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The Real Estate Philosopher


In NYC, Real Estate is Certainly the Worst Possible Investment – Except for all the Others

Dec 4, 2019

I was at a confidential secret hush-hush meeting with some very senior New York City real estate people – all so-called C-suite guys and gals.  And boy was their mood gloomy, and for good reason.  Consider…..

  • New York politicians seem to want to raise taxes every way possible to fund various programs
  • Albany politicians just made an unholy mess of multifamily assets in New York City with the changes to the rent regulations.  Whatever side of the political spectrum you are on, the fact is that the market is in disarray and investment capital is fleeing the asset. 
  • The New York City Climate Mobilization Act is a wonderful thing for the world – and may even help save the human race – but it is another expense on New York City real estate.
  • Rent control is – seriously – yes seriously – being considered for retail in New York City.  
  • And – I hope it is a drafting error – but the draft retail rent control statute would have it apply to all commercial leases, which includes office. 
  • Rent control is moving nationwide and may extend to other asset classes such as senior housing and manufactured homes and other places where people live.
  • People running for president are proposing various taxes and programs that might be societally “good” depending on your viewpoint, but are not good for investors in real estate.  
  • Almost every day a new NYC politician proudly voices his/her statement that he/she will not take money from the real estate industry – to distance his/herself from the real estate industry.  And this not to mention some presidential candidates targeting private equity players, which are a major force in New York City real estate
  • Real estate is an easy target for states that are insolvent or having high expenses (i.e. big “SALT” states) because you can leave the state personally, but you obviously can’t take the real estate with you.  And that certainly applies to New York City.
  • States (and cities like New York City with high-income taxes have people fleeing to states with low-income taxes.
  • Indeed, some of our major clients have themselves moved to other cities and made prominent statements about how inhospitable New York City is to the real estate industry
  • The New York City luxury market is in disarray for these and other reasons.

Shall I go on?  It seems like you would just have to be crazy to invest in real estate right now – and especially so in New York City.  But as my headline points out, part of investing is comparing to alternatives.  And if you look at those….. 

  • The stock market has gone up without stopping about 300% off its lows and without a bear market for just about ten years now.  Sometimes stocks do go down.
  • Interest rates are so low it hardly matters if you put your money in a savings or checking account nowadays.  So short term debt is probably just equal to inflation if that.  This is not to mention more and more negative interest rates worldwide.  
  • Long term debt is subject to dramatic risk if interest rates go up.
  • Emerging markets go up until they go down – with a ton of volatility.
  • Gold is, well, gold I guess.
  • Commodities I guess I have no clue about, but I do know that oil has gone from the 30’s to almost $150 and then back, and keeps swinging wildly. 

And then you might take into account the fact that, from a nationwide point of view, overall the economy is pretty strong and businesses still need real estate to operate.  Indeed, in New York City – where doom and gloom hold sway in the real estate industry – it seems like every day I hear about another mega-tech company swallowing an enormous block of space.  This includes Google, Microsoft, Facebook, Amazon (yes, back in the game), and a bunch more.  All of those parties have to use office space and their (mostly well-paid) employees need places to live, shop, eat, recreate, etc.
 
So if you now apply the “bad things” about real estate – that I just mentioned above -- to the “worse things” about the other investments, and add in the current strong demand for real estate in New York City, you come to the conclusion that I respectfully come to, which is that real estate is “not dead yet” (to quote Monty Python) and indeed might indeed be the least bad investment alternative.  This is especially true for cash flowing real estate, which mostly has yields dramatically higher than short term bonds and at times more than keeps pace with inflation.
 
An interesting article I just read on REIT.com has a similar view.  The article I refer to is an interview with Princeton Professor, Burton Malkiel, who wrote a famous book you may have read a while ago, called A Random Walk Down Wall Street.  In the article, he gives his thinking that real estate exposure is strong for investment diversification, and he recommends between 15% and 25% of an investment portfolio in the real estate asset class.
 
To conclude, there are a ton of reasons to fear real estate as an investment, especially in New York City, and the fears are 100% real; however, investing rarely means the complete absence of risk.  Instead, it is a comparison of risk and reward with the hope that, by careful analysis, you end up being over-paid for the risks you take in making an investment. 
 
So that is my thinking.  But full disclosure, I am a lawyer – and I am generally not a good investor, with one exception, which is that I have found that when I invest with my real estate clients I have made money close to 100% of the time.
 
So Viva La New York City Real Estate!

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As the Chairman of Duval & Stachenfeld – a law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.

It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.

You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the Chairman of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.

Regards,

Bruce Stachenfeld
a.k.a The Real Estate Philosopher™

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