As promised, here are my predictions for 2024:
Artificial Intelligence – despite all the hype -- will be close to irrelevant, except as a useful tool that saves time. People will start to realize that it is not a game-changer. It is not a new business; it is just a new way of doing business. I called it a Glorified Spell Check in a prior article, i.e. it can catch errors but will not create value for you. I do caution that even though AI won’t give you a competitive advantage, not having it at your fingertips when your competition has it will hurt you since it will provide some cost-savings and other internal benefits. Notably, Bill Gates’s famous quote is apropos here; namely, that people tend to overestimate what will happen in one year but underestimate what will happen in ten years.
The availability of funds for real estate deals will come back, and come back strongly. Last year was a desert of unfunded deals even for super-high-quality sponsors, but greed and speculation are back in just about every other asset class. It is hard to believe that crypto can get money and real estate cannot. Many of the private equity players already have war chests and their ability to raise more will increase as (with a more robust stock market) the so-called denominator effect diminishes. So funds for real estate deals will become available again, probably midway through the first quarter of the year. And once it starts it will become a flood. There are a lot of sidelined dollars awaiting a home. Once a few respected parties start to provide funding, everyone else will follow the crowd.
Those who timed the market last year and sat out deals and investing will be kicking themselves. As I strongly stated in my articles last year, market timing doesn’t work out in the long run. One of the most brilliant investors I have seen in real estate – over 30 years – said they just ignore macro events and do their normal underwriting. Sometimes cap rate compression is a tailwind and sometimes a headwind, but in the long run, it balances out. How many shunned buying in NYC for years after the GFC and missed out on half a trillion dollars of value creation? My prediction is that this time around is no exception.
The many private equity funds that used to do equity and moved into high-yield debt will find themselves with slim pickings. No one wants to borrow money at 15% to 20% if they can avoid it. Parties needing that kind of capital will either (i) take less of it, (ii) just give up and hand the property to the lender, or (iii) find another path. This is because they would be giving up virtually all of their upside and working for free for the high-yield debt lender. So these private equity players will go back to equity, where they should have stayed all along.
It will be a great time to be a – great – real estate lawyer. Yes, this is humbuggish of me to say, but true nonetheless. Lawyers who can really figure out how to help their clients out of trouble or how to create value when clients wade into complicated situations, will be in high demand as they provide value that makes their – outrageous? – billing rates worth every penny. Having said that, average or run-of-the-mill lawyers who don’t have this skill set will be outclassed to the chagrin of their clients.
Diversification Buyers is a term I coined once real estate became a separate asset class about five years ago. This got red hot as Blackstone was raising over $1B a month for its B-REIT and then cooled off suddenly when interest rates rocketed up and Blackstone, and others, found themselves in a pickle with too many parties wanting to be redeemed too fast. I predict that by the second quarter of this year, this will reverse and there will be a ton of money raised for these types of generally safe and uninspiring coupon-clipping investments.
New York will continue to morph from a place where people work to more of a destination location. As an anecdote, my wife Ann and I took a cross-country trip last year and stopped in a bunch of cities. After a day and a half in each city, we found ourselves wondering what to do next. But NYC is different – you never get bored here. My prediction is that NYC will reinvent itself to continue to be the place to be – the place where there are always things going on -- where the action is. WFH will not kill it. There is more to do here than anywhere else and that will only grow. See my advice below.
Foreign investment in the U.S. will boom. Although we are focused on our problems in the U.S., which the media always magnifies, our problems pale next to most of the rest of the world. If you are living in most major economies of the world, investing the U.S. is a no-brainer. So I expect foreign investment in the U.S. will have a very fine and strong year.
One of my clients thinks lending will be back big-time. I hope he is right but I have my skepticism since a lot of the traditional lenders are stuck with properties given back to them – or properties that will soon be given back to them -- which will make it hard for them to put out significant dollars. Yes, at some point traditional lenders will be back in the market, but I don’t think that it will happen that quickly – at least not in the first half of this year. This will mean that non-bank lenders making things like construction loans and bridge loans will have a banner year.
Office will make a surprisingly strong come-back. Yes, I have been saying this and admittedly I have been wrong so far. But my prediction is that the office denouement will end up similar to what happened in retail. Everyone said that internet shopping would kill retail but suddenly retail is one of the hottest – and maybe the hottest – asset class – note the recent Real Deal article that Madison Avenue has a retail boom going on after being left for dead. All of this is for one reason not oft mentioned, which is that people like to go out! We humans are social animals and sitting home clicking on Amazon to buy stuff is convenient but in the end unfulfilling. We like to shop. It is the same with office; namely, sitting at home typing is unfulfilling, and if our friends are at the office we will want to be there too. My belief is that the death of office as an asset class is greatly exaggerated. Having said that, some locations will do great and some will be hurt severely. Notably, cities with difficult, time-consuming, and annoying commutes will lag the comeback.
What about interest rates? Ha! I won’t predict that since no one has an idea and I continue to believe it is irrelevant – or it should be such. You know, interest rates could rocket up during a boom and real estate could be a fantastic investment. Or interest rates could plummet during a recession or depression where real estate is destroyed. It is just a cost – nothing more. Having said, that my guess – not a prediction – is that interest rates won’t move much this year. The economy is booming which implies that the Fed won’t lower rates. At the same time, inflation has abated so there is no impetus to raise rates either. I note that this is NOT a prediction – just my best guess.
Those are my predictions. Now here is some advice:
Use Mr. Media to Your Benefit: Warren Buffet talks about Mr. Market, who offers him a deal (on a stock) every day. Sometimes Mr. Market is too pessimistic and sometimes too optimistic. So Buffett buys when Mr. Market is too pessimistic and sells when he is too optimistic, etc. I urge you to do the same with Mr. Media. Mr. Media amplifies ups and downs, to wit, retail, and now office. Instead of listening to Mr. Media, just assess if he is too optimistic or pessimistic and make your own decision taking this into account. Mr. Media is a great guide to buying low and selling high.
Developers Create Value: For developers, it is more important than ever to ‘create’ value as opposed to looking for it. If all you are doing is assessing what brokers send you, you should go into another business. Your raison d’etre is to use your creativity and inspiration to ‘create’ value. Increasingly the internet, AI, and other conveniences will make information available to everyone instantly, so staring at computer screens looking for deals will result in failure. Creating value is where you will make your money.
Buy in States With Investment-Friendly Politics: Sorry if this sounds political as I don’t mean it to be that; however, for most asset classes it makes more sense to invest in states in which politics is not a major downside risk. This has already been happening in a big way, although investors are reticent to say it that way and instead use euphemisms like “Sunbelt States.” The concerns about rent control and other anti-real-estate-industry initiatives make certain states a nervous place to invest.
Buy in NYC: Semi-contra the foregoing, buy NYC! As I noted above, one way or another NYC will be a powerful growth story. I note the recent article in The Real Deal showing the billions – yes billions – of dollars spent by buyers from all over the US buying apartments in NYC. You know Floridians spent $787,826,227 in 651 purchases in NYC in the last two years – so maybe a lot of New Yorkers are moving down south, but some are moving up north too. You may find it of surprising interest that among the top states where buyers bought New York were, New Jersey, California, Florida, Connecticut, Massachusetts, Pennsylvania, Texas, Illinois, Ohio, and Maryland.
To conclude this point, New York is not even remotely dead. Yes politicians keep trying to kill it with ever-crazier laws, but so far they have failed to do it. So my advice is to figure out how to buy real estate in NYC – and yes of course try not to overpay.
Don’t Time the Market: I know I sound like a broken record here, but don’t sit around timing the market. Keep doing business. But of course, stick to your underwriting and carefulness. Along these lines, my catchphrase is Be Overpaid for Risk.
Read my Book: Finally, I urge you to read my book about Power Niches. There I go being a humbug again. But I do think this will stand you in good stead. Possibly the most important advice in the book is my personal four-word mantra about how to build any business:
It’s The Network Stupid!
You’ve heard that phrase, “It’s not what you know, it’s who you know.” That is as true today as it was 100 years ago. So get out and meet people and develop relationships. You don’t know what will happen if you do that, but you do know what will happen if you don’t do that; namely, nothing.
Well, that’s it.
I wish everyone a very fine and prosperous 2024.
Bruce Stachenfeld aka The Real Estate Philosopher®
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Books or Commemoratives Can Help You: On another front, I am busy on another venture, which is a foray into the publishing world. In that regard, I’ve bought into a publishing company called Easton Studio Press – it’s a successful 20-year-old publisher operated by 50-year publishing veteran David Wilk. David knows just about everything there is about the publishing industry. Read his bio.
The reason I am involved is—you guessed it—real estate! David and I have developed a new publishing imprint (product line) for real estate books, commemoratives, and similar publications called Credentia Press.
Our purpose is to publish books, commemoratives, and other similar publications in the real estate industry. And yes, I will be writing more real estate books for sure. One is coming out in just a couple of months written with my friend David Dowell, called How To Invest In Real Estate If You Know Nothing About Real Estate.
Chances are that you don’t have a book or a commemorative already planned for your real estate business, but I think you might consider doing exactly that; namely, creating a book. commemorative or other publication about your real estate business or about a building or complex you own.
There is nothing that shows more pride in accomplishment than a well-written and well-presented book, commemorative, or other publication that takes the reader through the history of your business or your building or your development. It is not simply about ego by any means, although you should be proud of what you have accomplished and want to show it off.
Indeed, my law firm has a 25-year Commemorative coming out in just a few days. I was thrilled to write it and it is now a showcase and showpiece to all of us at the firm – and those who will join the firm in the future – telling our history and what we are planning for the future.
What better way than a professional writing to let your employees, investors, tenants, and other third parties know what a class act your company/project/building is. Not to mention detailing the history of your organization. And these types of writings show a certain panache that gains respect everywhere.
I note that Blackstone has a book like this in its lobby written by its founder or it did last time I was there.
David/Easton can provide every element that goes into making truly special and important projects of this ilk, including ghostwriters, editors, book designers, project managers, access to quality printing, as well as distribution and warehousing.
If you think that this concept can be of potential value to you, please give me a shout and I will put you in direct touch with David to discuss your moving forward.