CRE and RE 2020/2021

I was recently asked what my projection of the 2020/2021 real estate market both for commercial and residential properties was. While I typically don’t predict the future, I felt that it was time to step up and say something. 

This is a complicated question to answer but I will do my best. Let us review this thread in a year and see where the pieces fall in relation to what we predict currently.

The markets both in CRE and RE are white hot. We have heard predictions ranging from a slowdown to a correction to a downright bubble burst in both sectors for many years now and those predictions have fallen on the deaf ears of the markets, the buyers, and the institutions. What HAS changed is the type of product being bought and sold in both CRE and RE as it pertains to the breakdown of sales types... I shall explain:

Commercial Real Estate:

In CRE: The "retailpocalypse" and the "Industrial Revolution 2.0" have changed the way we will forever view, trade, and consume retail and industrial assets across the country. Many are familiar with the plethora of headlines screaming news of retail closing at unprecedented rates and those headlines are accurate and true. What we don't hear nearly as much about is what we call "retail re-sizing." In 2018 we were battered with news of closings of "big box" retail (typically defined as "boxes" that are over 25,000 sq ft) stores like Toys R Us, Best Buy, PetSmart, etc....

It appears that during the last cycle we built too much suburban big box power center retail, and the mass closures experienced over the last few years are one of the direct results.

Before you run to your closest broker (hopefully me) to sell all your retail assets, take a look at what is happening with mid-size and small format stores in the same time frame. We are opening more stores that we are closing in this sector! This is what many call the "right-sizing" of the retail footprint in America. I will attach a graph to further hammer down this point.

The "Industrial Revolution 2.0" is a whole different schmooze... not for now, but incredibly relevant. Take a look at my profile to see content related to this massively important topic.

The take home message to my LinkedIn network and everyone reading this is that things are CHANGING. In terms of market velocity... it's blatantly obvious: it's a question of when, not if we will experience a significant shift in market trajectory and even direction. Make all the money you can now because once this inevitable correction happens, this will slow way the heck down. In the words of one investor who described a building he built, leased up, sold, bought back from bank, repositioned, and sold again: "when the bar is open 24/7 you drink till you puke, and then you drink again."

Residential Real Estate:

This market is NUTS. I have been purchasing, renovating, and reselling single family residential property for quite some time (with most of my experience during the beginning of the upswing in this latest run... think 2012-2019). I personally have gotten out of the residential market completely to focus exclusively on commercial NNN brokerage for many reasons, some of which are below:

·        It's super fun, and super lucrative

·        I do NO physical labor, and NO adult day care (i.e. babysitting contractors)

·        I will buy back what I've sold during the next downturn for $0.60 on the $1.00

·        I am not stupid

This run is exceptional and extraordinary insofar as most up cycles typically last only 10 years. This one has been in the works for approximately 11*. That's nuts. In August 2016 I was in Austin, TX listening to Gary Keller speak and he personally stated in front of 10's of 1,000's of real estate professionals that "the shift" was upon us and that we had "already seen the beginnings" of the next market swing. Apparently, he wasn't 100% right as prices have gone up and days on market down since then. But the point is this: Gary has been warning us to keep our eyes out for the correction for YEARS already.

* The actual historical date of bottom of the market is subject to interpretation, but I truly believe that the bottom fell out in 2009, and not in 2012 as some data suggest. 

There is so much more to state and so much more research for me to drop on here but I gotta get back to the phones so I can make some coin. Bottom line is this: enjoy it while it's hot. If you own, consider leveraging (rates are RIDICULOUSLY LOW... anyone remember rushing to bank to refinance when rates dropped from 18% to 12%!?!?!?), if you own investment real estate, consider selling, if you broker/are an agent consider WORKING HARDER. It will probably not be this easy to make money in CRE or RE for a while...

BEFORE this all hits the fan in CRE and RE, think about what YOU will do to change your business plan so that you can keep crushing it while the market corrects. 

Blessings,

Dan Lewkowicz

Senior Advisor

Fortis Net Lease