Only foolish people try to predict things. Well, actually, that is not true. Smart people make continuous outrageous predictions. When they are right – which happens by chance to pretty much everyone at some point – they crow about how prescient they have been. When they are wrong – which usually happens way more than 50% for most predictors – they rely upon either (i) the fact that everyone will forget what they predicted or (ii) a revisionist claim that their prediction wasn’t really a certainty anyway, or what they meant was…..
Anyway, with that predicate, here is what The Real Estate Philosopher predicts for 2019 in real estate:
The Choppy World Markets Will be Great for Real Estate: With wild swings up and down in the market – political uncertainty – the media loving and swirling controversy as much as possible – and fear and greed vying for control – a nice safe cash-flowing asset class will look very attractive. I predict that cash-flowing real estate will do great. However, projects with risk will have increasing difficulty attracting debt and equity capital.
For the First Time in Years Opportunity Funds Will See…..Opportunities: Yes, I predict that the really long wait is finally going to be over. The years of no deals or few deals or just wishing there would be deals is finally going to end. There will be opportunities at last. These will be generated by troubled deals that don’t provide sufficient cash flow to be attractive to those fleeing the uncertain markets.
Opportunity Zones Will Continue to be Hot: I have written about this before so I will devote but little space to it here. I will just reiterate my prediction that capital will flow here eagerly. Indeed, the more the stock and other markets gyrate, the more capital gains will be created, which are tax fodder for these deals. The tricky spot however will be the fact that opportunity zone deals are by definition “development” deals, and as I noted above there is going to be increased difficulty attracting capital to deals of that ilk. All of this will require creative structuring (to provide investors the tax upside with as much protection against development downside as possible) and – dare I say – lawyers who understand development, tax, and opportunity zone deals and who are not afraid of intellectual challenges.
Opportunity Funds Will Become Big Players in Opportunity Zones: A second point vis a vis Opportunity Zones is a prediction that Opportunity Funds will become major players in Opportunity Zone deals. They just don’t realize it yet. Indeed, we have a perfect structure for this. I have been talking about it a fair amount but so far I admit no one has actually done it yet. Any day now…..
Auction Funds Will Hit the Real Estate World: Yes, of course…..hmmmm…..what is an Auction Fund? Few know right now but I think by year-end this will become a significant force in the real estate fund world. In a nutshell, it is a creative way to provide liquidity to investors in real estate private equity funds that is backed by NASDAQ and blessed by the SEC. This concept is just starting out so I would stay tuned here.
The Tokenization of Real Estate Will Become a Real Thing: Right now it sort of sounds like a mixture between millennials and bitcoin, but I think this is going to be a “big thing” over time as it will eventually provide great liquidity to real estate.
If the Bubble Pops it Will be Bad for a lot of Disruptor Wannabees: Okay, this is hardly a prediction since I start it by hedging with the word “if”. So I don’t count it – happily I have “ten” other ones so my headline is still accurate. But I will say that “greed” can turn to “fear” in the blink of an eye. Once that happens, all that ridiculously plentiful cash seems to vanish with the speed of an egg-timer. Real estate tech companies with an expiration date vis a vis their burn rates will go belly-up or be bought for a song by bigger players or shrink dramatically. Real estate players with projects that need more capital than they have will either be seriously distressed or pay for that money at exorbitant rates (see above about Opportunities for Opportunity Funds).
Co-Living Will be Ready for its Close-up: So far it has mostly been all about co-working and co-living has lagged because it is a lot trickier to pull off. However, I think you will see some major things happening in this space this year.
Creative Players Who Are Willing to “Create Value” Will Outperform Those Who Are Not: This is an old theme of mine but I think it will become more and more obvious that with the continued instantaneous flow of information it will become harder and harder to take advantage of market opportunities that are based on lack of knowledge of others. Instead, economic outperformance will have to be based on people thinking of ideas and angles to “create” value. Peter Drucker points out that the “purpose of a business” is to “create customers,” which requires innovation. It is the same in real estate and this will be more and more critical in a choppy market. For investors, I urge you to look to invest with parties that have something more creative than just “looking for good deals” and for those who are doing deals, I urge you not to sit by and wait for brokers to call but instead “create” the deals and thereby capture the value yourself.
Retail Will Remake Itself but Not in The Way Many Expect: Everyone is talking about the “experience” of the customer in the store – or the mall – and my sense is a lot of retailers are spending a lot of money on upgrading the customer’s experience. Sorry, I don’t think that dog hunts that well. For coffee, yes I love the Starbucks friendly “experience,” but if I am shopping for blue jeans, I can’t imagine how the “experience” will change my shopping habits, except maybe once I might go into a store if I am curious about the fact that they serve me some mint tea while I try on the jeans. I think what will “work” for retail is the good-old Power Niche. My prediction is that retailers with something they own – through a brand or a Power Niche – will do great – Amazon and Walmart and mega-players with pricing power from sizing will do great – and parties spending time and money creating an “experience” will be wasting their money.
Choppy Markets Will Bring Out the Best and Worst in All of Us: Everyone says “my word is my bond” in an up market. I mean it is pretty easy to be honorable when it just means you are accepting upside. It is when things go wrong that we will once again learn – or re-learn – who we should be doing business with. I hope – but not sure I can predict it – that those who showed their honor and integrity during the Global Financial Crisis (now ten years ago) will be rewarded with deals, investments and upside during this go-round.