So today we're going to talk
about why the real estate market has gone down over $2 trillion.
And for a lot of you
there are in residential, you're going to say that's not happening.
That's not happening.
That's because you're looking at a small segment.
We need to look at the entire picture because lenders and buyers and sellers
are involved in everything.
So what's the good news and the bad news for real estate investors?
So we're going to talk about the commercial real estate market,
which at its peak was over $11 trillion at the end of 2021.
We're talking about a huge category here, multifamily office,
industrial retail mall.
They're all inside of here and of course, have all impacted
significantly from the recent hikes from the Fed.
There've been 11 total and those hikes have crashed.
The value to you is what you're now going to have a ripple effect to investors,
to debt holders, and of course the rest of the market.
So today, the U.S.
real estate market is down to just over $9 trillion.
Now, that might seem like a lot, but just 18 months ago, it was over 11 trillion.
So here is the breakdown by category.
You got multifamily retail, industrial office and of course, hotels.
And you're going to see at the peak in 2021,
we had over $11 trillion in estimated value.
And the third column, you're going to see a value decline
at the end of that column, you're going to see that collectively
the commercial real estate market is down at least 18% with office
buildings leading the charge, which I circled here at 31% value decline.
So why did we have an 18% decline?
The reason, of course, is because the Federal Reserve has raised
the federal funds rate 11 times, which does raise the cost of borrowing,
which means that the sellers are actually having to accept less
or those properties because the cost of debt is higher.
One of the things I want you to focus on is the multifamily call.
You can see we had over $4 trillion in value and now that's just over three.
Just in the multifamily category alone, this represents
42% of the total erosion of the commercial real estate market.
So while a lot of you are focused on office buildings
and how badly they're doing right now and they are, what you really need
to take a look at here is the multifamily column,
because multifamily has eroded by 42% because it overwhelmingly represents
a majority of the commercial real estate market,
especially the loans that have been done in the last several years.
As you can see in this chart, we've got an $846 billion erosion in value.
Now let's talk about the good news and the bad news.
So the bad news, of course, is that commercial real estate
has had a $2 trillion loss and it has an 18% loss of value.
This represents almost 50% loss in equity.
So how do I come up with that number?
Most real estate loan values is somewhere between 60 and 70% loan to value,
which means on the average you would have about a 35% equity stake.
If there's an 18% loss in value,
that means that the equity is down about 50%.
The good news is that lenders are way ahead of this and loan to values right now
are somewhere between 50 and 65%, which means that
if you're going to do a real estate deal today, you have to have 35 to 50% down.
Another piece of good news is that inflation is down.
Core inflation is still up, but inflation is down.
And the Fed's been working very hard on.
The third thing is that many people believe that
these aggressive hikes by the Fed are now over.
Hopefully they are over NY on pause, but I don't believe
we're going to see any rate cuts any time soon.
So whatever the rates are today,
you need to expect for the next 18 months that they're going to be about the same.
As I said before, stay alive to 2025.
The bad news, if you have a floating rate that low maturity
or try to refi, you're in big, big trouble.
You might lose the property and you might even need to do a cash call
with your investor.
Sellers are going to start defaulting and these deals
are going to make their way back through the system.
Third thing is banks are going to start taking on this toxic real estate
owned property or RDL, and they're going to tighten up their lending standards.
The good news is, is if you do not have a loan maturing
in the next few years, you're actually in a very good position
and your loss of value is just paper loss at the moment.
You just need to wait this out.
Opportunities will start to come.
Every week we have an investment committee and we're seeing more
and more opportunities hit the market as some of these sellers
and banks are starting to get very nervous with their loan maturities.
And there's an opportunity to buy many of these properties
at significant discounts from where they were just two years ago.
We're finally starting to see some repricing, which means that
now we can raise money again and buy properties, cash flow.
And new investors,
of course, are just going to clean up the mess of many of the syndicators.
That made a lot of mistakes in the last few years.
One wild card that we all need to be watching for is, of course,
the unemployment rate is very low, which is inflation area,
which could continue to make the Fed increase rates.
And of course, core inflation is something they're looking at
with shelter being the biggest issue, which of course
is the price of a single family home and a single family mortgage and rest.
So those are two things
to continue to watch as we move forward into this next period.