Why is every one saying the real estate market is at the peak of its cycle and is about to crash? I understand that there will be more interest rate hikes, and in some areas, some housing prices seem over inflated. What other reasons are there though?
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Sounds to me like you're exaggerating on what you heard, or you were misinformed. No informed RE professional is saying RE is about to crash. There is a consensus that there are certain market segments due for a correction (i.e. class-A MF with oversupply in various CBD's, class-B/C malls, high-street retail in Manhattan, etc.), in addition to potential valuation hits due to cap rate expansions (devaluation over a 4-year, 100 bps cap rate expansion supersedes a 4-years of 3% rent growth CAGR pretty significantly). That being said, sponsors of some deals can very well not make a profit, and MAYBE a few deals will have partial equity write offs.
What I just described is not comparable to 2008 where equity was getting wiped out and lenders were taking 50% write offs. That is what you call a crash.
I've heard people who do not know much about RE calling the crash for a couple years now, I think they're all trying to be chicken little.
My sister's brother's uncle's barber. He knows A LOT of people.
He cuts hair for a fella over a Keller Williams Commercial North Grand Rapids so he knows what he is talking about when it comes to Real Estate and Bubbles.
There are a few things out there that could provide downward pressure on housing prices: -rising interest rates -record levels of leverage in consumption to household net worth -baby boomer transition - when the generation starts to pass away en masse, their children (millennials) will either a) not want to own the house and sell it or b) not be able to afford the taxes and upkeep and sell it.
Smart money is finding it incredibly difficult to find good risk-adjusted returns.
Interest rate increases are real. So you should be modelling cap rate expansion and moderating your leverage.
In simplistic terms, think about a discount rate as r+g where r is the cap rate and g is your growth rate. If rates are going up, your discount rate is going up. And if growth is decelerating, you got to figure that cap rates are going up.
There are still spots where you can find value, but they are getting harder and harder to find.
Uh, I'm sorry, what? Please explain the logic that more expensive capital leads to higher returns.
If you're arguing that higher rates indirectly lead to NOI bumps because rents need to rise for investors to meet their returns, I completely disagree. It's a function of the leasing market. If landlords could just charge more rent they already would've.
Have several thoughts. I'd be curious to see what everyone's input is, but overall I think these are hinting at a market slowdown. (bear in mind I'm in MF, so that's what all the below points are geared towards)
Real wage growth is at zero, yet rent growth, as well as most other living expenses, are still increasing at a rate >CPI. Not sure how long this can continue.
In most areas, caps are extremely low and are continuing to drop, even with the recent decrease in transaction volume. There's a lot of speculative interest in RE, but people aren't pulling the trigger.
Cost of borrowing is greater.
In all those high profile areas a massive amount of deliveries are about to come online.
In my opinion, all of the above signal a downturn in the RE MF market. However, the beauty of RE is there's always opportunity, you just have to cater your investment thesis to the current environment and adjust your expectations.
In San Diego I'm seeing deals across my desk that are 5% cheaper today than just 6mo ago. Yes, MF appears to be showing chinks in the armor as the first asset class (barring regional malls) to show weakness.
First American Commercial Escrow has a national office here. They are slowwww.
Rates are coming back down though. Freddie Mac just lowered their rates 10bps. Not a huge decrease, but the 10yr is at 2.20...down from 2.55 or so. If Wall St. continues to slide it may counter any increases by the Fed.
Saw a number of multifamily deals re-trade on increased rates earlier in the year. Buyers were buying for a very specific cash-on-cash return and when they couldn't hit it, they re-traded. This is a sign that the market is relatively dynamic (cap rates and yield spreads).
I can say with certainty that the majority of B and C multifamily deals I've sold over the past two years will result in very little cash flow to the principals. My brokerage numbers were largely bullshit (sorry brahs) that were masked by convincing buyers they could run properties for cheaper. As an owner of B apartments, I can confirm you can only run a building so cheap.
Buyers also weren't factoring in long-term CapEx and reserves.
I don't know that it will get messy since there's such a huge demand for the product and you can't build it, but I do believe most sponsors aren't going to be nearly as wealthy as they think they'll be in 5 years. When rates rise further and CapEx time rolls around, sponsors will realize they've overbid.
The Class A market is a whole other issue. It will eventually get very messy but might take another round of building when banks loosen up again. It's great to have demand for millions of units, but when the unemployment rate increases—for whatever reason—all that demand for insanely priced units will dissipate quickly. Poorly timed buildings will get whacked, and all the others will have to decrease rents.
There's unlimited demand for units for moderate income singles and households in major metros. The issue is you can't build for them.
Just my 2 cents.
CRE lending is growing but trending downward, same with CRE prices
As another commenter mentioned, wage growth (or lack thereof) does not justify prolonged rent growth
Markets like NYC, Boston, LA, etc. are mature, they're your "capital preservation markets" if you will, and yet several growth markets like Houston, Dallas and Denver to name a few are soon going to be facing major issues with oversupply
While this is pretty speculative, I can't leave out regulatory risk. You know what happens when we get in a trade war with China, Canada and Mexico? That's right, the price of steel, wood and concrete go through the roof. Couple that with a labor supply shortage construction has been facing for years now, Trump's economic policies which experts can at least agree would be inflationary and a potential overhaul of major infrastructure projects across the U.S.
What you have is literal stagflation in CRE. Less lending, inflated prices, reduced liquidity and potential oversupply in some areas. It really is not apocalyptic, but I am fairly convinced we're headed into a trough.
Btw much of this data is publicly available, one need only go check out the Fed Website, BLS, ULI, etc.