Here is a thought piece from your Real Estate Philosopher that I am confident you will “like” even if you think I am dead wrong. In brief, I will stick my neck out to say:
2021 Will Be A Boom Year for Real Estate
Why do I say this? Here is my thinking:
Let me start by hearkening back to the fact that, as of about four years ago, real estate became a separate asset class. I wrote about this when it happened and several times since. This means that financial advisors should be telling their clients to allocate investments among:
- Real estate
They aren’t doing it that much – yet – but they are doing it some. This – plus all the dry powder funds raised in recent years -- has resulted in what I have named The Great Wall of Capital moving towards real estate. That trend slowed up at the beginning of COVID but is already picking up steam again, part of which is from what I call Diversification Purchasers and part of which is from those with increased dry powder due to COVID induced eagerness to capitalize on distressed situations.
To add to this, the government has printed an unprecedented amount of money – and there is every indication that more, or a lot more, or a real lot more, will be printed soon. Where does that money go?
Well, so far, a lot of it has been sitting in bank accounts. Indeed, I read about a month ago that bank deposits increased by $2T – that is, Two Trillion Dollars – during COVID. And deposits today are at a record of $15.7T.
Consider that the value of all publicly traded U.S. stocks today is only $36T; this is a crazy amount of money.
A lot of the government largesse certainly went to people who needed the help and spent it to make ends meet. However, since the government could only do rough justice in doling out the dollars so quickly, a fair amount went to people who, in hunkering down at home, just stuck it in the bank. As the economy recovers and jobs return, something will get done with that money.
Bolstering my views on this are two relevant facts:
Did you know that this year has the lowest rate of personal bankruptcies in 14 years? Go figure that – it was a surprise to me.
And also, did you know that this was one of the biggest years for new business formation in the U.S. ever, with over 1.1M new business formed? Go figure that as well – another surprise to me.
All of this bolsters my view that while some are suffering terribly, others have an incredible pile of cash to do something with.
Before getting to where the money will go, consider where has the money gone so far?
With interest rates at effectively zero, the risk/reward on even intermediate-term bonds makes no sense, so that a large percentage of these dollars have gone into stocks.
This may sound “wrong” in a moral sense, but if you think about it, for the past nine months, the government has been printing money to boost the price of Tesla stock – and other stocks too -- since that is where people have been putting their money.
In the midst of one of the worst humanitarian and economic crises we have ever seen in our lifetimes- the NASDAQ – is up a (psychotic) close-to-40% this year as of the date of this article.
And whoever is in charge of the printing presses in Washington come January – i.e., irrespective of the Georgia runoff results – there is every expectation that more money will be sent out into the economy in January or sooner depending on the results of negotiations in Congress.
You have heard the word “TINA” before – standing for “There Is No Alternative” to investing in stocks - which brings me to real estate. Yes, this article is, of course, about real estate.
In the past three-ish months, I have read many articles about what investment advisors advise we should do with the money. Every single article says roughly the same thing:
- There is a standard allocation of roughly 60/40 between bonds and stock with 10% for alternatives – but that is under question now.
- This is because the risk-reward on bonds is “bad,” so they should be avoided.
- But then you shouldn’t “reach for yield” due to taking on risk that may harm you in the end.
- And then puzzlement or non-advice about what to do. Indeed, most articles give zero advice except for things that people like me don’t understand, like overseas bond trading based on currency fluctuations.
Indeed, in a recent Barrons’ article series – just last weekend on December 5th, some of the smartest investors in the world weighed in on investing post-COVID. Do you know how many mentioned real estate?
Answer – zero!
Not a single one.
Yet one of our clients is doing a deal right this minute where he is getting a cash on cash return of close to 9% with moderate leverage on a credit tenant with a baa2 credit rating from Moody’s.
And I have seen many deals in the past few months with similar returns. Even “safe” and “boring” deals are yielding five times more than treasuries.
So here is what I think will happen in 2021:
I think we will see an enormous amount of capital chase into real estate.
I predict that any minute it will become apparent to wealth advisors – and everyone else – that TINA has a very friendly companion, which is real estate.
So I predict that TINA will fuel a real estate boom in 2021.
How will this affect you? The answer depends on what you do in the real estate world, of course:
First - echoing something I have said before, you don’t want to compete with this money – this now Greater Wall of Capital -- as your competition will be delighted with a much lower rate of return than you likely want. So buying a nice cash flowing asset will soon be too highly-priced.
Second – as I have said before, a whole bunch of times, you want to be “creating” deals and value so that you can end up selling to this Greater Wall of Capital, from which you will get top dollar very soon.
Third – you should be thinking of ways to attract this capital so that you can utilize it (as opposed to competing with it), such as open-ended funds, non-traded REITs, syndication platforms, and similar initiatives.
So if you are struggling right now – staying up at night – worrying about what will happen in your real estate business – I urge you to hang on. There is light at the end of the tunnel.
Real estate investment will experience a solid boom in 2021.
Lest I throw caution to the winds, my prediction is predicated on nothing in the nature of another Black Swan swimming towards us, i.e., a major war or other world dislocation or, God forbid, the vaccines not working as intended.
Absent an event of that nature, I am confident that real estate will be the place to be in 2021.
Finally, since I am a New Yorker – I will say that New York will be bouncing back very quickly. And a lot more quickly than is suspected. It will all happen on the same day. There will be a “moment” before which no one is in the office because no one else is in the office, i.e., like right now. Then the next “moment,” everyone will be in the office because everyone else is in the office. When will that moment be? Of course, I don’t know exactly, but I think sometime in April.
So please keep the faith in NYC. Rumors of its death have been greatly exaggerated, as are rumors of people fleeing and similar matters.
Even we lawyers know that it is smart investing to “buy low and sell high,” and NYC is lower than it has been in a long time.
Lastly, on a personal level, I am putting my money where my mouth is – investing in real estate in 2021 – in public REIT’s and with my clients if they will let me do so.
Bruce Stachenfeld aka The Real Estate Philosopher™