Valuetainment - May 15, 2023


Worse Than 2008？ - The Commercial Real Estate Crash


Episode Stats

Length

8 minutes

Words per Minute

220.43947

Word Count

1,983

Sentence Count

166


Summary


Transcript

00:00:00.000 If you own a lot of commercial real estate, you may want to skip today's video because the
00:00:03.220 commercial real estate industry is getting destroyed for a few different reasons. One,
00:00:07.560 in 2019, commercial real estate was already getting crushed because we were no longer going
00:00:11.880 to malls. How many malls did we see that were abandoned? I lived in an upscale community in
00:00:16.360 Dallas, Preston Hollow. Right across the street was a mall with a movie theater, abandoned massive.
00:00:21.460 We're seeing this across the country. Why? We're shopping online. Then COVID hits. People are not
00:00:26.160 working from home. Everybody was accidentally trained on working on Zoom. People have started
00:00:30.460 saying, maybe we don't need all this office space. Then on top of that, then rate spike comes the way
00:00:35.900 it is right now with interest rates. Then banks are getting destroyed and money's leaving banks
00:00:40.520 to money markets. Banks don't have the money to lend to commercial real estate buyers. People are
00:00:45.800 saying, what the hell is going on? Right now, there's a commercial real estate property in San
00:00:49.160 Francisco just five years ago. It was a $300 million property. This is in the news. They're
00:00:53.820 estimating it's going to sell on an 80% discount from $300 million to $60 million. And I'm going
00:01:01.640 to show you a few things that's going on right now with commercial real estate. Again, if
00:01:04.640 you're in this industry, watch it at your own risk. I don't know how closely you're following
00:01:09.120 on what's going on with Art as an alternative investment, but a lot of major companies like
00:01:13.900 Goldman Sachs, Pimco, they're starting to talk to their clients about alternative investment.
00:01:18.360 Matter of fact, this last year, I was at Art Basel and guess who was there? Goldman Sachs.
00:01:21.780 I had a dinner with them and it was all around people that are investing millions of dollars
00:01:26.120 into Art as an alternative investment. Here's some stats. 2022 was the biggest auction year
00:01:31.640 ever. Highest total from victory auction houses, nearly $18 billion. So now you may say, Pat,
00:01:38.280 that's great. I can't afford to buy a $5 million piece of Art or an $800,000 piece of Art. I
00:01:42.520 don't have that kind of money. You sometimes talk about baseball cards you bought for a million
00:01:45.800 dollars. I don't have that kind of money. I understand. The same way they created mutual funds,
00:01:50.680 a company called Masterworks, allows you to buy into Art by Andy Warhol, Pablo Picasso,
00:01:57.140 whoever may be, Banksy, but you buy shares of that Art. So you'll say, here's a million
00:02:02.940 dollar piece. I own a share of this Art. And then while they sell it, you make the return
00:02:07.580 on that piece of Art. So today, with what's going on with inflation, with what's going on
00:02:11.880 with the economy, with what's going on with the stock market, people are a little bit concerned.
00:02:15.260 One of the asset classes people are looking at is alternative investments,
00:02:18.620 specifically in Art. And if you want to participate in this, I highly recommend you look into
00:02:23.800 Masterworks. Everything they do is buy the books. SEC, you have to do your own due diligence while
00:02:28.480 you go through. But if it is something you want to participate in, click on the link below. If you
00:02:32.320 get involved with them, it's by invitation only. They have 600,000 people already that are working
00:02:37.900 with Masterworks. And if you want to diversify your portfolio, I highly recommend you consider
00:02:43.460 Masterworks. All right, if you get value from this video, give it a thumbs up and subscribe to the
00:02:47.320 channel. Let's get right into it. By the way, don't take my word for it. I want to share with
00:02:50.220 you with some other experts from the industry are saying about what's going on with commercial
00:02:54.000 real estate. Here's what Goldman Sachs thinks about what's going on in commercial real estate
00:02:57.080 today. Lenders with less than $250 billion in assets account for 80% of commercial real estate
00:03:02.360 lending. Yet Goldman Sachs in March of 2023 said, our economists assume that small banks with low
00:03:08.440 share of FDIC covered deposits reduce new lending by 40%. New lending reduced by 40%. So imagine
00:03:16.420 people are trying to sell. Buyers cannot get financed. I get a call from a building at $89 million.
00:03:23.080 They dropped the price two years ago to $56 million to $46 million. Then they're about
00:03:28.460 to sell. And the guy that was trying to buy it, Silicon Valley bank happens. He calls me
00:03:32.660 and says, I can't get financing. Can you come in 40% on the deal with me? And I'm not going
00:03:36.480 40% on the deal with them because they can't get financing today because banks are not financing
00:03:41.080 today. That's Goldman Sachs. Let me share with you what Morgan Stanley Dean with her saying
00:03:44.360 about commercial real estate today. They believe prices could fall as much as 40% while nearly
00:03:48.980 $1.5 trillion in debt is due for repayment by the end of 2025. Here's what John Kirshner,
00:03:55.580 the head of U.S. Securitized Products at Janice Henderson Investor said. He says, what we're doing
00:04:00.580 is being patient, staying away from all but obvious trades, and then just waiting for the distress to come
00:04:06.940 to us because it will happen. Meaning they're going to come to them saying, hey, can you please buy this
00:04:11.460 building from us on 20 cents on a dollar, 30 cents on a dollar, 40 cents on a dollar, and even Charlie
00:04:16.560 Munger believes commercial real estate market is in trouble today. So these are not regular people
00:04:21.840 we're talking about. By the way, look at CBRE. They're in the commercial real estate business.
00:04:25.460 Look at the chart they're showing right now on what's going on with commercial real estate. This
00:04:29.200 is a vacancy rate on downtown offices from 2007 to 2022. You see that number right there?
00:04:35.980 It is up at 17.6% the last three months of 2022. It is the highest it's been since 2007. It's
00:04:43.080 including 2008 and 2009. Look at the peak of 2010 versus today. That was 13.8%. It's at 17.6%.
00:04:52.040 Since 2021, office loans in delinquency have increased. Ready? 44%. That's a big number. And by the way,
00:04:59.300 this problem is even...
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00:05:15.120 Worse in big cities, New York, Chicago, San Francisco, big cities in California. It's even
00:05:19.720 worse. Matter of fact, Brookfield, that is a half a trillion dollar company. They have money.
00:05:24.600 This company just bought one of the insurance companies I do business with for roughly $4 billion.
00:05:28.500 Here's what they did. They are the largest office owner in downtown LA. And they recently
00:05:32.900 chose to default on loans on two buildings rather than refinance the debt due to weak demand for
00:05:39.440 office space. It's a half a trillion dollar company. A lot of money, a lot of assets. They
00:05:43.120 choose to default. They don't even want to refinance because no one's trying to release
00:05:46.520 more office space from them. On top of that, I'm not dumping on San Francisco, but obviously
00:05:50.560 bad policies cause people to leave. Remember how I showed you that picture about the $300 million
00:05:54.660 building in San Francisco? That's going to sell at an 80% discount. You ready for this number?
00:05:58.860 30% of San Francisco's office space is vacant today. Ready? Seven times the pre-pandemic
00:06:05.020 percentage. You see that chart right there? Where it was in 2018 to where it's at today,
00:06:09.820 people are not leasing office space in San Francisco today. They're taking a massive hit.
00:06:15.020 This is a reality. This is not some gibberish. These are stats. So somebody said, well, Pat,
00:06:19.640 that's San Francisco. How about nationwide? Is this really affecting everything?
00:06:22.340 Do you know what is the biggest banking lending drop in the history of US? March of 2023. The
00:06:30.900 previous three were 2001.com bubble, 2008, great financial crisis, 2020 COVID. And then it's now,
00:06:39.240 you know what the dollar amount is? A record $104.7 billion in the last two weeks of March is how much
00:06:46.060 bank lending dropped. Banks are not lending because money market is getting all the money today and banks
00:06:51.700 don't have the money enough to be able to lend the way they were doing pre. They need money. And
00:06:56.140 people are taking the money out of these banks, especially with what happened with Silicon Valley
00:06:59.160 Bank and First Republic and all these other places. It's even getting worse. So commercial real estate
00:07:03.140 folks, they own those properties. I hope you got a lot of cash. And if you have a lot of cash and you
00:07:07.320 want to go into commercial real estate, the next six, 12 months, 24 months, maybe 30 months is going to
00:07:12.700 be a pretty good season to get into it. And by the way, we got more pages. I can give you more data. I think
00:07:17.140 you got the point on what's going on today. Here's the reality of it. Question, Pat, are you buying commercial real
00:07:20.900 estate properties right now? I am. I bought two. I'm about to buy another one. I'm making an offer
00:07:24.840 on the fourth one. Few are in auctions. The auction one I'm going to buy on literally pennies on the
00:07:28.820 dollar. And I'm buying that one at 20, 30% of what it was actually worth three years ago. And I'm going
00:07:33.420 to get into it, but I'm doing it because I'm operating. I'm not doing it because I'm leasing it
00:07:37.300 out. Now, some are saying, well, Pat, should I buy some commercial real estate? Is it going to be a good
00:07:40.960 time to buy discounted? If there is one type of commercial real estate that the value is not moving
00:07:45.320 is industrial space because warehouses are needed. Whether the direction Amazon's going, all these other places are
00:07:50.760 going to put the stuff online that they're selling. They still need a warehouse. So the warehouse model
00:07:54.880 is not going away. That is not dropping. That's actually kind of going a little higher than the
00:07:59.600 class A buildings, the business office buildings. Those are the ones that take in a big hit. Even
00:08:03.540 in Fort Lauderdale, there's a couple of buildings, brand spanking new, beautiful, sexy, law firm type of
00:08:08.760 buildings, empty. They can't sell them because it's expensive and it's sexy. And class A buildings
00:08:13.640 today are not what they once were before. So for you to want to risk buying it, it's got to be on you.
00:08:19.140 I'm not going to give you advice. This has got to be on you. If you believe we are going away from
00:08:22.720 the model of working and, you know, brick and mortar type of buildings, then you know what not
00:08:26.880 to invest in. But if you think this is going to come back and recover and everybody's going to be
00:08:30.220 needing these buildings again, you're going to have a great opportunity in the next 12, 24, 36 months
00:08:34.240 to buy some distressed properties. Okay. If you got value from this video, give it a thumbs up and
00:08:37.780 subscribe to the channel. I got another video I want you to watch. There's about 85% of economists right now,
00:08:42.220 according to Wall Street Journal, that are predicting recessions here, Q4 of 2023 or Q1 of 2024.
00:08:47.520 If you want to know my 10 investing rules that I follow when it comes to recessions, click here
00:08:54.100 to watch that video. It's actually 10 Ps. You want to take a look at that. Either way,
00:08:58.000 have a great day, everybody. Take care. Bye-bye, bye-bye.