How people use space is constantly changing, and the pace of that change may increase. Outperforming requires more work today than yesterday, and deal flow is critical, but not at the expense of execution. It takes far more work than running a stock or bond portfolio. In that context, I think the call for lower fees by investors, similar to what has happened in liquid assets, is disastrously misplaced. This is an operating business of wildly heterogeneous assets. We’re not picking stocks. We’re running businesses.
What is the biggest single risk you see?
State and municipal budgets are strained. Taxing authorities view real estate as a piggy bank and have become very aggressive in reevaluations. Whatever your pro forma assumes future taxes will be, it’s probably too low.
THE NEW REALITY
Any final thoughts?
Institutional real estate investors may be best served by evaluating their opportunity sets into the two broadest possible categories: liquid and illiquid investments. Technology, access, and the regulatory environment is changing both areas, but they are doing so in different ways. Surprisingly, some of the big changes are happening faster in illiquid assets, like real estate, than in liquid assets, like stocks. From my vantage point, illiquid assets are more attractive long term than liquid assets. The advent of crowdsourcing platforms, the emerging “democratization” of real estate, and even real asset-backed cryptocurrencies will push more individual investors into real assets, and this trend is only just beginning. Remember that equities really took off after the 1981 IRS ruling allowing the funding of 401(k) plans from employee salaries. It’s been a great ride, but success always breeds its own destruction. Most stock portfolios are not diverse, simply because they are all diverse in the same way. When everyone uses the same techniques for diversification, what I call “copycat diversification,” then nobody is really diverse. And this creates far more volatility in liquid markets than people have historically assumed. Volatility is a risk, and liquid assets will continue to have more risk over time. REITs aren’t real estate. I like buying and owning stuff I can’t easily sell, and I think the benefits of illiquidity will soon become widely available to anyone with a 401(k). Every share of a listed stock is the same. But every private real estate deal is different, and good managers have the potential to create value every single day. I don’t experience the ups and downs that come with owning liquid securities that I can sell at the push of a button. Liquidity is neither good nor bad; it is cheap or expensive. You should know what you are paying for.
A LOSS OF PURCHASING POWER
Here is a fact for you: Retirees today are poorer than retirees back in 1979, thanks in large part to the persistent lack of purchasing power that has developed over the years. The declining strength of our currency has impacted every retiree in America. It is time to calculate a real interest rate by subtracting this ongoing inflation! Prices continue to rise as your purchasing power has plummeted all the way up to your retirement. The simple fact is your dollar is buying less, and your savings are not growing at all. With an interest rate of virtually zero, for every year that passes, you lose your life savings. Any wise pensioner has already realized that something needs to be done. Back in 1979, the average pensioner with $100,000 in savings earned enough to support a good middle-class lifestyle while maintaining their capital integrity. Now, a million dollars in savings does not earn enough in real interest to pay so much as a gas bill. To lead a middle-class life on this kind of equation means that you would need $100 million! With hyperinflation, the price of capital has gone up 1,100 times in just 35 years. Capital, therefore, is no longer producing for conservative investors. Saving is sitting down, and in this volatile market, you need to stand up and take riskier actions to secure your financial future. More to come ...
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