Short Real Estate

A little bit Investing, A little bit personal

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3 Random Thoughts  

1.Office Landlord Defaults Are Escalating

The pandemic has changed the way we work.

No prizes for channelling my inner 'Captain Obvious' on that bold call.

But when you look at the stats, it's glaringly obvious that things aren't going back to 'the way they were. 

Security firm Kastle System tracks building access activity for 41,000 businesses across 47 states. During the week ending February 15, the office occupancy rate for the top 10 cities tracked was 49.8%.

OFFICE OCCUPANCY ONLY HALF PRE PANDEMIC LEVEL 

A recent report from Wells Fargo observed that the office vacancy rate has only been climbing since the pandemic began. It was at 12.5% in Q4 2022

CRE VACANCY RATE

The trajectory of office real estate seems obvious to me.

Offices will still exist, but businesses can now function at much lower capacites. This size reduction won’t happen all at once, pre-existing rental agreements create a lag effect, but firms will continue to consolidate space as leases come up for renewal.

I have previously spoken about where I stand from a real estate prospective.

• The rush higher is over

• Lack of affordability as a result of surging prices and rising interest rates have resulted in a stand-off between buyers and sellers

• While activity has dried up, the lack of supply puts a floor on how low the market will go

That's on the residential side.

On the commercial side, I am much less optimistic.

For office landlords, their cost of capital has skyrocketed as a result of surging interest rates while demand continues to dwindle.

In a highly leveraged, narrow-margin business, you best believe there is going to be some knock-on effects when the cost of financing your debt doubles.

If your rental yield is 6% and your cost of capital jumps from 3% to 6%, a previously lucrative project suddenly becomes unviable.

Sure, these spaces can be converted into residential units, we are already seeing that play out. 41% of apartments are in former office buildings, accelerating a trend that began in the 2010s.

But in my opinion, this transition period won’t be kind.

As the WSJ highlights, we are already seeing signs of cracks in the US.

I’ll personally trade this view by shorting specific Office REITS. I think this is where much of the damage will be concentrated. Shorting ‘home builders’ or ‘suppliers’ is a riskier call in my view.

Another way to play this is the SRS index. This is a leveraged inverse ETF so this one can turn against you pretty quickly if you’re not careful.

Still, an interesting higher risk short-term play that may become more appealing in the coming weeks.

*Note: I have been wrong more times than I care to remember. This is not investment advice, do your own research on this before making any investment decision.

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2. Retirement Scares Me

FIRE (Financial Independence/ Retire Early) is the idea that we should seek financial independence by maximising our income, saving an unusually large portion of it and investing it in low cost diversified index funds so that you can accumulate a sufficient pool of money that allows you to retire early. I may be brushing over some of the details but you get the gist.

I’m all for financial independence; it’s a huge part of what I do. It’s the second half that I’m not really on board with yet.

Early retirement.

Every person I know, be it my parents, my friends parents or my extended family members have either struggle with retirement or given up on it completely and gone back to work.

We seem to under estimate the loss of purpose that comes with retirement. A huge part of your life is suddenly ripped out and you’re just left with an empty cavity while those who once depended on you, move on seamlessly.

Mentally that can’t be easy.

You’ve undoubtedly lost a sense of self.

You are starting to see this talked about a lot more.

“I won’t be worrying about all that; I’ll be too busy holidaying and playing golf”

Sure, there is the initial honeymoon period but think past that. Spending your days filling time just to fill time is sure to get old pretty quick.

The general response to this one is.

“Oh but I will have the freedom to do whatever I want”

But why are you waiting until retirement to pursue ‘whatever you want’?

Don’t get me wrong, I’m not suggesting people should work until they drop, (literally) but trading your 40 healthiest years to a corporation in exchange for 20 years of freedom when your body is in breakdown mode isn’t ideal.

Surely there is a balance.

Why can’t we prioritise our hobbies in the best 40 years while working a bit less instead of working non-stop and then coming to an abrupt halt.

Why can’t we operate on a glide path system into retirement where you can still offer your skills and earn an income into old age. 

As Michael O’Leary said

‘It’s better to wear out than rust out’

This whole 'rushing to finish line' idea just seems flawed to me, why can’t it just all be one long enjoyable brisk walk.

Granted this is a pretty idealistic view, but just beware of the downsides before you make 'retirement' your ultimate life goal. It may not be all it’s cracked up to be.

Find the balance.

*Come back to me on this one when I’m 55 and my future kids have squeezed me for every bit of energy and money I have. I’ll likely have a completely different take. 

3. The Answer To One Simple Question May Have a Huge Barring On Your Future Wealth

Inflation is an inherently personal thing.

We quantify it in general terms with headline figures but don't be fooled. Inflation isn't the same for everyone.

How inflation affects you will differ depending on your age, location, job, savings and investments.

There will be winners and losers: Net buyers and net sellers.

Let's take an example.

You bought a house before 2020 vs. You're looking to buy a home in 2023:

For those who bought pre-2020:

• Initial fixed rate at 3% or lower (many of these will be approaching their fixed rate cliff)

   

• Up to 40% increase in home value since purchase

Your mortgage repayments have remained constant while the value of your home has increased dramatically.

Yes, you're paying more for eggs, but your debt as a percentage of household net worth is considerably lower.

You're wealthier now than you were before the pandemic, in both absolute and relative terms, due to the inflation tied to your most significant asset.

Over 2/3rds of the Irish population have a mortgage or own their home outright.

For many of these, inflation has been a net positive due to the housing effect— a wealth-creation event

For those looking to buy a home now:

The past three years have created a very different scenario. Wealth destruction.

• According to the Central Statistics Office, the average house price index has gone from €293,000 to €359,000 since 2019, an increase of 66k

   

• Mortgage rates are now starting to increase. This is set to continue as the ECB looks to raise its deposit rate to 3.5%. (ECB rates were negative in 2019)

As such, recent inflation has had a materially negative impact on both the purchasing power of the savings accumulated to buy a house and the future debt burden that the mortgage represents.

The same inflation. Two very different outcomes.

The Property Divide

This is the very essence of how wealth gaps materialise, playing out in real time at an accelerated pace.

Many factors drive wealth inequality in Ireland, but it's bizarre to think that the side of the wealth divide you find yourself on may be determined by simply asking the question.

Did you own a home before the pandemic started or not?

Remedies

Don't just listen to the headline numbers. Figure out how inflation is affecting you personally.

Are you being crushed by rising prices, or are you a net benefactor as prices increase?

Everyone isn't on the same boat here. The sooner you realise this, the sooner you can jump ship.

1 Personal Update

This week, one question reverberated off the walls of every primary school across the country.

What ya givin up for lent?

As an ode to my 9-year-old self I have decided to roll back the years and join in the self-inflicted misery for the next 40 days.

What am I giving up?

My Phone!!

Why would you even think of doing a moronic thing like that? I hear you ask.

While I agree that getting rid of your phone is akin to chopping off a limb, there is solid reasoning behind this one-man intervention.

1. The distraction levels have gone out of control: Most of the time, the phone ends up in my hands, and I have no idea how it's even got there.

    

2. Information overload: My head is wrecked from the million things I am reading, following, and learning about at the moment. I can’t keep up with it. Constantly eating but never digesting. In an attempt to reduce the noise, I am tidying up my sources so I can focus in on specific areas of importance.

    

3. I have a tendency to do random challenges for no apparent reason just to see if I can. It’s just who I am as a person.

Some rules

1. I’m not a complete lunatic. I will be able to use the phone at the weekends.

    

2. I do quite a bit of work on my phone, so I had to redirect all those people to my email.

    

3. I had to figure out some workarounds so I could still listen to podcasts etc, but I think it’s doable.

I’ll let you know how it goes or if it is even humanely possible.

I’m expecting an iPhone easter egg if I manage to pull this one off.

Currently in the ‘cold sweats’ stage of withdrawal, but that should pass…..right?

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