The Four Stages of the Real Estate Cycle Ahead – June 2020 Monthly Letter
“Wars in old times were made to get slaves. The modern implement of imposing slavery is debt.” – Ezra Pound 1885 – 1972
The whole world has changed and will continue to do so. There will be things you will love and things you will hate. It is your response that matters. It is how you adapt, innovate, and overcome that ensures your success or misery. First, let me wish all the fathers out there a Happy Father’s Day later this month. I got an early Father’s Day present when my #3 son (Austin not Nick) recently announced his engagement to his long-term girlfriend. Ah…the cycle of life continues.
As I have said many times over the years of writing this letter it is ALL about jobs. The U.S. unemployment rate jumped to 14.7 percent in April of 2020 (and 15% in San Diego County). When I wrote about our last “Great Recession” in 2009, unemployment was at 7.6%. The worst in recent history was 10.8% in November of 1982. In the “Great Depression” unemployment skyrocketed from 3.2% in 1929 to 25% in 1933 (note the length of time from crash to trough). So, if you ask me “when will we turn around”. I will tell you, “show me the jobs!”
The biggest concern that I have right now is that we have experienced a traumatic earthquake with plenty of losses and damage. However, the helicopters are out and dropping money from the skies and people are so dazed and busy picking up candy that they are failing to see the tsunami that is building offshore. Further obscuring our view of the tsunami, is the fireworks of the coming election. If you think this has been a bruising battle so far, hang onto your hat, the fireworks and surprising twists have not yet begun!
Closer to home, here at CDC, we have seen our inbound call volume cut in half. Leasing has slowed to a crawl. Surprisingly, investment sales have stayed steady but many more roadblocks. Lender financing is challenging. Buyers are trying to find what is an appropriate market value. Due diligence is tricky – what is appropriate for entering tenants’ office space to inspect? Most cities are closed or with limited access. Having meetings is a challenge (Zoom is great but there are times a deal does not get done without an in-person meeting). Through all of this, I have come to realize that this is just one more thing we as Brokers at CDC Commercial get paid to do. These are just more obstacles for us to overcome to get a deal done. Our job is to go through walls for our clients (or over, under, or around if that works!).
One thing over time that is true. Creativity and aggressive innovation — in the face of hardship — will fuel a turnaround. Right now, with unemployment rising, it is hard to remember that capitalism is a creator of jobs, companies, and industries.
History shows us that between some of our worst financial panics, U.S. capitalism has built transcontinental railroads, U.S. highway systems, and the internet. The creative side of the story is hard to see in today’s moment. We are in the middle of the crisis, and growth stories are just now putting down roots. Areas to keep your eyes open to are biotech, driver-less cars, fuel cells, unmanned aerial vehicles, stem cells, and regenerative medicine (that is growing back the liver you ruined in quarantine!).
I recently read that the real estate cycle is like the five stages of grief: Denial, Anger, Bargaining, Depression, and Acceptance. While I agree wholeheartedly, I think these four quotes sum up the cycle ahead of us even better.
Stage 1: “You’re wrong about the market. My property’s worth more than you’re telling me it’s worth.”
Stage 2: “OK, I agree that the market has changed. But I still won’t sell my property unless you can get me more for it than what other people have already offered me for it.”
Stage 3: “We need to sell this property. Where do we need to price it to unload it?”
Stage 4: “I don’t think we’re ever going to see another great real estate market again.”
And Stage 4, of course, represents when we have probably hit the bottom of the market, and it is the best time to begin buying properties again.
And now from the other corner of our office, here are Nick’s numbers for the month;
Wow! I have a lot of charts this month, but they really tell a story and support what Don has written.
First, the commercial property price plunge by Green Street and Wolf Street.com. This is dramatic and rather startling – we have rolled back 5 years in a month or two.
Second is the London Groups chart that parallels Don’s stages of the real estate cycle.
Finally, the real estate life cycle chart should help serve as a map for your road ahead (we are blowing through some of these milestones quickly so be alert).
Please give me a call or email me if you would like an analysis of your properties’ value or to discuss what you should be doing with regards to the Coronavirus pandemic and its impacts on your business, tenants, or property (Nick Zech, 858-232-2100, firstname.lastname@example.org).
Being as this is my fourth downturn, let me give you my first piece of advice. If you color your hair, stop it (at least now you can get it cut!). We need all that grey hair experience now! In an attempt to benefit from the collective whole of the over 3,000 readers of my monthly letter, I would like to ask you to e-mail me your ideas (what are you doing) and experience and successful strategies in these kinds of times. Help add to my list (10 things smart people did in the last downturn).
1. Buy with positive leverage (cap rate higher than the interest rate).
2. Buy A+ properties at distressed prices.
3. Buy notes from lenders and foreclose and obtain an underlying asset.
4. Buy freeway visible property
5. Grow market share
6. Sale Lease-backs to raise capital for Tenants
I will compile these and e-mail them back out (and post to LinkedIn). Remember, Together Everyone Achieves More (TEAM). The rallying cry now is to survive, to thrive! I hope you enjoy the story…
My Daddy’s Chair
A man’s daughter had asked the local minister to come and pray with her father.
When the minister arrived, he found the man lying in bed with his head propped up on two pillows. An empty chair sat beside his bed. The minister assumed that the old fellow had been informed of his visit.
“I guess you were expecting me,” he said.
“No. Who are you?” asked the father.
The minister told him his name and then remarked. “I saw the empty chair and I figured you knew I was going to show up.”
“Oh yeah, the chair.” said the bedridden man. “Would you mind closing the door?”
Puzzled, the minister shut the door.
“I have never told anyone this, not even my daughter,” said the man. “But all of my life I have never known how to pray. At church, I used to hear the pastor talk about prayer, but it went right over my head. I abandoned any attempt at prayer.”
The old man continued, “Until one day four years ago. my best friend said to me. ‘Johnny, prayer is just a simple matter of having a conversation with Jesus. Here is what I suggest. Sit down in a chair; place an empty chair in front of you, and with faith see Jesus on the chair, it’s not spooky because he promised, ‘I will be with you always’. Then just speak to him in the same way you are doing with me right now.'”
“So. I tried it and I have liked it so much that I do it a couple of hours every day. I am careful though. If my daughter saw me talking to an empty chair, she’d either have a nervous breakdown or send me off to the funny farm.”
The minister was deeply moved by the story and encouraged the old man to continue the journey. Then he prayed with him, anointed him with oil. and returned to the church.
Two nights later the daughter called to tell the minister that her daddy had died that afternoon.
“Did he die in peace?” he asked.
“Yes, when I left the house about two o’clock, he called me over to his bedside, told me he loved me and kissed me on the cheek. When I got back from the store an hour later, I found him dead.
“But there was something strange about his death. Just before Daddy died, he leaned over and rested his head on the chair beside the bed. What do you make of that?”
The minister wiped a tear from his eye and said, “I wish we could all go like that.”