Why will Real estate outperform in the next cycle          

First, Happy Thanksgiving.  I hope everyone has a great holiday season.  As you sit around the table this year, there is plenty to talk about and debate (including this blog ).  Check out the screenshot above of the headlines on Bloomberg.  Depending on which headline you believe the market could accelerate, tip into a recession, stagnate, or?  But there is a big silver lining for real estate.  What historical period can provide insight into where we could be heading?  Why will real estate outperform?  Where should you invest now and more importantly what should you absolutely avoid?

 

What to make of today’s economy

Wow! The data is all over the place, unemployment is rising, spending is still going strong, some companies are pulling back while others are accelerating.  What does this all mean for the economy going forward which scenario will we end up with.  Before getting into the answer let’s talk about the possible scenarios:

1. Deep Recession 5%
2. Mild Recession 15%
3. Mild Recession followed by Stagflation 30%
4. No recession, economy remains stuck 30%
5. Mild increase in the economy 15%
6. Economy comes roaring back 5%

I did a survey a month or so ago asking how house prices come in line with income, as you can see below the answers were tilted towards a recession/correction with house prices going down in the 10-15% range.

 

How do I think this economy will shake out?

First, I don’t think a huge recession is in the cards as the federal reserve will do everything in its power to prevent that scenario, furthermore I don’t see a 2008 style blowup economy wide although there are definitely excesses in AI, bitcoin, etc…  On the flip side, a roaring economy is also not likely in the cards as deficit spending will continue to act as an anchor on the economy.

This leads me to the most probable scenarios, a mild recession, a mild recession then stagflation, or basically a stuck economy with nothing happening one way or the other.  Regardless of which of these three scenarios occur, there will likely be a silver lining for real estate.

What is the silver lining for real estate?

Although there is clearly much more downside than upside in today’s economy, there is a huge silver lining for real estate.   If we look at historical periods of higher inflation or stagflation (like late 70s and early 80s) real estate outperformed other assets. There is a flight to “hard assets” like real estate during inflationary/stagflationary periods. I would caution you to take this with a grain of salt, for example the stock market could decline, having a negative return but real estate stayed flat which leads to the outperformance.  This does not mean that real estate will return to the covid era of 20% returns a year.

Correction before the silver lining

To build on above, there will be a correction in the 10-20% range before the outperformance of real estate starts as the disconnect between incomes and prices must come back to historical patterns to enable a healthy real estate market. See my prior blog post with more details on why this will occur.

Although real estate overall will outperform other assets this statement is not uniform across all real estate, there will be huge winners and losers as the economy finds firm footing.

Where should you invest in real estate now

1. Suburban mid priced houses: always a demand for mid priced rentals in good suburban school districts
2. Light industrial (smaller spaces under 10k feet): in every cycle there will be demand for small industrial space for plumbers, electrician, granite, etc…
3. Small office under 3k feet: even though the office market is in the tanks small businesses still need/want office space
4. Multifamily mid-priced: Lots of demand in the mid/lower priced apartments as there is a shortage at this price point in most markets

What property types and areas should you avoid in the next cycle?

1. Large office: It will take years to work through the glut of large office space, especially b/c properties in the urban cores
2. Inner city real estate in most markets: the return to the office has focused on return to suburban offices, many companies are relocating from the urban cores to newer suburban space
3. Higher priced homes: Luxury homes will come under pressure in many markets as rates remain high and demand slows, Luxury will underperform mid-priced homes in this cycle
4. Luxury multifamily: In almost every city there is a glut of high end multifamily.  It will take years to work through the excess.

Good news ahead for real estate

Although I do believe that real estate will outperform other assets, there will be a hiccup before this occurs over the next 18 months or so.   But, long term real estate will be a great investment compared to other asset classes. As we have seen historically, real estate outperforms during inflation and stagflationary times.  Although real estate overall will outperform, it will not be uniform as large office space continues to fall substantially while suburban mid priced homes continue to outperform with higher rents.  Please take the survey to the right and let me know your thoughts on how you think this will play out with real estate prices.

 

Additional Reading/Resources

1. https://www.fairviewlending.com/stagflation-or-falling-prices-most-likely-for-housing-market/
2. https://www.fairviewlending.com/root-cause-of-real-estate-price-declines/

 

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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner.  I’m not an armchair reporter/writer.  We are an actual private lender, lending our own money.  We service our own loans and own commercial and residential real estate throughout the country. 

My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market.  I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends .  I would greatly appreciate it.

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida.  We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games.  We fund our own loans and provide honest answers quickly.  Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all we need is our simple one page application (no upfront fees or other games).

Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

 

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