July - Kauai Edition 2023 - View From The Fort

This month we’ll touch on the state of the economy and where things are in the commercial multifamily market before giving way to a few takeaways from our trip to Kauai.?

In general, we are entering into that "buy" zone as multifamily property prices are down 21%. Yardi Matrix estimates that over 2000 properties bought between 2021 and 2022 will be sold at distressed prices in late 2023 & 2024. Considering there are almost $1.7M apartment buildings across the US, if one happens upon a distressed deal, one would be wise to give it strong consideration - maybe jump on it. While this is different from 2008, it is the same in that 2023 and 2024 will present opportunities just as 2009 - 2011 did. Only this time it is in commercial real estate.

Now on to some less dry stuff...

Do your surroundings inspire you? I am talking about day-to-day life; as you are driving/walking/cycling down the street, are you awe-inspired by the nature (or lack thereof) around you. It didn't take long to be awe-inspired on our most recent trip to Kauai. Only a few minutes away from the port of entry, the beautiful landscapes were having me breathe a sigh of relief.

"This is where I need to be," I thought (or somewhere like it). My family agrees. My youngest boy kept asking, "Can we move to Kauai?" When we were packing up, the poor guy couldn't believe it was over. I empathized with him and tried to give him reasons to look forward to going home. "Think of Oscar and Lionel" (our cats), I said. Who was I fooling? I wasn't ready to leave either.

If you've never been, it looks like the island has an army of landscape architects laying out each mountain, waterfall, palm tree, and vine; it's miraculous. I have had the good fortune of traveling all over the world. Still, a fantastic combination of pristine beauty, order, and cleanliness impresses me about Kauai. And it's really not that crowded. Do you know why? Because it's expensive! Would you like a Mai Thai, sir? Why that sounds great! Ok, that will be $19. I am not exaggerating. The cost of shipping acts as a natural crowd control.

Friend and colleague, Derrick Clifford, talks about the 3 Degrees of Freedom on his podcast: Location, Time, and Financial. I am good on #2 and close to #3 (although having young children, I may never be); now time to work on #1.

I know what the parents with young children are thinking out there. How can I take my kids out of their Great Schools-rated-10 schools? There is a workaround (I speak briefly about this in the video below).?

Visiting other countries and economies will open my kid's eyes and expand their horizons. I don't want them to be sheltered, ignorant, or naive. Hopefully, it is not at the expense of creating expectations. "Where are we off to next, pop?"

Why am I blathering on about all this? Just think about it. Why settle in life? Why not feel inspired by your surroundings? If you're walking down your street, and you're thinking I am surrounded by way too much concrete. Or, you are sitting in a cubicle or in an office for 40+ hours a week, thinking that there must be more to life. Why not make a change? Life is too short to not feel inspired. Let's make a plan and stick to it. We can have our cake and eat it too.

On to other news...

Even as The Fed Raised Rates on Wednesday, There is Sentiment?Maybe There Won't Be a Recession

On Wednesday, the Federal Reserve raised interest rates by 0.25 percentage points in its ongoing efforts to combat inflation, ending a brief pause in rate hikes from the previous month.

This increase brings borrowing costs to a 22-year high, ranging from 5.25 percent to 5.5 percent, impacting both businesses and consumers. Despite a slight decrease in inflation over the past few months, it remains above the Federal Reserve's target rate of 2 percent. As of June, the consumer price index stood at 3 percent, the lowest figure recorded since March 2021.

While some analysts view the rate hike as unnecessary, as the impact of the Federal Reserve's ten consecutive rate hikes over the past year may have a delayed effect on the economy, most remain cautiously optimistic that it won't lead to a recession.

Fed Chair Jerome Powell addressed these concerns during a news conference, stating that the committee will consider various factors, including the cumulative tightening of monetary policy and the time lags for policy changes to affect the economy and inflation. The goal is to bring inflation back to the 2 percent target rate, and decisions about interest rates will be data-driven.

Economist Matt Colyar from Moody's Analytics expressed his perspective before the announcement, expecting that June's inflation report will set the tone for future reports, giving the Fed confidence to adopt a wait-and-see approach.

Regarding the possibility of a recession, there are mixed indicators. Some point to a potential downturn, such as declining mortgage demand, low confidence among small businesses, and a contraction in manufacturing. However, Colyar argues that robust job and wage growth, low unemployment rates, and high consumer spending on services suggest that a recession is unlikely. Powell echoed this sentiment, stating that a recession is improbable.

"It's our belief that the US economy avoids recession and that the Fed's next rate hike, which everybody expects this afternoon, is more than we think is needed," he said. "It is unnecessary when conditions are already tight enough for inflation to come down to the Fed's target."

A Bloomberg survey of business economists in July revealed that a significant majority believes the chances of a recession within the next year are now 50 percent or lower. While this optimism may differ from historical inflationary episodes, it's important to note that the current circumstances, including pandemic-induced supply chain disruptions, differ from conventional inflation-credit cycle dynamics seen in previous recessions, as pointed out by Colyar.

If the US manages to avoid a recession, potential interest rate cuts are not expected until June 2024, with the Federal Reserve likely to adopt a wait-and-see approach for around a year. This aligns with the gradual slowdown of inflation and growing confidence that inflation will stabilize or move closer to its desired target.

Commercial Real Estate Pricing is Down, and That Spells Opportunity

"Opportunity often comes disguised in the form of misfortune or temporary defeat."

??-?Napoleon Hill

"Be fearful when others are greedy and greedy when others are fearful."

???-?Warren?Buffett

Last year I stuck my neck out and said that interest rate hikes were only temporary and that in the not too distant future, they will come back down (signs point to cuts beginning in late 2024). I am sticking to that.?

In this video I stick my neck out again, and I again don’t think it is a stretch. Cap rates are up and values are down, but if the FED starts cutting interest rates, cap rates will also come down (although there is a delay), and values will once again rise. While it may seem scary or painful now, this is the time to buy, as Napoleon Hill points out in the quote above.

One point that I should have added. Buy commercial real estate now while values are down, and refinance those interest rates later, when rates get cut.

A disclaimer on the video below.?

In the video I mention "If you hear people buying at a 5 cap." I should clarify that not all markets are the same, and while a 5 cap may be a great deal in Dallas, it isn’t necessarily in another market like Montgomery, Alabama, for instance. I had a few of our markets in mind, when I mentioned a 5 cap. I blame it on being at a beach in Kauai.

Click to watch short video

Thanks for reading.

See you next month

Would you like to see if apartment investing is right for you? Let's talk about it ??

Download this free guide?to help you quickly get started escaping?The Rat Race.

?? Click the image to download your free copy

Enjoy cash flow, appreciation, and tax write-offs without the hassles of being a landlord.