Displaying items by tag: real estate

Over the last year, Elon Musk has been increasingly pessimistic about the US economy and warning that a more severe downturn is coming. Recently, he warned that the prospects of commercial real estate would suffer due to a lack of financing given stresses in the banking system, and workers who are not returning to offices. In an article for TheStreet, Luc Olinga covers Musk’s thoughts on the matter.

Now, the Tesla founder and CEO is also warning that the residential real estate market could face similar pain as inflation and a weakening economy mean that demand will be tempered, while supply is artificially constrained as homeowners with low mortgage rates are unwilling to sell. 

He sees the same underlying factor negatively impacting residential real estate and commercial real estate - banks raising their lending standards which curtails demand. This would lead many prospective buyers to fail to qualify for a mortgage. 

On top of this, there are a myriad of other economic stresses such as inflation and higher rates leading to higher costs and payments. At the same time, Musk sees it as inevitable that the labor market experiences its own downturn, adding to pain for the US economy and housing market. 

Finsum: Elon Musk has been quite vocal in warning about risks to the economic outlook. He recently shared why he thinks residential real estate could follow commercial real estate lower. 

All asset managers are adapting to this macro environment in their own ways. In terms of private real estate, funds are taking more time to make investment decisions, exploring new sources of financing, and structuring creative methods to deploy capital. Jenn Elliot covered the cautious behavior among private real estate funds for WealthManagement.

It’s a sharp turn from the last couple of years when funds were much more aggressive in terms of investing and raising capital. Now, raising capital has become much more difficult given that the risk-free rate of return is above 5%. Additionally, rising recession risk, stumbles in the banking system, and stress in commercial real estate have also muddied the picture. 

One silver lining is that many investors have been sidelined which means there is less competition for deals. Thus, private real estate funds have more time to evaluate ideas and can be more selective.

However, the most significant headwind is that a deflationary mindset has become pervasive. Essentially, most investors expect that prices will decline over the next year. In some ways, this becomes a self-fulfilling prophecy. So far, damage has been contained to commercial real estate where there have been a few high-profile defaults and redemption requests. 

Finsum: Private real estate funds are behaving much more cautiously due to higher rates and increasing economic uncertainty.

In an article for Seeking Alpha, Jussi Askola covered the aggressive buying of REITs by the Blackstone group and bullish comments from Steve Schwartzman and John Gray, who are the CEO and COOs of the Blackstone group, respectively. Their investment decisions are monitored due to their leadership of the private equity giant, and its successful long-term investing track record. Additionally, private equity groups are large owners of real estate, so they could have particular insight into the sector.

This is evident in public filings of REITs whose shares fell precipitously last year due to the rise in rates and weakness in real estate. The company has built up a portfolio of REIT assets, totaling nearly $30 billion. Essentially, the company sees a discrepancy between real estate assets in private and public markets with public markets offering more favorable valuations. 

And, it signaled on a recent conference call that it says more upside in other types of liquid real estate securities as other investors pull back from the asset class. And, they note that these opportunities present themselves in REITs that are exposed to strong sectors with no distress. One factor that may appeal to Blackstone is that many REITs currently have a nearly 30% discount to their market value. 

Finsum: Blackstone is being contrarian with its aggressive buying of REITs while most investors flee the sector.

Jonathan Brasse discussed a recent white paper from Swiss alternatives group, Partners Group, about why private markets are poised to grow faster than public ones over the next decade in an article for PEREnews.

In essence, Partners Group notes the changing landscape for private markets, and how they are playing a larger role in financing the ‘real economy’. Since 2016, funding on private markets has exceeded that of public markets. Last year, about $400 billion was raised on public markets, while more than $1 trillion was raised in private markets.

Another change is that companies raising on private markets are generally healthier and more profitable than ones listing on public exchanges. These trends are also evident in the real estate market.

Fundraising for real estate in private markets has been steadily growing, while the number of real estate IPOs has dwindled. In terms of future returns, real estate listed on private markets has a better chance to be renewed, repurposed, and transformed, while such expenditures are less common on the public side given the pressures of quarterly earnings and shorter time horizons of public investors. 

Finsum: Private markets have been overtaking public markets in terms of funding. This trend is also happening in real estate markets.

According to research from the Indiana University Kelley School of Business, the current strength in real estate may prove to be transitory. Currently, the housing market has remained resilient despite higher rates due to a demographic bulge and low inventory of available homes. 

However, Indiana University’s research indicates that demographic-driven demand is at a peak. Coupled with low supply, this is likely to drive prices higher in the near-term. However, there is likely to be long-term slowing in demand due to slower population growth and an aging population, barring an unforeseen surge in immigration or household formation.

Additionally, baby boomers are likely to start downsizing, while lower fertility rates also mean that demand for housing will be structurally less. Due to the pandemic and increase in remote work, there was a surge in household formation that exceeded population growth over the last couple of years. This trend is also unsustainable given demographic realities. 

The rise in mortgage rates has also artificially constrained supply as many would-be sellers are not selling due to locking in low rates. Yet, this is simply ‘pent-up’ supply that will be released into the market once rates decline or through the passage of time. 

Finsum: Real estate has continued to hold up well despite deceleration in economic growth and higher rates. However, this state of affairs looks unsustainable in the longer-term.