Your Millions/Billions of Dollars Under Management Will Soon Be Worthless
Next to procreation, bargain-hunting is surely one of humans deepest motivations. There’s a primal thrill in the prospect of using cunning to obtain a resource for less than its real value.
The bargain hunt and kill endorphin-rush support my crackpot evolutionary-psychological theory. In nature, the alpha individual must stay calm and patient in the throes of uncertainty. This is contrasted to the short-thinking masses who unload for pennies on the dollar at the first sign of disaster. Darwin’s theories need no further proof than one of these bargain hunter’s balance sheets to show who’s on top of today’s economic food chain.
(NB: Ironically, many of these bargain-hunters will overpay for instantly-depreciating luxury assets like yachts and S-Classes to prove how good they are at getting bargains on appreciating, non-luxury assets like stocks from an oil-barrack land-lease bond-derivatives short-sale-pool).
The ubiquity of this relatively-small but growing cohort of well-heeled, bargain-hunting, private-wealth investors compelled me to come up with a proper name. I call them the Ultra-Bargain-Hunter-Investor (UBHI).
The UBHI Way
“I have [/my office has] $___M/B under management diversified across several asset classes including real-estate.”
— Snippet from every UBHI conversation.
In the UBHI world, values are not expressed in the context of philosophical or organizational principles. The UBHI lacks a grasp of economic fundamentals. The UBHI has little forbearance of history — which was obviously not disrupted the proper way. The UBHI cares little about longterm asset and/or regional market economics and viability.
The UBHI can only grasp numbers, big-bucket categories, five-year-projections, and other generic factum that can fit into an Excel spreadsheet.
To dumb-down this already dumb thinking, I made a chart specifically for real-estate UBHIs. I call it the NEUTUN Matrix (New/Existing/Unit-Type/Unit-Number) (Graph 1); it covers most investment information the real-estate UBHI will ever want to know.
Using the NEUTUN Matrix, and adjusting for regional variation, a UBHI can authoritatively jive that a 100-unit, new-construction, Class-A multifamily-mid-rise in a prime market like Manhattan is worth more than the same unit-count in an existing Class-B historic, multifamily-structure in a third-tier-city like Grand Rapids.
That’s the thing, most UBHI I come across — and I come across a few — talk a mean game with lofty numbers. But they don’t know much about anything.
Whenever I drill down on the particulars of their holdings and deals, I find that the impressive numbers are interspersed with black-holes of liability that could swallow an entire UBHI universe.
Can you tell me about the general condition of the single-family homes or buildings in your portfolio?
Can you tell me anything about your tenants, what they do for a living, why they live in your building and not someone else’s?
Wait, you said your DTI ratio is what?
Can you tell me how your portfolio will fare in the event of a mass climate-event or migration-influx?
How will your hospitality-portfolio survive in an era without large-volume business travel; your student-housing portfolio in an era of remote classrooms; your urban-multifamily buildings in a Blade Runner scenario?
In the UBHI world, there is no room for hard questions, variables that won’t fit on a pro forma, or scenes that won’t show well in a pitch deck.
In the UBHI world, markets are evergreen and stable, catastrophic-corrections may arrive but they always lead to unfortunate societal problems and innumerable personal opportunities.
Not this time.
I don’t claim expertise on much outside of 80s and 90s high-end road bicycles and real-estate. I have deep personal, professional, and intellectual knowledge of these two topics.
While I love 80s and 90s bikes — and once thought the bike industry would be where I ended up— it was ultimately the real-estate industry upon which I hung my professional ambitions; this was done to the exclusion of other pursuits.
There is no “including” with me and real-estate. It’s the thing.
I made this choice late in life and after having worked in the industry for several years. I hold no real-estate degree, opting to learn the industry through involvement with deals, noting a decade’s worth of industry-observations, and doing a ton of writing and research. I did this as a minor player on development teams, both at startups as a team-member or an independent consultant for various clients.
It’s only recently I felt ready to enter a deal as a principal. I was initially reticent due to my lack of personal confidence in grasping the complexity of deals. That morphed into a reticence to invest too heavily in a market on the verge of collapse (well-founded, in my opinion).
For as long as I’ve been in the industry, I’ve extolled the necessity for a radical shift in the way real-estate is designed, built, operated, financed, and regulated. I have repeatedly warned that a failure of the industry to undertake this transformation would lead to — and is leading to — market, societal, and ecological collapses.
I knew mass-evictions were almost inevitable, driven by the ongoing, growing, and permanent unemployment of millions of redundant workers; that catastrophic climate-events will drive migrations, destroy vast amounts of properties, and leave huge, uninsurable areas in their wake; that police-state riots and looting were coming to (and have arrived at) areas that moments ago were investor darlings; that mass-depopulation will do away with the need for much of today’s real-estate, regardless of asset type of geography.
I take (a) little pleasure seeing my predictions come to pass.
The fact is that market conditions are far worse than the media lets on. Fears about angry mobs and food shortages are well-founded. US Election results will not be pretty no matter which way they go. Economic, political, and environmental instability could render most any of today’s real-estate holdings worthless.
So when I hear a UBHI boasting of their bloated portfolio unit-count and value, I bite my tongue.
UBHI on Cash
The assets the real-estate UBHI recently used as a cash-hoses have or are running dry. And the bargains they think they’re getting in this interim chaotic period — ones whose value is derived from a dead past and non-existent future s— will soon turn into money-sucking, tenantless liabilities to be managed or abandoned.
Contrary to popular rumor, there aren’t any bargains out there. There’s a ton of worthless real-estate. Some of it is quite new and shiny .
The reason for this situation, in my opinion, is this:
Roughly 80-percent of North America’s built environment should never have been built. Worse yet, 80-percent of jobs should never have been created. The global economy generally, and the American economy especially, rapidly expanded mostly because it had the debt to do so; this permited the growth of an economic and industrial apparatus that consumes more human and natural resources than earth and its residents can sustainably maintain. Now we are paying the bill for our over-drawn earthly accounts.
This hasty expansion is evidenced in North America’s building stock, which is mostly shabby, poorly-designed and engineered junk that will be worthless within 30-years, if not much sooner.
We have millions of decaying and toxic single-family homes in too-large, scattershot-drawn-lots; we have overpriced and cramped, oil-burning urban apartments sharing zip-codes with sky-scraping and vacant $20M marble-clad, three-bed condos, not to mention sidewalk-stuck and improvised homeless-structures; we have an unlimited supply of generic, high-VOC-materialed, PTAC-sporting two-and-three-bed apartments for UConn summer interns; we have comically-proportioned-and-designed McMansions in the exurbs; we have tracts of funereal 55+ units located in soon-to-be-swamp subdivisions; and, of course, we have new, cheap AF, code-compliant, balloon-framed, attached-and-detatched, single-family ticky-tacky-tract-boxes for soon-to-be-permanently-unemployed-thirty-somethings — placed wherever a cocky 27-year-old can get a piece of dirt and a $1.5M note for his initial construction phase, bolstered by his dad’s cash down-payment on the first fives units — used as rental income/tax-write-off and/or a place for son to live, of course.
These are investment staples for the real-estate UBHI and all of these markets are rapidly crashing.
My dad told me that if an investment tip made it to the mainstream media, it wasn’t a tip. It was a PR stunt.
I can’t help think of that truism when I hear of all the deal-making afoot: no one is getting any deals. They’re buying junk assets.
There’s no sale. The value is — and always was — $2 for that H&M t-shirt.
This precipitates the questions: What assets and industries will retain or appreciate value after the shit really hits the fan? Who will survive?
Tune into the next bat-episode for the answer.
But I’ll give a spoiler before the mathematicians in the house beat me to it: the best deals are the 20-percent of buildings and businesses that should exist.
Stay tuned as I further elaborate on that characteristics of that 20-percent. I will expand on how the real-estate industry and its development process can — or cannot — adapt to sobering, post-Covid market realities. I’ll also start outlining simple — but non-easy — solutions that’ll help pull the real-estate industry out of its present location in 2016 and shift it to 2020 and beyond.
[Update: This piece did not foresee Biden coming into office and allowing the issuance of $1.9T of FED-backed debt, most of which was used to bolster the exact lagging assets mentioned in this piece. What a dummy I am.]