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The Seven Year Itch, The Presidential Year, The Theory of the Safe Haven

    Home Newsletter The Seven Year Itch, The Presidential Year, The Theory of the Safe Haven
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    The Seven Year Itch, The Presidential Year, The Theory of the Safe Haven

    By admin | Newsletter | Comments are Closed | June 23, 2015 | 0

    What will 2016 be for the New York City RE market?

    It is the year in which the current real estate cycle, and stock market, reaches its 7th year.

    It is also our Presidential election year.
    And yes, coming off of Father’s Day, I can tell you that my own 7-year-old is pretty amazing, but many of you out there are questioning

    whether this stock market cycle can even make it to 7 years.

    Just trying to see where the market will go


    The main theories of what is driving the current Real Estate market are:
    1) The Fed will continue a low rate environment until the presidential election is within striking distance (The Inflation Hedge Theory)
    2) The US Real Estate Market is a safe haven compared to the rest of the world, at almost any price (aka The Parking Lot Theory)
    3) The stock market simply can’t maintain beyond seven years.

    If the stock market tanks, the real estate market is safer (The Joseph Theory)

    The Inflation Hedge Theory
    There is no question that in such a low-rate environment, hard assets such as real estate and art have seen tremendous surges in values.

    Absent a less risky return in the stock market, Real Estate and its slow and steady returns, and the fact that it is a real asset,

    is attractive to investors around the world.

    Should it become time for rates to rise, and inflation kicks in more seriously, investors believe that real estate will provide a hedge – that is, its value will keep up.

    The Inflation Hedge idea dovetails with an ever-decreasing return on capital as the investor profile changes in Real Estate.

    We’re seeing a continued push into the RE sector by professional investors, looking to unlock value in long-held real estate.

    Real Estate has seen quite a shift away from the Mom & Pop type of real estate investing in the US, where initially smaller consolidators bought out some of the small, local players, creating decent-size portfolios of houses, apartment buildings, what have you.

    Since, bigger players have come in and bought out these consolidators.

    Ultimately, these bigger fish have turned into REIT’s, and allowed investors to achieve consistent, albeit lower, returns with a bit more confidence than in other sectors of the stock market.

    As as the players get bigger, the acceptable returns for investors have compressed, as people feel inflation nears reality.

    Parking Lot Theory takes the inflation hedge theory to its inevitable conclusion: it almost doesn’t matter what the return is –

    as long as the money is relatively safe, there is the potential for capital appreciation, and the downside for loss is much lower.

    Perhaps that goes without saying, but investors in NYC real estate feel able to sleep at night knowing that their money will achieve small but safe returns.

    As Chinese investors see their indexes seesaw, many savvy investors are

    moving money out of that volatile market and into NYC Real Estate.

    See the European markets, and emerging markets as well.

    Let’s

    assume that foreign investors simply want their money in the US, where there is rule of law, no fear of having property confiscated, and, in a city like NYC, the safety of real estate being as liquid a market as one can find in the city, should an investor need access to that capital.

    Direct investment for foreign investors continues to be preferred, and these buyers are willing to accept quite smaller returns for the safety of the US market.

    As I understand it, smart US money isn’t necessarily piling into foreign investments, either.

    Conversely, US investors are buying Real Estate assets domestically.

    The broad idea is that the US market remains the safest haven right now, for domestic and foreigners alike.

    Now it may not all be in NYC, but it is likely to be in the US.

    As I mentioned in the last post, we are seeing some indications that sellers are overpricing condominiums as a reaction to this surge of investor

    money.

    We’ll see how low capitalization rates can go for single apartments.

    Joseph predicting a bear market

    Lastly, the Joseph Theory would indicate that the stock market cannot continue its fat years’ run for more than seven years, and that concern would prompt a search for assets less correlated the stock market.

    Certainly, the concern with this theory is that a reduction in liquidity (either a slower sales market or lack of lending capability) could slow down sales in New York or make selling a challenge – it would then be a situation where well-capitalized investors can wait out any slowdown and take no

    action on any paper losses in their real estate portfolio.

    But I believe this would impact primary home buyers more than investors.

    In my view, all three theories hold water in guiding RE investment.

    And yet, all good things must come to an end.

    These two sentences can coexist.

    Not to say that the Real Estate cycle won’t continue as it always has, but some of the fundamentals have changed or at least

    shifted, for good.

    The means of analyzing RE deals have become more efficient, more digitized, and more professional, both on the brokerage and investment side.

    I would

    be hardly surprised to see the residential RE market remain far stronger than the broader economy, or for a longer time horizon, especially as renting grows as the first choice for millenials.

    The next few years will be fascinating to watch, and experience, as they unfold.
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