Will real estate be a safe haven?

My feeling is equities are fine and dandy but your investment can completely disappear. Real estate can decline in value but at least it provides a place where you can live. It looks like we're in for a major restructuring of capitalism.

Please define 'safe haven'.

An asset uncorrelated to other declining assets ("safe haven" = "hedge")?

An asset with a very highly likelihood of a positive return over a time period ("safe haven" = "guaranteed return")? Please define your time period.

An asset that is *always* convertible to another asset type ("safe haven" = "fungible/liquid")? (though profitability may not be guaranteed. See above.)

An asset with greater utility than only as 'a store of value' ("safe haven" = "multipurpose")? (it may increase in value, and you can also live there)

If you know what criteria you're looking for in an asset, you can then assess whether NYC real estate has those criteria, and the likelihood that it will continue to do so over your desired time period.

But get some precision into your definition first.

Are lagging assets usually safe havens?

Can't speak for other lagging assets, but data dictates that real estate has historically been a safe haven during recessions. 2008 was the exception because it was the housing market crash that brought us into a recession, not the other way around.

I think if it is your home, you have enough liquidity and not planning to sell, it is very much a safe haven. You would have been paying rent anyway. You may even be able to lower your cost by refinancing cheaper. Pure investment property, hard to say.

But mentally, for most people, real estate is much easier than equities as you do not see day to day volatility.

That's exactly what Howard Lorber said today on The Real Deal "How big brokerages are dealing with coronavirus in NYC" conference call today.

My point about Real Estate being a lagging asset is that taking your money out of the stock market post-crash and then investing in Real Estate pre-crash could potentially be a good way to maximize your losses.

Forgot to mention, that if you are lucky enough to have a spacious home, very good for you mentally during this time as everyone is working from home and children are there too.

Absolutely agree. On the converse will everyone who bought into a building where you got every amenity you could imagine (and even a bunch you couldn't) except an extra square foot inside your own unit pay a price because you can't even use them now?

Investing in anything pre-crash is a good way to maximize losses. My question how do we know NYC real estate will crash? Will it be commercial real estate foreclosures? Banks unable to issue mortgages? Mass foreclosures from unemployed home owners? On the flip side what would be the scenario to prop up real estate?

If people recall, heading into 2008 real estate was considered "solid". The reason for this is because real estate has held strong in previous recessions. Now that our most recent recession came off of a housing crash, the public sentiment has definitely changed about real estate. As we all know, the real estate market is dictated by consumer confidence. Is the public sentiment of 2008, coupled with the looming recession, enough to offset the housing optimism that started this year?

Yes. Most buildings gyms have been shutdown.

taak, NYC real estate has many different segments. Commercial for example has retail and office. Resi has different price points and locations/ taxes. Is there is a specific segment you are looking to discuss as you can't generalize price predictions of different segments and sub-segments?

300,
I think it's more than most: in that same call I mentioned earlier, Howard Lorber said he was on the Board at 432 Park Avenue at that they had at first closed a number of amenities totally, but with the gym left it open and restricted the number of people who could use it at the same time. He then said that Cuomo clarified what he meant about closing gyms to include private gyms which were building amenities so they totally closed the one at 432. I guess that there are probably some which are ignoring this, but given how strongly the bar/restaurant curfew is being enforced I would guess they are going to hit these too.

NYC always bounces back first. Everyone dreams of living here.

Everyone *has dreamed*, at least since Giuliani cleaned up the place. What if that changes? What if people say, "it's too risky living on top of everyone else when new diseases are appearing. My company discovered that remote working actually works. There are too many homeless people and the taxes are outrageous. Maybe I should live somewhere better like back country Greenwich or Austin or Aspen."

One thing for sure which this is going to prove is that in certain industries paying huge dollars for big office space in Manhattan rather that having people work from home is a waste of money.

If restaurants, bars, niteclubs, theaters, "experiences", etc go bust now, the reason to live here full time goes down.

And if crime rises because people are disenfranchised, broke, etc and the city looks like a ghost town because a significant amount of retail spaces are vacant, and taxes rise big for everyone because need goes up and there are fewer to spread it over we could see 1970s style flight.

@30 how about a little PMA (positive mental attitude) under the circumstances. Let's get this virus under control, let's focus on stopping the spread and supporting each other.

I get you tend to see the glass half empty, however we have enough shi* to deal with besides worrying that our hometown turns into the thunderdome, post covid.

Keith
TBG

Because that worked out so well so far with Trump denying the problem? How about we stop sticking our heads in the sand that problems exist and try to fix them with actual solutions instead of thoughts and prayers?

I see the current epidemic as an indictment of open-plan offices, too. I don't know if everyone working from home will be the answer, but we'll all definitely come out of this having to work differently.

Nothing in my comments suggests just sticking one's head in the sand or not focusing on fixing the problem.

"@30 how about a little PMA (positive mental attitude) under the circumstances. Let's get this virus under control, let's focus on stopping the spread and supporting each other"

WeWork, Purple Bricks, OpenDoor, Compass, etc:
"We're going to be 'Disruptors' in the Real Estate business."

Covid-19:"Hold my beer."

"Nothing in my comments suggests just sticking one's head in the sand or not focusing on fixing the problem."

From the guy who scheduled open houses this past Sunday and before that was making posts that everyone was overreacting to Coronavirus.

https://therealdeal.com/2020/03/20/retailers-tell-landlords-they-could-stop-paying-rent-soon/

"Retailers tell landlords they could stop paying rent soon
Commercial property owners still have to make mortgage payments

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Retailers tell landlords they could stop paying rent soon
Commercial property owners still have to make mortgage payments

TRD NEW YORK
Mar. 20, 2020 02:00 PM
By Rich Bockmann
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(Credit: iStock)
(Credit: iStock)

Restaurants and other retailers that have seen business screech to a halt because of coronavirus shutdowns are warning their landlords that they may soon stop sending rent checks.

Sandwich chain Subway sent a “force majeure” letter to landlords earlier this week saying that it may cut off rent payments if franchisees have to curtail business as government entities order them to shut down or significantly pull back services.

“In the event this pandemic compels the Subway restaurant owner to narrow the scope of its operation (e.g., take-out or drive-thru service only) or to close entirely,” the letter read, Subway reserves its right to “abatement or postponement of rental payments.” Subway did not respond to a request for comment.

Several landlords told The Real Deal they’ve received similar letters from tenants.

Retailers are seeking relief after the city plunges into a virtual shutdown.

The government’s heavy-handed actions began Sunday, when Mayor Bill de Blasio ordered the city’s tens of thousands of restaurants and bars to limit their services to delivery and takeout, effective Tuesday morning — a deadline the governor quickly changed to Monday night. Gov. Andrew Cuomo on Wednesday began curtailing the percentage of employees who can show up for work, ultimately ordering all non-essential workers to stay home, effective Sunday.

Retailers such as Apple and Nike had already decided to close stores until later this month.

The near shutdown of the city puts landlords in a tough spot as they still have to make mortgage payments. However, the state’s top judge over the weekend ordered an indefinite suspension of evictions, including of commercial tenants.

On Thursday, Cuomo announced a 90-day suspension of mortgage payments for homeowners who can prove hardship caused by Covid-19, but the order does not apply to commercial landlords.

“Landlords are sort of in the middle,” said Rosenberg & Estis attorney Eric Orenstein, who explained that owners’ agreements with their lenders sometimes limit the flexibility they can give to struggling tenants. “They want to help their tenants who want to pay the rent, but they also have an obligation to pay their lenders.”

The above could wreak havoc with some Coop's financials.

Having 30yrs and theburkhardtgroup fight online is triggering PTSD from the years before my parents got divorced.

Sorry that's not the intent.

Now go to your room and do your homework.

The open house was cancelled. And because my thinking is not static, my opinion of the coronavirus has evolved as new information has come out. Although much of the initial data has remained the same. And let me emphasize 'much' before you jump on that last sentence.

Keith
TBG

It is time for people to support their local businesses - restaurants by doing take outs!! You do not have to give the restaurant guy a hug. Govt after a week or two will have to balance the economic losses due to shut down vs having more infections where the death rate for healthy people below 60 so far is very low in the US. Italian average age for people who died is close to 80.

And the whole world can do with positive attitude which of course does not mean partying like spring break.

If you're Downtownish this may help:
https://evgrieve.com/2020/03/updating-whats-open-in-east-village-for.html?m=1

https://www.boweryboogie.com/2020/03/these-lower-east-side-restaurants-are-still-open-for-takeout-and-delivery-updating/

Thank you. I have been going out for walks in the village / Chelsea area (my favorite activity). I have to time my walks before dinner so that I can pick up some good food rather than cooking ourselves which we did most days anyway before corona panic started.

To keep things in perspective 258 deaths so far in the US. It will likely go to 1000 in less than a week and confirmed cases to 50000-75000 within the same time period, but panic is indeed much worse that the fatalities. It seems that the adequate number of tests are now available. Hopefully once people see the number of deaths as a percentage of confirmed cases after the data is richer in a week, they will start to question the wisdom of continued shut down beyond what seems to be minimum 2 weeks for now.

https://www.worldometers.info/coronavirus/country/us/

44% of US cases are in New York.

We need a treatment

Based on what’s been happening in other countries and what’s been happening here,I think this shut down will last well past April, and probably into May

Turns out having our capital tied up in our Turtle Bay illiquid coop just happened to be a wash. Scheduling closing on sale now and for once appreciating the length of time the board approval process took.

It could be a lot worse. Would you be a buyer right now at the price you are selling at?

I doubt NYC real estate will be immune.

Peak-to-peak, RE valuations went up 10%. Rents did about the same. ZIRP made owning appear cheaper, but it also increased supply. People banking on cheap loans & 4-5% appreciate rates missed the point that the cheap loans were intended to juice production (which is GDP) not valuations (which is not GDP).

So what’s changed here?
- Valuations are still poor, though the early drop in prices based on non-macro factors has helped some.
- ZIRP is still ZIRP.
- The bloom has come off “if it’s gone up in the past, it must go up in the future”.
- Immediate activity is at a standstill (no showings)
- Recession is here
- Employment concerns are here
- Stock wealth is reduced

Who’s going to step up? The valuation-agnostic folks invested in stocks are down in wealth & light on cash. The valuation-gnostic folks who stepped out of the market and are sitting on cash are looking for value.

Nada,
If I may add to your increased production comment - it flooded the market with ultra-luxury and other high-end new construction as the capital was cheap. Buy vs rent for this segment including call it 10-20 percent ownership freedom premium still does not work as opposed to most resales where buy vs rent works pretty well (7-10y hold) in favor of buying.

Do you think rent vs buy ratio has shifted in the non-ultra segment in the past ~10 years? From my spot-checks, it seems to be in the same place.

In the ultra segment, it has certainly shifted in the direction of buying (prices down, rents flat), but nowhere near making buying favorable IMO.

Also, what do you assume for RE appreciation rate & return on down payment (if invested elsewhere) these days?

George as I see it prices held steady on UES in the 70's. People were doing all kinds of things like scouring obits to find a vacant rental in Manhattan plus there was the weekly stampede when the Voice published the latest rental classifieds, no doubt helped by warehousing. 1980's saw major sales increases up to the '87 crash when the city was still trashy. Today you can go Uber to Uber place to place no waiting on the sidewalk at all. And as I mentioned before buildings can start hiring armed guards for lobbies if it gets to that point. People of means will make their own decisions. It's why Google Amazon etc. are here at all because talent is demanding to live here.

10y back was 2010. So tricky comparison. Prices and rents were both depressed. If you were to pick basic luxury doorman rental building (950-1100 sq ft), rents are up 20 percent over last say 7-8 years and your payments are down 10 percent after factoring in increased real estate taxes, prices, and reduced salt deduction due to much lower interest rates. 1 bed room renting is even worse. There has clearly been reduction in ultra-luxury (call it more than $3500 per sq ft) prices by say 15-30 percent and rents probably are the same or higher but renting is still cheaper by at least 10-30 percent. In my buy vs rent, I assume zero cost of capital and zero expected return. Otherwise, individual views will change the calculations (they should) and it will become very complex asset allocation decision based on asset vol, correlation, risk tolerance, ever changing relative asset expected returns etc.

@30yrs - The answer to your question depends in whether I needed a place to live un NY. If I did, yes, I would be a buyer of our apartment at the price it is selling at because I would not be able to find anything comparable in the rental market. It hits all of my personal preferences. I don’t think those align with a large segment of buyers by any means, but I am pleased that our buyers feel as we do about the apartment. They are eager to close.

>> In my buy vs rent, I assume zero cost of capital and zero expected return.
In that case, all-cash purchase becomes optimal.

I assume 25 percent down payment typical of non ultra luxury buyer in Manhattan. All cash-purchases are indeed optimal for some very rich or very risk averse people (think of people with more than the amount of their potential real estate purchase sitting in cash like investments earning sub 2 percent before taxes and sub 1 percent post taxes) as they feel that they have enough risky investments despite that cash like investment).

I want to pose this scenario.

Let's say we turn the corner by Q3/Q4 based off of GS's analysis. We had a lot of buyers come out of the woodwork in Jan/early Feb. Let's assume these buyers 1) had their potential down payment in the stock market and 2) have their income(s) of 200k. At that income level, it's highly unlikely that they will be losing their job(s), so we can assume that they will still be earning income and saving the majority of it during this pandemic. Assuming the stock market drops 50% from ATH, their potential down payment, let's say 200k, has now dropped to 100k. In this worst case scenario where the buyer sold at the bottom of the market, they would still have about 150k in potential down payment money by Q3/Q4, assuming standard taxes and minimal spending.

Assuming we are going to turn the corner within this year, real estate should be ramping up again with buyers taking advantage of lower interest rates, better deals, and a potentially larger deposit (assuming they didn't sell at bottom and decreased their spending).

Thoughts?

Are there that many people to keep 100% of the down-payment for their expected home purchase (call it 1-2 year time frame) in stock market? Most financial advisers would have recommended keeping big chunk of down payment in cash/like instruments.

300,
The problem with "rents are up 20 percent over last say 7-8 years" is that I haven't seen a single index that takes into account the shift of renters paying a 15% broker's fee to owners paying the fee in that time period.

Believe Related were always no fee. Wondering what the average rent increase is for them on a net basis across Manhattan. I do not have any data on them. Renters are clearly paying less in fees and increasing number of buyers are also getting rebates.

A decade ago it was hard to find a "No Fee" apartment in Brooklyn and today it's 2/3 of the listings on SE.

300, I was pointing out a consequence of your zero cost of capital. Why pay the bank any interest at all when your own money is free?

As far as I can tell, rents are roughly where they were at the last peak in 2008. So are prices. So are assumptions of people like you, so are the assumptions of people like me. What’s changed to make it different this time?

ZIRP going into it was missing last time, so that’s a negative this time. Always-goes-up mentality was there last time, it’s missing this time.

Everyone is attempting to make historical comparisons in an attempt to predict the future. We can't. I don't think there are any, and we'll end up in a very different place than we ever imagined. Life will go on eventually, but 300, I think we're a long way off from getting freedom of movement. Unless, underscore, we get to a much quicker and easier testing program. For now, there's no safe asset except cash, and I expect another leg down in the financial markets.

jas, 300 & I were having these same discussions a decade ago trying to predict the future that has now become historical. So please humor us ;).

I feel like I'm in groundhog day! I sell a decent amount of real estate every year, 40-50 deals, get to speak to a lot of people. A big part of this is emotional, they want to own their home. They want to own the place where they raise their children, live their lives. I also get to see a inside peek at their finances, most are spending a small percentage of their total net worth on buying a home. And then they have varying degrees of mixes of cash, bonds and stocks.

And perhaps with good timing and a little luck the home that you create your life in will wind up making you a little money. And while pandemics are raging, stocks are crashing, you can ride it all out in the comfort of your own home. And if that intangible feeling of comfort of home ownership doesn't mean anything to you, you can ride it out in your rental :)

I personally think it's a sound financial strategy to own your home, keep a third of your funds in cash and put the rest in the s&p 500. That works well for me, however I also known an investment property.

And I'm pretty conservative, a big advocate for living below your means.

That said let the argument of buy versus rent rage on!

Keith Burkhardt
TBG

Ned Ryerson!!!

So good!

So glad to see Inonada and 300_mercer at it again.
Also, keeping myself honest, I just ran the numbers from the date we purchased the apartment we are selling, and there is no question that as of today, the capital would have done significantly better in even our relatively conservative portfolio than it has done in the coop. Even though there wouldn't be huge appreciation due to recent events, the capital would have been preserved with modest appreciation. Even so, we still wouldn't have done anything differently because the hit that we are taking on the apartment is the price we were willing to pay for control of our home (and keeping myself honest again, while I say "we," Mr. MCR might have another take but for the "happy wife happy life" philosophy).

MCR: That's the single most powerful force in real estate . :-) Probably one of the reasons why the rent vs. buy math is almost irrelevant for many people.

Any way you look at it, there's going to be quite a few estate sales coming up in the market at all price points.

consider the following market variables:
- Impact on employment, wages, bonuses, etc.
- Mortgage interests at 0% interest
- Impact of tourism reduction to condos for rental
- Short/medium term borders restrictions and impact on tourism
- Medium/probably long term ban to Chinese citizens which are not permanent residents and used to be buyers in luxury condos
- People locked in their small units in Manhattan reconsidering living in an open and bigger place, impacting NYC sorrounding boroughs
- Working from home

Definitely there will be areas where places will increase and others where prices will lower. I don't see any appreciation in Manhattan and I do see some in boroughs like Queens, Long Island and NJ..

And there could be a great cultural flowering if commercial rents go down and things like experimental theater groups etc. come back.

@stache - The arts scene in Detroit has been on fire for years. Good things can come out of a city's bottoming out.

But take a look at how far rents would have to fall to be back at the levels they were to attract those businesses. It would be devastating.