5 things

Written by Tyler Kastelberg

June 26, 2022

Happy Sunday!

I hope this note finds you relaxed with your feet kicked up on the couch and a cold beverage of choice in hand. If you’re in SF, replace that cold beverage with a warm mug of something – the fog is here for the summer.

This week’s newsletter is dedicated to the top 5 real estate headlines from the week and my thoughts on their implications. Thanks to Logan from our content team for pulling these together.

Before we get started – if you’re new here, subscribe to this newsletter. I send one weekly email on Sundays with content like this.

Our top 5 real estate headlines of the week …

Fed to raise interest rates

Against a backdrop of high inflation and looming rate increases, Fed Chairman Jerome Powell was recently grilled by Congress on what the bank is doing to limit inflation while also, hopefully, reducing pressure on individual people purchasing goods at increasingly high prices. Through it all, Mr. Powell signaled a high level of reluctance to stop raising rates until inflation is truly on the decline. But how long it will take the economy to hit that mark is impossible to say.

My take: On implications to real estate asset pricing … I think the fed’s future rate increases are already reflected in REIT prices, evidenced by the lack of price action with the news this week. However, I don’t think the increase in borrowing costs is fully reflected in private market real estate transactions yet.

JLL analysis of real estate headwinds

A recent JLL article analyzed the commercial real estate impacts of rising inflation, as well as the rate hikes the Fed is executing in an attempt to curtail inflation. JLL points out that some of the biggest inflationary drivers now, food and energy, are things the Fed has minimal direct control over. Meanwhile, the analysis suggests real estate markets are still undeterred, though participants are now taking a little longer, triple-checking decisions to avoid investment missteps. This seems like a good take. The bull run of the last few years had to come to an end sooner or later, but it seems reasonable to expect a gradual ratcheting up of investment discipline as opposed to a complete break in transactions entirely.

My take: Inflation is going to hurt class C assets/locations more than class A assets/locations. I saw a LinkedIn post earlier this week that said self-storage properties in tertiary markets are seeing both record occupancy AND record delinquency. When the cost of living increases, the most vulnerable in our population get squeezed the most.

JPMorgan shrinking mortgage workforce

JPMorgan recently announced it would be shrinking its mortgage team by over 1,000 people, who will be either laid off or moved to other areas of the business. As the housing market cools off in the face of high inflation and rising interest rates, lenders have signaled staffing cuts to meet the volume of business in the near future. For years, real estate professionals when the next downturn would appear. Now that the writing is on the wall, the question is how long it will last. 

My take: I wrote about massive layoffs in the mortgage industry a few weeks ago. A chart of the mortgage industry headcount resembles that of Bitcoin. When it’s good, it’s great. When it’s bad, it gets really bad.

Lower valuations across the PropTech world

As economic headwinds and industry-specific challenges pushed PropTech valuations down, Bisnow spoke with a handful of PropTech founders to get their take on the market. The article points to one particular nuance of the PropTech sector: unlike other types of tech companies, many firms that are often considered PropTech actually have much different business models, such as co-working providers or tech-heavy brokerages, that make it harder to scale with little capital. For PropTech firms that struggle to find the traditional capital to fuel their growth, expect to see some creative partnerships with landlords and other real estate companies. Building formal relationships with the biggest companies in the business is one thing, but the middle market is ready to innovate, too.

My take: Bootstrap or bust! Profitable businesses have seen very little impact on their valuations compared to VC-backed businesses. I saw a graphic the other day that showed a 2% drop in the value of profitable businesses compared with a 50% drop in value for businesses with a burn rate.

The impacts of proposed SEC climate disclosure regulations

In this article from McKinsey, leaders at the firm’s real estate practice write about the impacts of the SEC’s proposed regulation requiring many real estate firms, particularly publicly traded ones and REITs, to disclose important climate risks, greenhouse gas emissions, and reduction targets. If adopted, the regulation would signal a new age of climate transparency, requiring firms that have ignored climate reporting to make substantial efforts in that area. Anecdotally, many in real estate still think ESG is a bit of a fad. While it’s unclear exactly what teeth the new SEC regulations would have if passed, the scope of the potential requirements signal loud and clear that ESG is here to stay.

My take: Look for new consulting businesses that pop up in the next few months to support these proposed regulations. One of the best creators of new businesses is government regulation.

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