Delaware Statutory Trusts And Cockroaches

As Andy Kessler so eloquently put it in a recent WSJ editorial, “There is never just one or two cockroaches.”  And he isn’t even a real estate guy.

Where one, two, three banks fail (Silicon Valley Bank, Signature Bank and Credit Suisse) and tens of billions of dollars are vaporized, others may follow.  As we have said previously, “you only find out who is swimming naked when the tide goes out.”

The follies of many a large financial institution, regulators and policy makers are now being exposed by rising interest rates and falling asset prices.  This is relevant to companies as well as individuals and their personal finances.

Even if there are no more bank failures, this is already having a chilling effect on lending in the CRE sector Lending standards will likely tighten even more and this will directly impact property valuations.

Last week saw February home prices down 0.2% year over year, the first drop in 11 years.  Echoes of the past and our last decennial financial crisis!

We believe the next shoe to drop in CRE will be office.  Work from home means future office vacancies, a ticking time bomb ready to explode.

According to the WSJ in late February Pimco, the largest fixed income manager in the world, and its Columbia Property Trust defaulted on $1.7 billion in loans on seven buildings.  Brookfield stopped paying $784 million on two Los Angeles buildings.  As we quoted Andy Kessler earlier, “there is never just one or two cockroaches.”

Due to this, we believe it increasingly unlikely we will escape recession this year.  The good news is with bank lending standards already tight, it shouldn’t be as bad as the Great Recession of 2007 to 2009.

However, there still seems to be more excess to wring out of the economy in stocks, crypto, real estate and banks so it’s better to be safe than sorry.

With the traditional safe haven asset class of multifamily facing negative headwinds this year and next due to out sized supply growth, one must exercise great caution when selecting replacement properties in 1031 exchange.

Rental growth across the Sunbelt has been much higher than other markets since 2013 (Globe Street).  This has resulted in the highest number of multifamily starts since 1970.  With living costs escalating, job growth in these same markets may slow.  Underlying asset appreciation may follow until a new equilibrium is achieved.

We believe it best to step away from this short term, supply and demand mismatch until the tightening credit cycle has a chance to cool things off.

In unsettled times, one of your best CRE options may be self-storage.  It’s demand drivers; death, divorce, dislocation and downsizing historically go up when the economy goes down.  

Furthermore, the prosaic nature of storage doesn’t seem to encourage the boom and bust development cycles that often characterize multifamily and other asset classes.

We believe what is equally ordinary is senior living.  It is hard to imagine an industry more dull than warehousing the elderly.  

In a seemingly increasingly fragmented and narcissistic culture, the elderly are simply an inconvenience.  Not only does their care take time out of our busy day but they are a constant reminder of our own mortality.  Best to put them someplace where they are not an inconvenience to us or themselves.

The number of Americans 65 and older is projected to nearly double from 52 million in 2018 to 95 million by 2060.  This is a growth industry that may only be stopped by death.  

With the global economy experiencing a bad case of the jitters, due to collective government incompetence, it is best to err on the side of caution when choosing your replacement properties.  We believe it is time to turn off the “how much more money can I make switch” and turn on the “how can I try to keep the money I have made switch.”


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