I haven’t done one of these in a while and a long flight was the perfect time to write this down. Without further ado, here’s nine things I think I think:
- One mistake that I’ve made in my investing life is underestimating how strong and self sustaining major trends can be – things like the urban boom in the last cycle or the eCommerce revolution. I suspect that the rise of suburbs and remote working will be similar now that the demographics are favorable, the technology is there for remote working and public opinion about days required in the office has shifted substantially.
- The financial story of the first half of 2021 will be the battle over inflation that is currently raging. The yield curve is steepening with the short end staying anchored and the long end spiking quite quickly. The Fed has indicated that much of this is transitory due to pent up demand as the country slowly reopens after a year of lockdown. If they are correct, we should see a flattening on the long end of the curve and delayed Fed action. If they are wrong and inflation proves not to be transitory, the Fed may need to tighten quicker to deal with potentially our first bout of upward price pressures since the 1980s.
- We could continue to see cap rate compression in product types like apartments, single family homes for rent, industrial and self storage even if rates continue higher. Why? Because these asset classes typically feature short term leases and act as a strong inflation hedge. I also think that industrial could fare well due to the continued secular growth in eCommerce, despite longer average lease terms.
- If we do see real, sustained inflation it will help to widen the gulf between the best real estate operators and the rest of the pack as both capital structure and management of lease rollovers to optimize cash flow become more important than ever before.
- If we are in an environment where apartment rents will continue to fall in urban areas for an extended period of time, rent controlled buildings should be a great investment for investors with patient capital. Why? Because rents are often far below market and landlords can raise them when a tenant moves out. If units are substantially below market rate, and the opportunity is properly underwritten, rents can fall quite a bit and the landlord can still substantially increase their revenue when units roll. Key caveat here: this is true only if rent control is underwritten correctly and accounted for when the property is purchased. In other words, that it is known upfront and can be quantified. This is why we don’t like California multifamily at RanchHarbor – too many unknowns with regards to political risk that are generally not reflected in today’s asset prices.
- What happens in Texas last week is possibly the greatest advertisement for nuclear energy in history. The resulting plumbing issues will also lead to building code adjustments in a good part of the country.
- Trading volume in Gamestop and other meme stocks after customers were banned from trading them on Robinhood is a pretty substantial violation of the narrative that it was a battle between hedge funds and a ragtag bunch of individual investors on Wall Street Bets. It may have started this way but by the time things really got going, it was mostly a battle between sophisticated funds.
- The fact that Keith Gill (aka Roaring Kitty, aka Deep Fucking Value) is being sued for stock manipulation in the Gamestop fiasco for sharing a stock pick while Elon Musk and a collection of porn stars, C-list actors and influencers pump Dogecoin on a daily basis with impunity is a joke. Never let anyone tell you that the game isn’t rigged against the little guy.
- There is no quicker way to get me to decline a Linkedin invite than putting a Grant Cardone quote in your bio. Yes, there are people out there doing this. Don’t be that guy.
What I’m Reading
Now for Some Great News: There are increasing signs that a combination of vaccination and past infection may allow the US to reach COVID herd immunity by April. Wall Street Journal
Busting at the Seams: Surging eCommerce volumes have resulted in higher online shipping costs and upward pressure on costs is only expected to continue. CNBC
Fire Sale: Manhattan condo sales were in a slump before the pandemic hit. COVID-19 made the situation worse. Now distressed investors are looking for bulk purchase bargains and developers who have struggled to sell are looking to quietly unload units (h/t Michael Deermount). Wall Street Journal
Release Valve: Port facilities are backed up across the country but delays on the west coast have been particularly challenging with an average 8-day wait at the LA / Long Beach port complex. At the same time, Seattle and Tacoma have excess capacity and are trying to woo more shipping volume in a bid to relieve pressure on more busy ports. Bloomberg
Here We Go Again: A bill to do away with a tax break that has been in the crosshairs of reformers for years has been introduced in the US House of Representatives. This is far from the first time the issue has been raised and it bears monitoring for real estate investors. Bisnow
Picking Up Speed: The pandemic has caused homebuyers to utilize technology to buy homes like never before. Now that online homebuying tools are widely adopted, I highly doubt that we are going back to the old way of doing things. New York Times
Chart of the Day
Toto, I don’t think we’re in Kansas anymore.
Source: Michael Bury
WTF
Bottoms Up: A mother of four in the UK trying to protect herself and her family from COVID was duped into drinking her own urine for four days. Fox 5
Looking to Mingle: A man who was arrested for masturbating in a Walmart parking lot claimed that he did it because he was “lonely” because Florida. 96 KROCK
Basis Points – A candid look at the economy, real estate, and other things sometimes related.
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