There's an estimated $70 billion in institutional capital wanting to find a home in real estate, but unable to get in the door. Meanwhile, hundreds of wannabe managers and partnerships try to raise more money when managers and operators with secured commitments have trouble finding sound investments… The top markets appear too pricey, everywhere else appears too risky, especially the further out in the suburbs you look.
We see the same phenomenon in the stock market where investors flirt with new record highs when the world economy sputters and the U.S. only looks better by lackluster comparison… Fixed income, meanwhile, gets redlined over concerns about rising interest rates.
Then have you noticed how some of the early post-crash investors have stepped up their selling of assets bought at or near bottom. And some more recent buyers already pursue the quick flip mode—is it nervousness about a market top or just not wanting to be too greedy? They must know that they will have trouble re-investing the proceeds at any particularly comfortable yield.
Anecdotally, we hear of various managers dropping capital raising initiatives—value end seems to have already lost its luster in apartments, workout and debt products have become tougher sells deeper into this cycle. There are only so many build-core apartment let alone office development projects to go around. Houston is hot, maybe too hot, and what about the Dakotas? Those two under-populated states need housing and retail for all the gas frackers living there in their cars.
It's pretty slim pickings… And should we be surprised?
Essentially, government monetary policy (low interest rates and bond buying) as well as stimulus spending averted a crash, stabilized the economy, and enabled a very modest recovery. Many investors and their lenders were spared Armageddon as a result, but propped-up property values are still just that—artificially propped up by all the rescue money pushed into the system. If any of these supports are removed too soon, investors should realize the fragile markets could collapse since the economy is not producing enough demand for space on its own. And what's too soon—certainly not yet, and that's five years after Bear Stearns and Lehman. As a result, property values really have no business appreciating much more—they need to find their true levels, which are probably lower—care to see what happens if interest rates were to normalize?
At the same time, the financial industry has pared back its trillion dollar profit machine, but not much—the game remains using other people's money to trade and earn big fees, and hopefully promotes. Again, all the cheap money has kept the engine running, albeit at a considerably slower pace. But now the trading game is already running out of gas or better be, again since the rational value ceiling has been reached and probably exceeded without true economic gains.
And then you ask yourself--have the major global banks and governments really deleveraged? Or just effectively stalled for more time when time is running out. That's when you consider the ramifications of the slowdown in China, which was supposed to be the new power source for our inter-connected world economy.
But Twinkies are back—and the slimmed down bakery work force makes less with fewer benefits than before Hostess went bankrupt.
Let us eat cake.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
