Ian Formigle is the Chief Investment Officer at Crowdstreet. Crowdstreet is an online marketplace that allow the individual to review, compare, and choose the deals that meet your investment criteria.

Ian comes has 24 years of experience in real estate private equity, trading, and start-up. In this interview with the Investor’s Podcast, Ian shares with the listeners what he is seeing on the ground and his perspective on how the market has been shaping up.

Here are my short notes taken from the podcast. It covers how the various commercial real estate sector is doing, the impact of the fiscal measures, office and retail landscape.

The More Important Take-aways

Out of all the stuff, here is a summary of what I learn the most:

1. A lot of what affects real estate prices are current and perceived real estate demand.

2. Ultimate driver of value in real estate is demand relative to its supply.

3. One way to get a good deal is based on price. The other way is to secure a good deal based on structure. Because capital is hard to come by, investors may be pitched more advantageous splits in private equity deals.

4. There is going to be some moderation in certain markets. People are calling for the death of the CBD in Manhattan. However, if prices drop to a certain level, we might want to buy it. The lower asset value creates an opportunity for buyers to come in and profitably operate them at lower rents. This is only valid if the market is attractive. 

5. This recession is different from before. Different sectors are affected differently. If you wait for a performing sector to go down, then it might be a futile wait.

6. When looking at distressed deals, look at the discount to replacement costs. You do not know when they will come back but you must use certain assumptions about how these properties will look like when they return to some forms of normalcy.

7. Right idea wrong execution. Pay attention to the strength of sponsorship. We do not know how long this down cycle will run its way through, so it will need people with strong reserves to run through.

Ranking the Sectors from Worst to Thriving

1. Hospitality. 22% occupancy
2. Retail Malls. Follow by those heavy on food and beverage. If you have a mall anchored by a grocery or home repair, you are doing well.
3. Office: Downtown location looks weak but too early to tell. Not a lot of trades so the jury is still out. We can look at what the public traded REITs are telling us, and the REITs are telling us there is a fair amount of uncertainty. Ian thinks we will know more about the office market by the end of the year
4. Multifamily. Hanging in well. Year over year collections has been strong. Property transacted value Is 2-8% lower than pre-COVID. To see when a $600/week stimulus is off. Without stimulus, researchers predict that 1 in 5 tenants are at risk of eviction. Class B and Class A Multifamily would do better as it is populated by people working from home.
5. Last-mile Industrial Properties. Record demand.
6. Needs-based medical office and Data Centers

Indicators for Observing the Health of the Industry

1. The debt markets. For a lot of commercial real estate deals, without debt, you cannot buy it. A high correlation between the number of lenders making deals and how many deals are transacting. Got commercial trades to give you the latest market prices.
2. Ending occupancy data for hotels provided by SDR. The data shows that they have 12 weeks of successful improvement in occupancy from a low of 22% occupancy to 46% occupancy. This tells us that the market is recovering but is still weak. The owners need a lot of operating reserves still.

The stimulus that we should pay attention to:

1. Economic injury disaster loans by SPA. $2 million max amortized over 30 years.
2. Funds from Paycheck protection program.  Hotels and senior housing facilities are supported by this. They have allowed them to support the employees there and Ian expects these loans to be fully forgiven.
3. $600/week additional unemployment benefit. Supporting those lower-Class B and Class C properties.

If no second package passed, things could unravel.

$600 billion Mainstreet lending was announced but not yet seen, but we may be seeing initial signs of it.

The Office Sector: Too Much Conflicting Views

1. Companies are likely to retool their space to reduce density. Companies are going to use this increased spatial divide to recruit employees. Free food and ping pong tables will fade to the background. Office space has dropped from 250 square feet per employee to 100 square feet per employee in dense space. Possibly a 46% reduction in space due to reduced density. May create demand for more space
2. Companies not going to look for more space. Most of their workers working at home. Bad.
3. Companies not looking to hire more people. Bad.
4. More companies comfortable with remote working. Drag on demand
5. Shifts in demand based on location. Due to #1 to #4, companies may re-locate employees from higher cost to lower cost metros. If a company is thinking of opening an office in Austin versus expanding in San Francisco, the pandemic might have pushed the decision. Austin rent is half of San Francisco.
6. The resurgence in demand for suburban office space. Even before the pandemic, in 2019, 69% of Class A net absorption (increase in demand filled) occur in suburban, up from the long-term average of 60%. Suburban has appeal. Plentiful. Free parking. Vacancy 2% higher than average. Low-rise. Closer to employee home. 38% cheaper on the Class A level. Major users are asking brokers to look for 50,000 to 100,000 square feet of suburban space when they currently occupy 1 million square feet of space in the city core.

The Retail Space: Challenging

Grocery anchor shopping centres are hot. Store sales have doubled. The space isn’t dead.

The amount of food they purchase from grocery stores is up to mid-60%. It was not this high since the mid-1990s. This could moderate down.

If you can find a retail strip that is anchor by this kind of tenants, that are valued at below replacement costs, it is very attractive.

Key number: US$100 psf.

The Rising Popularity of the “18-Hour Cities”

In previous podcast interview, Ian have mentioned about the attractiveness of these mid-size cities with attractive amenities, higher-than-average population growth, and a lower cost of living and doing business than the biggest urban areas.

Pandemic have accelerated trend. Population migration from major cities to secondary and tertiary cities.

With companies allowing remote working will benefit this trend.

People are leaving New York but Ian feels that New York is damn resilient.

Changes in flow based on Marcus & Millichap research of Migration:

Outflow: LA, Bay Area, New York City

Inflow: Florida, Nashville, Charlotte, Texas, Austin, Boise, Salt Lake City.

In-demand cities based on Greenstreet Advisers research on cities that will thrive post-pandemic:

1. Denver
2. Charlotte
3. Phoenix
4. Austin
5. Raleigh-Durham

Commercial Mortgage-Backed Securities (CMBS) Market – Why is This Market So Important?

Usually, we will take out Multifamily because agency debt is dominated mainly by Fannie Mae and Freddie Mac.

CMBS accounts for 23% of outstanding debts issued last year.

CMBS is important as the canary in the coal mine for the commercial real estate market.

CMBS are typically placed on riskier asset. This is the first sign of weakness.

Today, we are seeing delinquencies skyrocketing in the retail and hospitality space.  The delinquencies are up 20% and 25% respectively when before the delinquency rates is less than 5% in March 2020.

For other asset classes such as industrial, the rats are still less than 5%.

This recession is not finance lead like 2008 and should be viewed differently.

When CMBS dry up, the transactions will dry up. No signals. Market participants become skittish about everything.

CMBS is also a leading indicator of recovery (as we are seeing recently). Price may not immediately rise, but it gives indication people are more comfortable.

Timing the Market

Ian thinks getting the right time is difficult. We know that currently this is a new cycle and it is a down cycle. Somewhere things will bottom out. And then prices will go upwards.

Layer into opportunities.

Commercial markets behave differently from residential markets and one of the drives is debt maturity.

The difference is residential loans are amortizing and you make decisions on them. For commercial loans, if your loan matures at a down market, you get exposed.

The best deals is timed based on debt maturities.

Institution owners can be fatigued. They may be aggressive to shed properties at crazy prices.

There is no magic moment. Just evaluate and buy good deals.

There are more articles like this in my Learning about REITs section

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

UBS Global Research got a pretty good special taking stock of the global real estate scene.

This covers the REITs in various global markets as well.

A lot of these reports would want to shape our views on where are the attractive investment opportunities. This one is no different but the report does provide a lot of good data that I find will help shape your view as long term listed real estate investors.

If you identify yourself as a long term listed real estate investor or a REIT investor, this article might be suitable for you.

They presented some data that tells you:

1. 10-year compounded return of Listed Real Estate versus other asset classes
2. Correlation of GDP downgrade and Listed Real Estate performance
3. Different layers of Listed Real Estate Valuation Metrics and how the various market rank
4. Range of Historical Vacancies in different office markets
5. Typical duration of Office Lease Tenures in various office markets
6. Correlation between Listed Real Estate company’s EPS and global GDP growth
7. Correlation between Listed Real Estate with equity and bonds
8. Sensitivity Analysis of Interest Rate changes and Listed Real Estate Returns
9. Correlation of Long term Yields and Demographic Changes
10. Correlation of Long term yields and CAP rates
11. FED Rate Hikes and Listed Real Estate Performances

And much more.

Let us get down to it.

1. Performance of Real Estate Equities Compared to Other Category of Securities

In the past 10 years to May 2020, global listed real estate delivered 6.7% a year. Listed real estate felt the impact of the pandemic more than global equities, who returned 9.8% during this period.

Physical real estate delivered a better return at 8.3% a year to December 2019 (due to the lack of availble data).

You can also compare global REITs return against other asset classes during this period.

2. Performance of Various Listed Real Estate Markets During 2020

Overall, global listed real estate have fallen by 20% this year. However, we observe that some countries have it worst such as France and Australia. Singapore REITs and Germany listed real estate have recovered relatively better.

On the right side, we also observe that most property sectors were hit but hotel, retail was more hard hit. This is because our movements were restricted to such an extent that overseas travel could not happen. Social distancing have also prevent retail operations.

While the stock prices have fallen, it does not mean that the cash flow of the underlying real estate business has dried up. Property tenants are contratually obligated to pay rent despite not making full use of it. Some tenants were very hard hit as they have no revenue and not enough working capital to fully pay for it.

The share price fell because stock markets are forward looking. The price reflects the uncertainty whether work from home, lower demand would change the long term nature of the rental income.

The uncertainty over rental income will in turn, affect the property values, which in turn, will affect stock prices.

If there is a secondary lesson to learn from this slide, it is that not all property segments are the same.

3. Economic Impact and Listed Real Estate Market Performance

This chart plots the change in year to date performance against the downgrade to a country’s GDP.

We observe a loose correlation between the economic impact (GDP) and performance by region.

Germany is unique in that the economic impact looks better than other countries. This is driven by the resilience of their residential sector, which dominates the market cap in Germany.

4. Valuation of Various Listed Real Estate Market

The analysts back tested different valuation metrics over time. They then weigh Price to NAV with a 50% weightage and 10% for the other 5 metrics.

Lower Z-Score reflects that based on that metric, the said market is cheap. (Blue is cheaper, red is expensive).

You can observe HK REITs, HK Property Stocks, China, and Japanese developers are the cheaper ones by all metrics.

The markets that are not cheap are Australia listed property companies and Singapore REITs.

I love spider graphs.

When we play a lot of computer games, this is one graph that shows which character or item is good. This spider graph presents valuation in a different view.

If all the legs of the graph is spread out wide, that region is cheaper.

We can see that Singapore REITs and Australia listed property companies are relatively expensive.

If there is one takeaway here, it is that there is not just one valuation metric.

If you want to have a greater margin of safety, layer price to NAV, PE, dividend yield and EBITDA divided by Enterprice together and you may find some company that is dead cheap based on all metric.

5. What Foot and Transit Traffic Tells Us About the Pandemic Recovery

The analysts trakc a number of unique data sets that can help inform their view of the markets globally during this pandemic.

What you see here is the foot traffic monitor. For most countries they have not recovered.

Here is one that monitors the public transit network traffic. Hong Kong did very well but the rest of the other countries were pretty depressed still.

6. Historical Vacancies in Different Markets

When you invest in a property company, management may update shareholders on the current vacancy rate or the amount of leasable space that are not leased out.

The best case is to have more spaces on lease, but it would be challenging for us to always have the best case.

To find out if this property is performing up to expectations, you can compare against the vacancy rate of the sub-market.

This chart above shows the vacancy rate of various office markets. London city has the wides range. Hong Kong office vacancy has climbed above the average.

Melbourne, Sydney CBD, and Tokyo Central 5 Ward vacancy are still within the historically lowest range.

7. How Different Are the Lease Tenures in Different Office Markets

The tenure of office lease term varies in different cities.

The tenure in major Asian cities tend to be shorter. The average tenure in Western cities tend to be longer.

8. CAP Rate Trends

CAP Rate is computed by taking the average net operating income of stabilized properties in that segment divide by the prevailing market value of the properties.

You can infer that this is like the average unleveraged net rental yield of the property segment.

If you rearrange this CAP rate formula, you can work out different things.

For example if your property rent for $10,000 a year and the CAP rate is 6%, if you take $10,000 divide by 6%, this will value your property at $166,666.

The CAP rate is in a way, like how investing people would use the discount rate.

Therefore, a high CAP rate lowers the valuation of your property, all else being equal. A lower CAP rate increases the valuation of your property.

The chart above shows the CAP rate change for different country segment from different time period.

You would observe that the CAP rate trend have been downwards. This reflects average property valuation rising faster than average rent. Most likely, this is due to greater demand for properties.

A lower CAP rate therefore leads to higher property value.s

Appreciate how high the CAP rate for Australia, UK and USA was in the past.

9. The Yield Spread Compared to Historical

This chart shows the physical property yield as a spread to the local 10-year bond yields. The rate at which the owners of the property lends at typically flows with the local 10-year bond yield.

So a wider spread means greater risk, greater value, possibly greater reward.

The current spread above the historical average for Hong Kong, Australia, UK initial, US, and continental Europe have been wide, indicating potentially greater reward.

10. The Leveraged Net Operating Income Yield of REIT’s Physical Property Indicates Attractive Value Versus Bond Yields

Because the yield spread is wider than the historical (previous chart), investors can possibly get a reasonable return on equity if they invest in REITs.

This chart shows the leveraged NOI yield of the properties belonging to REITs.

1. This leveraged NOI yield is based on 40% debt 60% equity (40% LTV).
2. NOI is equal to the stabilized rental revenue minus the stabilized cost expenses.
3. The analysts assume the investors purchase this property with 40% loan. They then include the interest expense in the NOI computation.
4. This NOI is then divided by the equity portion of the property.

What you see is the leverage yield.

I felt that if this is leveraged, an acceptable return with more margin of safety should be higher (perhaps close to 7-8%) in a normal interest rate environment.

However, on average, the leveraged yield is 6% which may mean the unleveraged yield is about 4.2% only. The yields in Hong Kong and Singapore should be even lower.

UBS has the opinion that these yields are attractive because if we compare them to the 10-year government rates for their respective countries, they looked very attractive.

In a yield-starved world, investors are on the look out for yield alternatives.

From this angle, REITs look more attractive vis a vis bonds.

11. The Correlation Between Listed Real Estate Company’s EPS and Global GDP Growth

This chart shows us that there is a reasonable correlation between earnings growth of listed real estate companies or REITs and global GDP growth.

By any indication, with the lower GDP growth, we should expect the EPS growth of real estate companies to fall drastically.

But I think, this time is a special situation. We have to wait for the rent collection to stabilize before making judgments if the EPS growth really becomes so negative.

12. Listed Real Estate Has Strong Equity Correlation and Weaker Bond Correlation

The historical relationship between bond prices (the inverse of bond yields) and listed global real estate is not very strong.

The average correlation is 0.15 since 1993.

However, a strong correlation exists for the relative performance of listed real estate against equities.

Listed real estate tend to outperform when bond yields fall.

Listed real estate companies, are… equities in general. If you are expecting listed real estate to help reduce the volatility of your portfolio, they might disappoint you.

Here is a sensitivity plot that shows the change in return from changes in US 10-year treasury rate.

We observe that when 10-year rate falls, the relative returns tend to be better but that is not always the case.

There are some outliers that, when rates increase, the relative returns were still quite OK.

13. The Correlation of Long Term Yields and Demographic Changes

This one is new to me.

The economist thinks that long term interest rates will remain low for some time.

The analysts think there are some structural changes in the economy, including aging populations and persistently high debt levels globally.

This suggests that 10-year treasury yields may trade in a lower range of 2-4$ over the next 20-30 years.

This chart shows the ratio of spenders (those in the 20-34 years old cohort) to savers (those in the 40-49 years old cohort) versus the 10-year treasury bonds.

The relationship looks strong.

This low rates trend looks supportive of listed real estate.

14. Correlation of CAP Rates and 10-Year Bond Yields

This chart above shows 2 different markets.

It shows that given enough time, there is a correlation between 10-year bond yields and the CAP rate.

Of course, bond yields are not the only influencing factors, with others including:

1. rental growth expectations
2. risk appetite
3. weight of money

What I observed is that

1. Office CAP rate correlation with 10-year yields is lower
2. Retail CAP rate correlation with 10-year yields is lower
3. Industrial and Apartment CAP rate correlation with 10-year yields are higher

15. Relationship Between FED Rate Hike and Equity, Real Estate Performances

There are 4 things overlayed in this chart.

The light brown line shows the real estate index while the dark brown line shows the equities index.

The light brown bars show the yield spread between the long duration treasury bonds versus the short duration treasury bonds.

This yield spread shows the shape of the yield curve. A region where the spread is high indicates that the yield curve is steep in a positive way. The yield curve narrows over time and then inverts. Correspondingly, we also see the bars becoming shorter and shorter.

Finally, the grey area indicates the period where the FED raised rates.

The grey area is where real estate investors traditionally fear the most because they believe higher interest rates are negative for real estate.

As we see on this chart, the grey areas coincide with the period where the light brown bars are at their lowest. This make sense because as the yield spread narrows and the yield curve flattens, the FED raised rates to make borrowing more expensive, to prevent the markets from overheating.

In the three notable periods where FED hike rates, the real estate and equity index did well together 2 out of three period. During the 1999 period, real estate did not do as well.

The main lesson learn here is that while higher interest rate puts pressure on the real estate business, other factors might matter more than just interest rates.

16. The Explosion of Debt Issuance in Asia and EMEA

This bar chart shows the debt issuance over time. What fascinates me was that, while more money was raised over time in America, the amount of capital raised in EMEA and the Asia Pacific grew by a crazy amount after 2010.

There is a treasure trove of in-depth REIT knowledge in my Learning About REITs section. You will find articles similar to these but are arranged in such a way that is easier for reading.

It is FREE. No upsell.

Just hope that you can get upskill, invest well, not lose money, make more money.

You can check it out below.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

As a REIT investor, I got to take in whatever perspective that I can come across about the supply and demand of properties going forward.

Our newest associate adviser have not even started work in the company but he has alerted me to this pretty good interview by the chairman and CEO of Starwood Capital Group.

Some of these people are motivated by their personal interest about the issue, so what they tell us might be a little or very bias.

I think this is a pretty balanced interview.

Starwood Capital group is an investment firm that was born out of the US Savings and Loans Crisis in 1991.

The failed banks had to let go of their properties and Barry Sternlicht raised $20 million from a few New York families to fund the purchases of these properties. Today, they hold $60 billion worth of assets.

I have always associated the Starwood name with hotels but turns out as a group entity, Starwood operates more as an investment firm doing all sorts of deals trading properties, improving portfolio and bringing in investors.

“Starwood Capital sought to acquire well-located real estate assets at a discount to replacement cost that has the potential to benefit from improving fundamentals. In so doing, we have invested in a wide range of distressed securities and non-performing loans, single assets, portfolios of assets, and companies.”

As the head of the firm, the chariman should have a pretty good view about how the state of affairs after Covid-19.

Here is the interview:

The biggest discussion point was on one of the most densest cities in United States: New York.

• In the hotel segment, the cities which typically thrive on big conventions like Chicago, New York, New Orleans will be the most affected. That will take a while to come back
• Zoom meetings will cut the rate of growth (the finance side of him speaking. This will affect the valuations of the properties)
• The office will have less of an impact. Going to the office is an experience that will not go away. Companies will take less space.
• 20 years ago, office spaces have gone denser from 225 sqft to 300 sqft per person. Likely, the density will go back the other direction
• The retail shopping center is the most hard hit. A lot of the retailers are upping their online game and have done really well. So those shopping centers that depend on tenants are going to get a hard hit. This is not an easy asset class to be in.
• Single-family housing is strong
• Barry believes a lot is how the employment will be going forward. If we stay at 20% unemployment for a prolonged period, this will have an impact on demand and rent, which will affect property prices
• New York has a lot of things not going for it
  • Covid-19 and the protests in a very dense environment have worsened the problem
  • Tax rates are high
  • Strong unions mean that generally, the cost of doing business is high relative to other places in the United States.
  • If you tax the rich, the rich leaves, less tax revenue, it places more pressure on those who stay, and that further exacerbates the problem.
  • In the past few years, the more active players are less of the financial firms but the communications and internet companies. The reason they come to New York is that the talents want to be in New York. If the talents had a change in perspective in the future, then the demand for properties may shift accordingly.
  • There is huge pressure on real estate. Rents could drop 25% and expenses could climb 25%
  • However, every foreign investor wants to own properties in New York
  • Just before Covid-19, a law was passed that if you put in investments to the property to improve it, you are not allowed to charge additional rent for it. Effectively, this is rent control and this disincentivizes owners to improve their property. The result of this, as seen in other areas is that the place becomes more and more run down.
  • WeWork was New York’s largest tenant. That likely means this segment in New York will not grow any time soon.
• Starwood Capital prefers to add assets in the Red states (Republican) primarily because they are growing, they are adding people, lower in taxes
• Shared office space makes sense but the valuation of the companies may be wrong. WeWork makes good money from countries like Tokyo and Singapore and it makes less sense in lower-tier cities
• WeWork is paying the rent in the majority of Starwood’s properties
• Barry thinks that WeWork can make pretty good money. He cites the example of their London space which they leased from Starwood Capital. They charge tenants $160 and after netting their cost they earn $130. They then pay Starwood $65.
• Retail is damn tough
  • Properties are bought when rent is $10,000 PSF and if tenants ask to pay the rent at $3,000 PSF, the value of the property will fall so much that it will go back to the financier. So landlords would rather keep the property empty
  • It is very very difficult to underwrite retail properties because you got tenants but you do not know what is the rent that they will charge.
  • It will take some time before they reached equilibrium
  • Amazon is the pandemic of retail. They practice predatory pricing (sell their products below the cost of goods) and in some other industries, this would have to be regulated.
• Barry thinks that there will be a wave of distressed assets coming.
  • The FED just encouraged the banks to work with the borrower but they are not doing it
  • 1/3 or 1/4 of hotels in New York will go bankrupt
• Hotels catering to high-end clients are not much affected
• Hotels that build their business around conventions are going to be severely affected.

Overall, I think there is nothing new here. What will be difficult is that it is difficult to see demand and supply. This translate to the stabilized rent. And that translate to the valuation.

There will be moderation but we are not sure how the terminal state will be.

This is not unique to real estate but other business segments as well.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

Out of the many things I have read, it was a post at Housing Wire that made me wonder whether we are thinking too much in the present and not stepping back and referencing back to the baseline.

Real estate are traditionally less correlated with the equity markets. This time they are really showing less correlation. Various segments are dying together with the equity markets bar a few real estate segments, who are thriving instead.

Tenants have zero revenue and therefore cannot pay rent. The whole chain of parties from landlords, corporate lenders, shareholders, suppliers are all affected.

Many commentators are saying people in history will reference the period before Covid-19 and post Covid-19 as a pivotal period where all things change.

I think they are right but like always it is the extend of the change that may matter more. One of the tough thing to do in investing is valuing businesses because the nature of the business changes and this affect the intrinsic value of the company.

Usually, we are able to put our money down when we have higher conviction. Usually, certain aspect of that company we are certain about. What Covid-19 did was to make us question whether what was once certain will continue to be certain after this or will change entirely.

The real estate sector have been certain for a long time. Even within the sector, there are changes in trends. However, they take place in a past that every stake holders can adjust to.

Now, everyone seem to think that with work from home, there are no need for offices. I think there will be moderation, but this is not new. It will be the pace we are talking about.

Even with 10-20% overall vacancy will kill the valuation of certain property portfolios.

How big will the effect be? I am not sure.

In this post, I pulled together some of the things I have reader on this subject. I will list out some of the main points that stood out to me.

Everyone Down the Line is Affected

Animal Spirits: Investing in Corporate Real Estate >>

An interview with the manager of a USA ETF that focuses on triple net lease REITs, or REITs whose tenant pay for almost all the costs. I first shared about the appeal of net-lease REITs in this post here.

The parent company of the ETF is collaborating with huge asset manager Brookfield Asset Management to carry out sale-and-leaseback deals to help businesses that are hit a deal with cash flow better.

While there are aids provided by the government, it is not enough. The banks are not lending out as they should.

Some of the triple net lease REITs were affected because the tenants are Restaurants, Gyms, Day Care.

Surprisingly multi-family homes may be affected in the long run because of people relocating to other cities.

The appeal of net lease properties is that the tenants have long term contractual obligations. The tenants cannot break the lease easily.

The net lease REITs are taking the approach of working with their tenants to defer the rent, and then amortizing the rent over the rest of the contractual terms.

Everyone becomes a loser:

1. Tenant cannot pay the rent
2. Landlord takes a hit
3. Corporate borrowers take a hit
4. Shareholders take a hit as well

When tenant goes bankrupt, everyone down the line takes a hit as well.

In order to invest, you have to believe that in the long term, things will go back to normal.

That is, you will drop off your kids at day care, you will go to restaurants to eat.

They are seeing business picking up in different industries. Consumer behavior changes and so does how business is carried out. And so the revenue are recovering as well.

They also observed that suburban real estate is really growing.

Facebook CEO’s Future Office Policy in Full

Ramp Capital LLC: What we can learn from Global Workplace Analytics

The Death of Cities >>

Accroding to Gallup, Americans don’t want to live in big cities, they want to live in rural areas. The reason they live in big cities are for jobs and opportunities.

Data from Global Workplace Analytics:

1. Only 3.6% of U.S employee workforce currently work from home 50% of the time or more
2. 43% of employees work from home with some frequency
3. 56% of the employees have a job where at least some of what they could do could be done remotely
4. Studies show desks are vacant 50-60% of the time
5. 80% of the employees say they would want to work from home at least some of the time
6. 35% of employees would change jobs for opportunity to work remotely full time (Millennials much more than Boomers)
7. 37% of employees would do so to work remotely some of the time (Millennials much more than Boomers)
8. Greater than 33% of workers would take a paycut of up to 5% in exchange for the option to work remotely at lease some of the time. 25% would take a 10% paycut. 20% will take an even greater paycut

Moving to suburban places are more appealing. The rents in major cities are too expensive.

The cities with affordable housing and zero state income taxes may become very appealing to educated and rich workers.

On Facebook’s new policy: If you move away from the city, you are most likely to take a pay cut. There are trade-offs and you have to think about it. It might just be worth it still.

Major tech firms may not need to be headquartered in big cities. This will not kill the cities but will set growth back.

We may see tech firms moving to the suburbs. It will depend on whether the firms take the lead. The workers will follow.

The Increase in Remote Work or Work from Home Job Searches

WSJ: For Many, Remote Work Is Becoming Permanent in Wake of Coronavirus >>

“Just as Intel, HP, and others originally defined how we operated for decades in tech, we’ll see a redefinition for the 21st century by new digital companies.” – Aaron Levie, CEO and co-founder of Box Inc

LinkedIn recorded a 28% increase in remote job postings and a 42% increase in searches using the terms “remote” or “work from home”.

“The response to the pandemic has revealed the viability of remote work for many businesses that had access to the necessary technology, but were hesitant to expand the practice.”

The physical desire among humans to be physically present is hard-wired inside of us.

Jeffry Carter, General Partner at West Loop Ventures: Work From Anywhere >>

The last 10 years have seen a move towards urban city center vertical office campuses. Things might change so that worker can get outside in a less crowded space.

“You strip out a commute and you strip out having to get on an airplane for business meetings and you kind of remove a lot of these other things that crept into the work that you had to do.” – Aaron Levie

Conferences and meetups have more value compared to when on Zoom.

There are things that happen spontaneously in offices because people are in physical proximity with each other. These are the random stuff and conversations and comments. These spark ideas.

Even before Covid-19, CEO have a problem recruiting for their offices in areas like San Francisco, Los Angeles, NYC and Chicago. They were looking for a way to leave or reduce their headcount there.

Covid-19 gave them the perfect opportunity.

There are states that wishes to raise more taxes and there are states that are more “free”. Migration by firms may take place and this may impact not just state policy but also federal policies.

Since 2012, Jeffry have been noticing a trend towards co-working. Home space tends to be too cramped up. It may not be WeWork but other companies will take its space.

Avoiding Our Cognitive Bias to the Analysis of Larger Homes and Office Spaces

HousingWire: Could the coronavirus crisis lead to larger homes and office spaces >>

There are predictions that home size and office space have to increase but may be predicated upon the assumption that the prospect of a viral outbreak is the only factor a buyer considers.

Owners can have 50% of workers that are productive working from home to work from home and another 50% to work in office with better spacing. This may mean status quo.

Long term productivity is also unknown.

“The Spanish flu wreaked havoc on the U.S. economy, and many predicted it would lead to a decades-long recession – but instead, the pent-up demand to spend and enjoy life spurred the roaring 20’s. No one has a crystal ball to tell the future. But we do know that cultural change is usually slow, methodical, and the result of many social inputs. The accuracy of any prediction is incumbent on capturing as many of those input as possible and avoiding the cognitive bias of “What you see is all there is.”

Mass Commuting and Singapore Office

Mass telecommuting will shake up S’pore’s CBD, end work and office life as we know it>>

Human resources technology start-up EngageRocket, the Institute for Human Resources Professionals and the Singapore Human Resources Institute — has gathered more than 2,700 responses on workplace sentiments in Singapore since April 13.

• 8 in 10 employees in Singapore wish to continue working from home at least half the time or more after the circuit breaker
• 40% of younger workers said they were less productive than before. 49% of older workers said they were less productive than before
• Companies cannot just manage employees based on face time
• Peak hour traffic might be a thing of a past
• Grade A office rent will get affected short term
• Companies will fold or they might have multiple offices around Singapore
• Office space might be re-design
• The retail shops, Gyms catering to office crowd are badly affected as well

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works