In the last few months, US real estate prospered in some areas and was hit in others. In the beginning of the pandemic, everyone thought that the market was imploding, then we saw it gaining speed and in August 2020 things became clearer. Some had apocalyptic visions and some kept their optimism, and that is exactly a situation that presents opportunities. Much to the joy of the unemployed and stock exchange investors, the Government provided aid in the form of liquidity and kept the catastrophe at bay, preventing the grim outlook feared by everyone.
In the study of Economics, special attention is given to the Great Depression that began in 1929 and how governments paved the way to depression. The USA isolated itself from the rest of the world with high import duty and protectionism. The rest of the world reacted in the same way, creating international tensions and economic hardship. All of this wasn't treated properly and without realizing the dire consequences that eventually brought Hitler to power in Germany. The pandemic caused international unrest, and we witness today similar tensions and related threats that gave rise to fascism 90 years ago. Thankfully, the lesson was learned, and Central Banks provided unprecedented liquidity before things got out of control. The stimulus allowed tenants to pay their rent (or not pay without a threat of eviction), it allowed landlords to stop paying their mortgage (without the threat of default), it allowed banks to lend money (without stringent collateral constraints), it allowed employees to get paid (without working). And so, the US economy "is prospering" and the world order hasn't collapsed, for now. One can only assume that in a few years students will learn how Governments created the Great Depression of 1929 and how the grandchildren created the Great Inflation of 2021…
We concluded several transactions in the last few months. In GREI we've sold one property in Atlanta and purchased another. In 40 Broad we've worked hard to complete the acquisition of few complexes in South Carolina. It was a deal that seemed easy at first but got tangled up with Fannie Mae red tape that kept me and the system working overtime in New York City and Hertzliya. Something with commercial loans always causes tension and high adrenaline and then anticlimax. It's like a Hurdle Race where the hurdles appear out of nowhere…
Also in 40 Broad we entered negotiations for the purchase of two properties on New York City's Upper West Side. NYC real estate is "hot" now. The city was deserted to a large extent, as I demonstrated with photos in my last newsletter. Those who could afford it, moved to the Hamptons and Florida, families relocated to CT and NJ, office workers stayed home, tourists were kept away, hotels shut down, bars and restaurants closed for good. It was discouraging and obviously affected real estate. Like many others, I am here to focus on opportunities. NYC was always my favorite city (after Tel-Aviv, Barcelona, and Athens) and it was sad to witness the situation caused by the pandemic.
NMB Portfolio - North Myrtle Beach, SC NMB Portfolio - North Myrtle Beach, SC
People often ask me if there are opportunities in real estate in New York. After a few months from the peak of the pandemic, countless analysis of business plans, wandering the streets of Manhattan, Brooklyn and Queens and visiting many properties, I can definitely confirm that New York was hit badly. However, the administration managed to pull some remedies to stop the collapse it helped create. First, you cannot evict tenants even if they didn't pay rent. Tenants just have to declare hardship. Maybe New Yorkers were hit harder than others. Our tenants still pay regularly in our properties in GA, NJ, PA, DE and SC. In addition, the administration stopped banks from foreclosing on properties. Therefore, the administration protects tenants and at the same time protects landlords that were unable to meet the schedule of mortgage payments. But there is a significant difference! I don't know how landlords will make tenants pay, but it's clear to me how banks will make landlords pay: they would just take the property and sell it at a discount.
The eviction and foreclosure moratoriums are being extended every few months. Everyone is waiting for restrictions to be lifted. But if this happens at once, a significant number of tenants may find themselves in the streets and some of the landlords will go bankrupt. This will be a problem. Therefore, the right thing to do would be to lift restrictions slowly. It would allow banks and landlords to stabilize. A new Government program may help landlords to collect unpaid rent and balance the system.
New York is coming back to life. The parks are full again, the trains aren’t empty, restaurants have opened, and some schools and universities have announced that they were going to soon be back to normal. Landlords that aren't forced to sell won't sell now. Some try to negotiate pre-COVID prices, but it won't work. In residential real estate, the market is now pricing Rent Stabilized buildings differently, and it became attractive only to certain companies. The office market is physically abandoned, but most tenants are still paying rent. Retail was hammered, and in my opinion, it won't return to what it was before. Every time I see a mixed-use building with vacant retail, the broker claims that the space may be rented to a restaurant. New York is certainly a city of restaurants and bars but there's a limit to the number of eateries a city can take. Eventually the competition will dictate much lower prices, so I can't see how this segment will recover anytime soon.
Unlike New York, Atlanta and Miami are breaking new records. The situation is good also in other places that I checked in the South East like TN, AL and TX. Is it really prosperity or is it a bubble? If you look at various parameters like the graph below, it's clear that the American economy actually became more dependent on imports than ever before and that isn't a sign of a healthy economy.
United States Balance of Trade
Source: © Tradingeconomics.com (BEA)
Therefore, in my opinion, it's neither prosperity nor a bubble. It's just good old inflation. It's the result of excess liquidity and reduction in new residential construction starts. The liquidity that flowed into markets has caused prices to rise. The economy will be kept on life support with artificially low interest rates for a period of time. As the FED Chairman Jerome Powell put it: "We are not even thinking about thinking about raising rates..." which means that mortgage rates will continue to be low for a while. Banks will eventually step up the spread because they won't have any other choice. I don't know what will happen "when the music stops", but it's clear that anyone who has cash or T-bonds and thinks he is "solid" is losing money every day. This situation actually pushes investors to put their money in high-risk instruments or lose it. If you like high profits and high risk – look at the capital markets. If you're more conservative, stay with low-leverage real estate. Biden $2T plan to rebuild infrastructure and reshape the Economy will change America and fuel inflation but it's for a good cause and good for investments.
NASDAQ Composite Index U.S. 10 Year Treasury Note
Source: © 2021, Nasdaq, Inc. All Rights Reserved. Source: © Market Watch
Happy Passover and Happy Easter!
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