• Mon. Nov 28th, 2022

Will a bear market bring commercial real estate out of its cave?

ByWillie M. Evans

Aug 2, 2022

Unless you’re tiptoeing back into society after an off-grid retirement, hearing that the economy has fallen into a bear market isn’t breaking news. Wall Street lowered its head on June 13 after the S&P 500 closed more than 20% below its peak reached in early January. Unlike a bull market, which typically lasts around 32 months, bear markets only last around 11 months on average. Bear markets tend to be short-lived, but thanks to an international supply chain crisis, an ongoing war in Europe, skyrocketing inflation rates and a recession expected any minute , this particular slowdown attracts additional attention.

Real estate has generally been seen as a safe investment for these downturns in the market. Properties are material, tangible assets that can generate income, and property values ​​are less volatile than stocks. But investors typically rethink their portfolios in times of economic crisis. As we enter phase two of the bear market (when stock prices fall and trading activity slows as investors decide to shift gears), there are some things to consider when it comes to bear the brunt, so to speak, of future economic stressors .

The good, the DEF and the ugly

Market watchers have put together a wide range of potential explanations for the start of a bear market. They understand the pandemic, drastic changes in consumer habits because of the pandemic, geopolitical unpredictability, lack of energy security because of this geopolitical unpredictability, and, oh yes, an increase in prices and a decrease in the purchase value of money.

In his July 5 comment, Howard Silverblatt, senior index analyst, product management for S&P Dow Jones Indices, blamed most of the market’s fall on inflation. “Inflation is squarely placed as the market faller declines,” he wrote. “As market ‘expert’ historians cite [Federal Reserve’s] “excessive” stimulus programs as the reason for the high rate of inflation for 40 years.

Indeed, the Fed has been criticized for not getting inflation under control fast enough, even though it has only the very rudimentary lever of interest rate hikes to pull. But if this bear market is mainly caused by inflation, better times may be ahead. by Kiplinger latest inflation forecast revealed that the inflation rate is expected to remain in the 9% range for the rest of this year before falling to 3% in 2023. Hopefully that estimate remains accurate. Since this month, inflation has already reached 9.1%.

All in all, inflation should finally start to come down over the next three months, and that’s the good news (especially for those trying to buy office furniture right now, damn it). The not so good news is the continued expansion of price pressures. The tight labor market has pushed up the price of hiring in many industries, creating a very real possibility of another wave of inflationary price hikes, especially if Fed actions fail to slow the labor market as they hope.

We’re not just in a bear market, we’re in a state of fiscal shock, so the Fed is being urged to do it big to get inflation (and therefore the economy) in order. . However, the key strategy to achieve this is to reduce the amount of money in circulation by raising interest rates. Rising interest rates make borrowing more expensive, which (hopefully) reduces inflation by slowing the economy. Fewer people borrow money to start businesses or buy homes when interest rates rise. Theoretically, prices will decline when the demand for properties, workers, and other goods and services declines. But rising interest rates can have a negative impact on commercial real estate transactions. So if this is the case, how should real estate players manage this period of market volatility?

Invest every chance

John Mazurek, executive director of sales at Douglas Elliman Real Estate, noted that in the last 20 bear markets since the 1950s, real estate values ​​have fallen only twice. Even after the last big price in 2008, prices in most of the country were well above 2006/2007 levels. For this reason, at a time when stocks are losing value, investors may be tempted to pull their money out of the market and look to real estate as a stable alternative.

But not all real estate is an equal investment opportunity in a bear market. “I love the idea of ​​turning vacant office buildings into urban indoor farms, but I think that’s far from it. But if you have a stomach for multifamily or warehouses, I’d give it a shot. Mazurek told me that people need a place to live, and as more and more UPS, FEDEX and Amazon trucks clog the streets, distribution and warehousing space is getting harder and harder to find, especially in already dense cities.

That said, now may not be the best time to sell assets either. “Except in cases of 1031 exchanges, I would not seek to sell commercial real estate investments,” Mazurek said. “Where are you going to park your money in such a stable long-term bear market like real estate?”

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Kevin Shtofman, COO of NavigatorCRE, a platform that helps commercial real estate clients integrate and visualize all types of data, sees the upsides of the downsides in the market. For Shtofman, the possible impending downturn is what keeps most real estate players so excited that there are always opportunities around the corner. “There have always been times of massive uncertainty and these are usually times of excitement because real estate companies don’t operate on mere comfort,” he said. “They are forced to innovate.”

Shtofman said each market cycle will create opportunities in every type of property. Example: logistics. “I haven’t seen anyone take an interest in industrial logistics and warehousing in my entire life. Until two years ago. And now, suddenly, it’s like the hottest asset class ever. So whenever an asset class is down, I always think OK, just wait a bit because it’s going to get exciting again.

But all that excitement aside, Shtofman thinks the combination of rising interest rates and fairly tight supply, especially in the multifamily sector, is going to create a pretty big chasm between successful deals and those who fail. “I’ve never seen a negative leverage environment until now,” he said. “These deals are made because investors are hoping they can quickly increase the rental rates they charge to justify the cost of this deal, but I think some of these deals are going to blow up in their face.”

Despite the grim cacophony of bad news swirling around the echo chamber, bear markets can be beneficial, if not essential, to the long-term health of commercial real estate. Many investors, large and small, are waiting for a bear market to raise capital. Bear markets can often mean high trading volumes and attractive short-term appreciation for even the most impatient capital. Investors who have the courage and self-control to continue investing during bear markets will be rewarded with larger profits during bull markets. No one likes to see an economic setback, but in this case it might be necessary to fight the inflationary boogyman that threatens to cripple the economy.