Predictions and Trends for 2021Jan 23, 2021
Hello, real estate friends. Welcome to 2021. I am guessing you might feel a sense of relief that 2020 is over with. COVID is still circulating and as awful as ever – and actually worse than ever - but at the same time, 2021 looms up ahead of us with the hope of better times to come. Here are my thoughts as a mixture of trends I am seeing plus some predictions for this year:
The Year of the Niche: I think just about everyone has finally caught on to the fact that there are two ways to invest in real estate: either focus on the four (or maybe five) basic real estate food groups and do it better than others. Or find a niche and try to learn everything about it and even dominate it. We see this in the real estate world and the law world as well. I predict that this trend will continue and grow and grow dramatically. This is an outgrowth of the first rule of marketing:
If you are not number one in your market, create a market that you are number one in
Yes, this is the essence of my book If You Want to Get Rich, Build a Power Niche.
The Year of Surreal Distressed Real Estate: Distressed real estate will not follow its usual patterns. The usual pattern is that the borrower gets overleveraged or otherwise in trouble. The smart opportunistic money comes in and buys it up cheap and gets a great deal. Some of that will happen, but not as much as in the past. This time around, everyone now knows everyone, and information flows instantaneously, so the chances of money itself being the cause of a bargain is less likely. Instead, I think that rational behavior will result in the following options from distressed real estate players:
They will give up quickly – and give the property to the lender, who will either hold it, team up with a third party to monetize it or sell it quickly and cheaply.
They have a plan that makes some sense – e.g., repurposing obsolete assets or waiting for hotels and similar assets to have customers return – but maybe the plan needs some time. If that plan really makes sense, the lenders will give that time and charge for it. Since they are already in the deal, their money will be less expensive than third-party capital.
The exception to this rule will be if third parties – e.g., lenders – become forced sellers due to regulatory or similar issues. They may become more emergency-based forced sellers. However, even here, the ubiquitous-ness of information will result in the pricing of the forced sale assets being bid up to market.
Overall, as I have said before, I think the big piles of distressed debt dollars will not have the field day they are anticipating. Instead, they will have to make money the old fashioned ways….
Real Estate Will be a Hot Asset Class: As per my last Real Estate Philosopher Article, due to the poor risk/reward on bonds and the fact that stocks and bonds are yielding close to zero, this will push investment dollars towards real estate, the foregoing being with a strong flavor towards cash-flowing real estate. If one believes in providing products to eager investors, the place to be will be selling to these investors, creating products to be sold to these investors, or obtaining permanent capital vehicles, which leads to my next point.
Permanent Capital Will Grow and Grow and Grow: You know how the stock market is kind of one big thing, and people keep buying index funds to lock in average performance. I see real estate heading this way more and more – see my article about real estate becoming a separate asset class for investment. I don’t know if it is three, five, seven, or ten years away, but I expect similar things to happen in real estate as it becomes increasingly commoditized. If you aren’t thinking about permanent capital and how it applies to your business model, you should. I am not saying everyone should have it – but everyone should be thinking about how it will affect them.
Development is the Place to Outperform: How would one cram the word “Development” into four letters? I don’t know that, but I do know that just about ‘no-one’ with investment dollars is open to it right now. So, with the theory of ‘buy low/sell high’ in all of our minds, it does seem like this is a chance to ‘buy low’ for high-quality developable properties.
Repurposing is Only Beginning its Trend: The days when real estate was something that was supposed to stand for the ages with whatever it was when it was built are, I propose, now over. We are already quite cognizant that real estate has morphed to be somewhat of a ‘service.’ Now, we will see changes in uses that are dramatic. And this is not because of COVID. It is a trend that started before COVID and will accelerate. Of course, you cannot just change a use – as there are many impediments to doing that -- legal, financial, and logistical – but that is where we will be heading more and more over time. Personally, I love this trend, as it fits so nicely with perhaps my most well-known article, You Will Never Find a Good Deal Again, with me making the point that ‘finding’ deals is over and what it is all about today is ‘creating’ deals. Repurposing has this at heart, and here, the victory will go to the creative visionary developers and sponsors.
By the way, I can’t help but mention that my law firm will be announcing a Repurposing Practice Group just next week. But this is under wraps, so don’t tell anyone about it yet….
Slim Pickings for “Standard” Opportunistic Players: It will be harder for non-creative players seeking opportunistic returns to find them the old-fashioned way. Many of these parties have enormous cash hordes and hope to deploy them the way they used to. I don’t see that happening successfully, which leads to two paths. One – a bad path – is inadvertently just taking on more risk for more reward. I believe that this is a path to either average or below-average performance. The other path – a good path – is to be more creative about how to deploy the capital. This includes platform investments that back strong sponsors, the permanent capital idea I mentioned already, and the morphing from seeking to find good deals to seeking to ‘create’ them – sorry to repeat this point. Happily, many of my clients are doing exactly this, and I have high hopes for their success.
Fear Will Turn to Greed in Real Estate Very Soon: You will see that this will happen any day now. Within just a few months – my guess is sometime in April -- it will be “game on” in real estate for deals. If you are an investor, you will not be able to sit around while your competition invests. You will have to get active, or people will wonder why you are managing their money. And the dangers of underperformance when you miss the “bottom” will grow every day. Once they ring the bell at the bottom, it is hard not to be pulled along.
PACE Financing: I think this is the year when PACE financing becomes mainstream. It is perplexing that this cheap source of capital that is environmentally friendly and has so many benefits is still unknown to many real estate players, including some of the most sophisticated. My PACE partners and I believe that the reason it hasn’t caught on yet is for the simple fact that NYC – the leader of capital markets – has not effectuated it yet. That should change within the next 30 to 60 days, at which point I think it goes viral. I will stick my neck out to say that by the end of 2021, PACE will be on the checklist for every loan transaction of significance in the 30-ish states that have adopted it. To be clear, I am not saying every loan will have PACE, but for every loan, the parties will at least consider it. I cannot help but mention here that we have a leading PACE practice led by my partner Tom O’Connor.
Retail is the Place to Outperform: As per a Real Estate Philosopher article I wrote only a month or so ago, I think it will become clear that one of the best places for creative deal thinkers who want to “create” value is retail, but not just any retail. It is what I call Power Niche Retail.
Office Will be Just Fine: My view on office hasn’t changed in the past year. I think COVID is a red-herring. The biggest trends are that office is moving gradually to being more of a service, through flexible space, co-working and similar uses. That trend started about five years ago and will continue. WFH (as it is affectionately known) will not change things that much overall. Another way to put it is that rumors of the death of office space have been greatly exaggerated.
New York City will Boom: It will be amazing what will happen. Almost overnight, deserted streets, boarded-up retail, dead restaurants, empty offices, and closed entertainment venues will burst into action. And what will be astonishing will be the speed with which it will happen. Everyone will not be there until everyone is there, and once everyone is there, everyone will realize things are amazing in NYC like they have always been. Personally, I just can’t wait to walk down those vibrant NYC streets and look around me and feel the excitement again.
Opportunity Zones Will Continue Along: With all the cash flowing out of the government, creating more capital gains than ever, these investments will continue to flourish. And at the end of the day, Opportunity Zones were bipartisan when adopted, so I don’t see the new government administration wiping it out; instead, it will morph somewhat but remain intact. And there are a lot of un-exercised capital gains out there and precious few legitimate deductions left. We have been very active in this space, both with our leading OZ practice, led by Jessica Millett (our Wizard of OZ), coupled with our OZ Hub, which matches investors with capital gains to OZ transactions.
Real Estate Technology and Disruption Will Grow Bigger (I said this last year too): For the first time in a hundred (a thousand?) years, the real estate world is being legitimately ‘disrupted,’ although I hate that word. The wall of capital moving towards the real estate technology industry is enormous and seems to be just getting started. We see mega-sized players, as well as fledglings, all taking ideas very seriously. Things we wouldn’t have even thought of a few years ago are now being eagerly discussed, such as real-estate-as-a-service, selling blockchain or other interests in individual buildings, so-called "hotelization," and so much more. And, in our view, the dizzying pace of change is just getting started. There is that famous quote from Bill Gates, which seems appropriate:
“Most people overestimate what they can do in one year and underestimate what they can do in ten years.”
In this vein, I think that real estate in ten years will look dramatically different than it does today. This will create major winners and major losers. Those who are the most informed and thoughtful will have the greatest chance of being the winners.
(Good Old) Corporate Real Estate / Joint Ventures: The trend of real estate players engaging in transactions through a co-venture structure seems to just keep on going – and this after about twenty years since it really started to take off. A trend lasting that long is unusual, but it seems to be picking up speed as now, in addition to traditional joint ventures, there are platform investments, programmatic arrangements, and real estate technology type investments (more on that below). Over the years, our clients have greatly benefited from the expertise provided by our crown jewel Corporate Real Estate/Joint Venture practice. In this area, we focus not only on the legal issues but also are mindful of the fact that the joint venture space is fertile ground for our core mission, “To Help Our Clients Grow Their Businesses." Since we have relationships with numerous players throughout the real estate investment universe, we are able to add a lot of value.
Rent Regulations for Housing: Housing has become part of a nationwide debate regarding whether citizens have a "right" to affordable options. I do not like to be political as The Real Estate Philosopher, so I will not weigh in on whether this is “good” or not, but I will say that this trend may be picking up speed. This is certainly what happened in NYC, when dramatic changes to rent regulatory laws caught the real estate industry by surprise and, in one fell swoop, wiped out a guessed 25% of the market value of rent-stabilized properties. I am confident that New York City will not be the only location where this type of result occurs, so we have been advising our clients to be mindful of these implications.
Creative Ways for Sponsors to Source Capital: I have spent the past year coming up with what I call The Real Estate Capital Smorgasbord, which are non-traditional ways for sponsors, developers, and similar parties to source capital. These include PACE financing, ground lease financing, sponsor capital funds, and much more creative structures. I have seen incredible demand for this from sponsors, as it is still difficult for them to obtain the tried and true sources of capital. I think this is just the beginning of this trend. And if you are a sponsor having trouble getting capital, yes, call me about this!
Finally, a word about my law firm is in order. We will be continuing the themes that have helped us service our clients above and beyond:
We will remain:
The Pure Play in Real Estate Law
We will continue with our core mission.
Help Our Clients Grow Their Businesses
And our hedgehog will be here to support our attorneys and our clients in bad times as well as good times. As I hope you already know, the hedgehog means we really care about our lawyers and clients.
I look forward to COVID ending and real estate booming, and all sorts of great things with my friends in the real estate world, and I wish everyone the greatest health and success.
Bruce Stachenfeld aka The Real Estate Philosopher™