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The recent banking turmoil has significantly impacted the real estate sector, particularly emphasizing the vulnerabilities in the banking system. With smaller banks facing existential challenges, liquidity in the market for real estate transactions is expected to decrease rapidly. This reduction in lending activity may lead to near-zero transactions, affecting leverage-dependent investors like Blackstone and causing potential foreclosures and distressed assets similar to the 2008 financial crisis.
The evolution of cap rates in multifamily real estate provides insights into the market dynamics. In the past decade, cap rates in cities like Atlanta and LA plummeted from double digits to as low as 2%, particularly in premium locations. These unusually low cap rates were influenced by investors seeking tax benefits rather than traditional financial returns, contributing to the high valuations in certain real estate markets.
Foreseeable challenges in the real estate market stem from financing constraints and the potential disruption in debt refinancing. As over $250 billion in commercial real estate loans are set to mature in the next few years, the recent banking turmoil may lead to a liquidity crisis. If banks curtail lending activities, leading to minimal transactions, the real estate sector could face a situation akin to the aftermath of the 2008 financial crisis, potentially resulting in widespread foreclosures and distressed assets.
Real estate investor discusses being heavily invested in real estate, perceiving limited diversification options in the real estate market. Despite concerns about potential risks, holds real estate in conservative sectors with fixed-rate debt, finding some comfort in multi-family real estate dynamics providing a tailwind. Addressing housing dynamics and inflation limits, the speaker anticipates challenges in affordability as housing prices soared, signaling a nationwide supply problem exacerbated by anti-development policies, affecting multi-family housing dynamics and construction delays.
Analysis of interest rate fluctuations in relation to real estate market trends discusses potential impacts on real estate developers due to floating-rate debt and interest rate hikes. Contrasting scenarios highlight the role of interest rate moderation in easing financial pressures on developers. Exploration of market dynamics suggests housing may lead economic shifts, driven by persistent demand and supply shortages, particularly in the single-family rental sector viewed as appealing to institutional investors for long-term investment potential.
Nick Halaris, President of real estate investment firm Metros Capital, joins Jack to share insight on the challenges commercial real estate faces after a surge in interest rates and the fall of two U.S. banks.
The phrase “commercial real estate” is a catch-all terms that refers to offices, apartment buildings (“multi-family”), retail, and industrial spaces. Unlike residential real estate, which is typically financed with long-term fixed-rate mortgages, a lot of commercial real estate was financed with floating rate debt, which means that as interest rates rose last year, the interest expense of some commercial real estate developers rose dramatically. Halaris argues that the turmoil in the banking system will likely induce banks to tighten their lending, which would inflict further hardship onto commercial real estate, much of which is financed via smaller regional banks.
Filmed on Tuesday, March 28, 2023.
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Nick Halaris website: https://nickhalaris.com/
Profit+ Subscribe Link: https://nickhalaris.beehiiv.com/
Nick Halaris on Twitter: https://twitter.com/NickHalaris
Nick Halaris on LinkedIn: https://www.linkedin.com/in/nick-halaris-4a25b93/
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Timestamps:
(00:00) Intro
(00:25) What Is Commercial Real Estate?
(03:20) Interest Rates Have A Huge Impact on Real Estate Valuations
(11:48) "Commercial Real Estate Is In Serious Trouble"
(16:58) Delinquency Rates Are Rising...
(19:13) Real Estate Is No Longer An Inflation Hedge
(22:45) Permissionless Ad
(23:48) Real Estate "Cap Rates" And Why They Are So Often Misunderstood
(26:53) "Accounting Games" In Real Estate
(35:02) How Bank Turmoil Will Impact Real Estate
(38:42) The End Game For Real Estate
(44:30) "it's Really Hard To Get A Loan"
(46:37) Prices Will Go Down More
(48:36) Blockworks Research Ad
(49:36) Silver Lining: Rates Could Go Down
(53:33) Retail Real Estate (Shopping Malls, etc.)
(54:39) The Housing Market Will Probably Remain Strong
(59:29) Private Equity's Investment Into Housing
(01:01:51) Nick Halaris' Newsletter, Profit Plus
(01:04:25) Closing Thoughts On Rising Interest Rates
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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