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The Real Estate Philosopher


When the Ducks Quack - Feed Them - But Don't Compete with Them - Two Ideas

Aug 13, 2020

I have always liked to read about speculative bubbles of the past.  There is a famous book called:
 
            Extraordinary Popular Delusions and the Madness of Crowds, by Charles McKay
 
 In it, the author details such speculative crazes as the tulip bulb craze in Holland and the South Sea Bubble, to name two of them.  It was written before the internet bubble, and the Global Financial Crisis, or I am sure they would have been included.
 
During the South Sea Bubble, people were speculating and investing like mad.  Things were going off the charts.  Fortunes – on paper at least – being made instantly – with no end in sight.  A particularly amusing – and famous – advertisement, solicited investors for the following:
 
“For carrying on an undertaking of great advantage but no one to know what it is”
 
This seems kind of silly doesn’t it?
 
But, it supposedly close-to-instantly raised two thousand British pounds, which was a lot of money three hundred years ago.  That is what happens during a speculative mania. 
 
Things like that could never happen today could they?
 
But, is this that much different than a SPAC, which is the new hottest thing around.  Yes there is a difference in that you do get the track record and investment acumen of the guy/gal running the SPAC, but otherwise the above advertisement is pretty much what a SPAC is all about.  I know this first-hand since I invested in one a few months ago, and just learned what the “undertaking of great advantage” is, and I am hoping it will be a good one – I certainly think extremely highly of the guys running it.
 
And, if you haven’t noticed, there seems to be a teensie bit of speculative froth in the markets – other than for real estate it seems – although I suspect that that will change soon enough as well. 
 
So, what is my point?
 
It is obvious.  We are in a mega bubble right now.  There is a wall of capital heading towards real estate that makes the tidal wave in the movie Deep Impact look like a ripple – I will call it The Wall of Capital.
 
By way of background, I wrote an article on September 2, 2016 entitled, A Tectonic Shift Is Happening in the Real Estate World, in which I pointed out that with real estate being a separate asset class there would be a ton of capital moving our way that was based on what I defined then as Diversification Purchasers. 
 
And this has been happening – relentlessly – for the past four years.  And during that time I have witnessed my clients trying everything they can to acquire assets at advantageous pricing, but unless they have an angle to “create” the deal (see my article on that subject entitled, You Will Never "Find" a "Good" Deal Again) they are continuously being outbid by parties with lower return hurdles.  All of this as prices rose relentlessly.
 
Of course, there has been a bit of a hiccup of late with COVID, but that has merely made things worse vis a vis The Wall of Capital, for two reasons:
 
First, everyone who could raise more capital is furiously raising it and, anecdotally, often exceeding the target capital raise.  In my prior article of just a few months ago entitled, Big V Recovery: Nine Predictions for the Real Estate Industry, I estimated that the real estate dry powder is approaching $1 trillion, and probably still growing solidly.
 
Second, the government has pumped an unprecedented pile of capital into the economy.  And, from what I have read, an equally unprecedented portion of this capital has gone into retirement and other savings accounts.  And, these amounts often eventually get invested.
 
All of this goes to make The Wall of Capital higher and higher until you have to crane your neck to try to see the top of it.
 
My thinking is that if you are a player in the real estate world, you are facing Armageddon if you try to compete with this Wall of Capital.
 
But, all is not lost and I have two suggestions for how to optimize your results:
 
First – the Wall of Capital is almost 100% focused on income producing assets.  This capital needs a current return – even if it is a measly 3% it still looks pretty good next to close to zero return on bonds and treasuries.  So make sure you are investing in or developing assets that you will sell to The Wall of Capital.  This turns a problem into a wonderful solution as The Wall of Capital becomes a top-dollar take-out for your development, repositioning, and similar initiatives.
 
Second – raise capital yourself from The Wall of Capital – maybe consider your own SPAC? – and use your skills to find nice safe income-producing assets probably at much lower returns than you are used to, and achieve asset management fees for your work.  Then you go from competing with The Wall of Capital – where you have no chance of winning – to a party harnessing this capital and investing it on its behalf.  This is likely a major change from your instincts, where you have likely been seeking out-performance based on your talents and skills, whereas under this new plan of action, you would instead be seeking to achieve average performance.  And I admit that personally such a plan doesn’t thrill me as much – it is not as exciting.  However, I do think that that is where a significant portion of the real estate world is heading and there is no reason for high quality players not to use their excellent reputations to raise and invest this capital along these lines.
 
To conclude, I think that whether we liked it or not Diversification Purchasers and Walls of Capital are likely the new and permanent “normal” and, accordingly, it behooves us to figure out how to make lemonade out of what otherwise could be some severely sour lemons.
 
Best regards to everyone.
 
Bruce Stachenfeld aka The Real Estate Philosopher™

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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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