When we underwrite these days we do not assume the good news trends of rents and interest rates will continue during the investment period. Nor should you. Multi is headed to over built. Office is headed to less space used per employee as open spaces and operations like Work Space make it a materially changing demand situation. Retail is moving faster and faster to shop online and less demand for big retail spaces. They need big high tech warehouses now. Hotels like to think they are in a sweet spot, but reality is Airbnb has added possibly 400,000 -500,000 rooms top the inventory but the hotel industry continues to make believe they do not exist. That number will grow and likely others will offer similar services. In addition, it is finally possible to get construction debt to build hotels, and since hotel operators falsely believe they are in some Nirvana period, there will be rapidly growing hotel development over the next several years at the same time Airbnb is adding large numbers of rooms at no cost. In addition, the brands have already pretty much covered the landscape with their original brands, so now there is a new proliferation of brands which will get around the issue of protected area.

In some sub markets we may be reaching the point where just buying an asset is no longer a good investment. Development may be getting to the edge. In some markets, construction costs have risen anywhere from 10% to 40%, and land costs are rising so fast that the combination of much higher land cost and much higher construction costs, then later hit with much higher interest costs, may sink the economic viability of the project over the hold period. In some markets, there are developers and operators who are starting to think maybe we are reaching the pause button. Even in the Hamptons, which should be pretty impervious to cost, prices and costs to build have reached the point that sales and prices are in reverse. Manhattan will reach this same stage soon. The Russians are pretty much gone. The Chinese are hesitating now due to the effective anti corruption campaign of the government and the extradition of some corrupt Chinese investors investing in places like Canada. The French moved their money awhile ago and there are not that many wealthy Greeks to matter. To assume the flood of foreign capital will continue is possibly over optimistic. Maybe the Chinese will continue to flood the US market with capital but recently they have become much more hesitant.

All in all, we may be reaching the peak soon, and the signs are certainly flashing yellow for those who want to look carefully. If you are a 3-7 year investor, now is a good time to underwrite much more carefully. It is a historic certainty, that investors and lenders are very careful at the start of a upturn when they really should be very loose, and they are very loose near the end of the upturn when they need to be much more disciplined. I have watched this over and over for 50 years. It never changes. It will be no different this cycle. Then the pain will happen again. It is inevitable. I just suggest you take off the rose colored glasses, put down the glass of Kool Aid, and take a long term look at the underwriting for your next deal. The world is as uncertain as anytime I have been in business, and it is not a time to gamble that good times will roll on for a lot longer.