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The Real Estate Philosopher


Some (Bold?) Predictions About Real Estate

Jun 23, 2022

There is an awful lot going on in the markets right now.  The almost twenty-year decline in the cost of money is ending.  Things are looking different.  Here are some predictions:
 
Generally, Real Estate Looks Pretty Darned Good:  Generally, what is going on in the markets looks excellent for capital flowing into real estate as an asset class.  Of course, this is a very amorphous prediction since real estate has so many asset classes it is not a single one.  However, there are now fewer places to make a 100% return on your money in six months (like crypto bubbles), so a return to what I would call saner markets makes real estate look like a nice and safe and logical place to put money. 
 
I Don’t Think a Recession Will Matter That Much for Real Estate:  We keep hearing talk about a recession.  Indeed – for amusement – economists predict a 44% chance of one now.  Don’t get me started on the combination of (i) economists being wrong whenever they agree and (ii) gee, what a prediction – that there is about a 50/50 chance there might be a recession – isn’t that always true, so why on Earth is this a headline. 
 
But even more importantly, am I missing something, or is this kind of irrelevant?  My point is that if the economy goes up 1% this year or down 1% this year (technically causing a recession), is there really that much of a difference.  The only thing that I think matters is if there will be a big (great?) recession.  And with business and consumers largely flush with piles of cash, that doesn’t seem too likely.  Perhaps we might all stop focusing on whether there will be a recession when the Fed raises interest rates more.  The goal is to slow down the economy’s train, and my sense is that it hardly matters that much whether the train goes into reverse just a bit after the mega-rise we all saw last year.  Either way, this has every likelihood of being good for real estate one way or another, as even in a small recession, the economy is pretty healthy and can support real estate investment.
 
Rising Interest Rates Will Winnow Talent in Real Estate:  We all will have to consider the effect of rising interest rates.  That is likely to be a strong headwind for returns.  Just as falling interest rates helped us all make more money more easily, rising interest rates will presumably have the opposite effect.  Therefore, those who know how to create value will be more of a necessity than ever.  My favorite article, You Will Never Find a Good Deal Again, will be proved out stronger than ever.  We will not be able to just hunt around for deals – instead, we will have to figure out how to create them. 
 
Also, a word to those trying to predict what will happen, i.e., how high-interest rates will go, will there be a recession, will inflation peak soon or get worse, etc.  Don’t try to do this!  You can’t do it.  No one knows the answer to these questions, and if you think about how many times Goldman Sachs told you oil would hit $200 a barrel before it crashed – or every single economist predicted no chance of a recession right before a recession – you will know I am right here.  And if you think back about six months, you didn’t even have these questions on your radar screen that much.  Instead, I urge you to just stick to investing, developing, lending, and working in places where you have the deepest expertise – the deepest knowledge – and the strongest competitive advantages – and let others waste their time on these predictions.

Office Will be Back – any Day Now:  Any day now, office buildings will finish filling back up to very close to what they were.  The moderate downdraft in business that is ongoing right now already has employers with more bargaining power.  Plus, employees are starting to recognize that WFH is kind of cool for a day or two a week, but there is a logical reason to be in the office.  Indeed, the elephant in the room is that when a business goes south, the first to be cut from the team are those who are not actually present on the team.  I mean, if you were running a group of people, the odds are you like some of them because you interact with them on a personal basis, and you don’t want to fire them, do you?  But for those you can’t see, it doesn’t hurt that much.  
 
Some Political Analysis that is Meant to be Non-Political:  It is certainly kind of sickening that our government spent several trillion dollars that – indirectly – went into tech stocks (that soared to inane heights) and crypto and all that ‘stuff’ and now has mostly disappeared.  My quick reading on Google indicated that there are about 35M people in poverty in the US now.  If that $3T were given directly to everyone in poverty, each would have gotten around $85,000.  Poverty would be drastically reduced.  Instead, we have the Ugly Ape, the Bored Ape, and other crypto Apes that shot up in value and then crashed down.  So sad.  What a waste of money. 
 
But looking for positives here is a mega-positive thought.  Whatever political side of the spectrum you are on, I suspect you are tired of whoever is running the game in Washington merely spending and spending and spending.  Whether it is entitlements, the military, overseas relationships, Ukraine, natural disasters, or just about anything else, there is never a thought in congress about how to pay for things – it is merely just writing the check for a worthy cause.  Suddenly the government is learning a lesson – that deficits do matter – and that they can trigger inflation that, if it gets bad enough, can wreck the system.  Perhaps going forward, there will be more spending sanity in Washington.  That is great news for our economy – our dollar – and worldwide competitiveness.    And – yes – great for real estate as a stable US currency will result in foreign dollars flowing into the US for solid real estate investments. 
 
Some Predictions Just for Fun:  I think that the metaverses and crypto and all of that stuff will survive; however, as always happens with something new (railroads, computers, internet, etc.), it will morph from a new business to a new way of doing business.  This means that few, if any, parties will make money in these asset classes – if they could even be called asset classes -- however, many players will incorporate crypto, NFT’s, metaverses, and things like that into their existing businesses.  This is exactly what happened with the internet twenty years ago – and more recently, you can see this in co-working.  For real estate, I don’t urge going into the crypto business; instead, I urge real estate players to figure out how to utilize this new way of doing business to their advantage.
 
As a side issue, I predict Bitcoin will survive as an asset class.  That is by no means a statement that one should invest in it right now.  Indeed, I personally would not do that based on Warren Buffett’s admonition that the main goal of investing is not to lose money.  No one can tell if Bitcoin is really worth the $20,000 it is trading at today or really it should be $2000 or $200,000.  If you can buy options on it with attractive pricing, that might be fun for gambling but not for investing.  By the way, I think my law firm’s hedgehogs have retained their value 

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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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