doing better than expected, and some properties are performing remarkably well. Remember, we are still in the denial phase. It is more than likely that we are overbuilt in certain areas of the country and under-built in others. In total, we have a huge inventory of available space to meet current and future needs. The changed world will see re-purposing of that which is already developed.
The technology that we have used to enable millions of Americans to keep functioning since mid-March include everything from Zoom conferencing to app-centric food delivery, clothing purchases, grocery shopping, etc. Even doctor visits can be remote and effective. Now more than ever, we can spread out to the wide-open areas of the country that have extra space, provide a better quality of life, and are more affordable.
With a new Cold War seemingly on the horizon, the race to space will be a huge contributor to the economic recovery. Just as the military build-up injected billions of dollars into the economy during the early years of the Reagan administration and created jobs, this is what I see happening now and in the future. The world has changed, and the opportunities are out there to be grabbed. Yes, right now.
Currently, we are experiencing both inflation and deflation. While deflation is greater in the immediate climate, as we adapt to the changed world, inflation will dominate, and real estate will benefit.
This Memorial Day is an opportunity for us to reflect on just how thankful we are for the great men and women in this country that have provided us with the safety and security that has brought us this far. No virus will defeat us, and there are no challenges that we will not overcome. I am thankful for your confidence and support and, of course, your friendship. Remember, real estate ownership provides solace in times of distress. Embrace that thought and know that you are in good hands with us.