Wow, it has been a wild ride during this pandemic, who thought there would be a national run on toilet paper. Fortunately, those days are over. You can now readily pick up Charmin (or whatever you like). The market is also starting to witness this transformation with stay-at-home darlings dropping double digits. What does this transformation mean in real estate?
What was in the data:
It hasn’t been pretty for stay-at-home darling stocks. Four of the largest beneficiaries of the stay-at-home trend were Peloton, Zillow, Zoom, and Netflix. All four are considerably off their yearly highs and are an indication of what is to come. The economy is transitioning from stay at home to a more normal pattern and the implications for the economy are huge
- Peloton drops 40% last week
- Zillow: Drops 22%
- Zoom: Drops 50% from high
- Netflix: Fall 10% last week
“Nesting” is over for good
As I pull the last roll of pandemic toilet paper out of the back (you know the one you got at the grocery store that was some random brand, not even one ply that was the only thing available!) I can say with 100% confidence that the “nesting” phase of the pandemic is long gone in the rear view mirror. As shown above, pandemic darlings are old news with airlines, uber, Airbnb, and others now showing record growth as the economy transitions from stay at home to go anywhere. With vaccinations readily available, the nesting phase is long over and doesn’t look to make a return anytime soon. With nesting old news, the new phase is go anywhere and buy anything.
What does the end of nesting mean for real estate?
Regardless of all the hype that everyone is going to work in their PJ’s forever, the reality is starkly different where most workers will be back in the office 3 or 4 days a week. This transition back to the office (and in person learning) will force real estate to fall into old patterns centered around work and school. Don’t get me wrong, there will be some who stay remote forever, but the overwhelming majority will migrate closer to work and school.
What happens when there is a major “inflection” in real estate?
As a lender in the last recession, I learned some important lessons about what happens when the real estate market goes through a large change. Although I don’t think we will revisit a 2008 crisis, there will be winners and losers in this transition away from nesting.
As a private real estate lender and portfolio and service all our own loans and therefore we were forced into a front row seat in the last crisis. Like many lenders we lost money on certain transactions. What key lessons did we gain from the last recession that will be applicable in the current transition we are embarking on in 2022?
Many years later I’ve gone back and analyzed which transactions we got hurt on and which ones we did okay on in the 08/09 debacle to ensure we don’t repeat the same mistakes. When I look at our portfolio in the great real estate correction, there were clear trends that emerged. Certain property areas got hit considerably harder than others. Why did some areas fare well relative to other areas?
What trends emerged in 2008 that can help us in 2022 and beyond?
As I studied our losses in our lending portfolio there were three glaring trends that predicted losses. These trends are true for both commercial and residential areas.
- Consistency: the more consistent a neighborhood the better it fared during a downturn. I’m not saying all houses look alike, but most houses were well maintained and grouped at an average price point. Neighborhoods that had problems had outliers that were considerably lower than others. On the commercial side this was also a key indicator of success. Properties in uniform areas performed considerably better. For example, a building in an industrial park with many like properties did better than a property not in an actual industrial park but surrounded by different commercial property types.
- Closer to core fared better: Properties closer to the city core/ close in suburbs in good areas typically fared better and came back much quicker than other areas. There is a desire in many areas for city living and now close in suburban living as traffic has gotten worse and many companies have moved jobs back to the city cores. Denver and Atlanta are good examples. The closer in areas came back much stronger than the far outlying suburban areas due to demand and lack of new inventory.
- Euphoria (up and coming): Towards the end of the cycle it seems like every neighborhood is the next “it” neighborhood with speculation abound. These areas are much less solid than more established areas and therefore are at considerably greater risk during a downturn. In the pandemic boom everything was up and coming even if it were over 100 miles from employment centers. This trend will rapidly reverse just as it did in the last housing recession
What is the mushroom theory in real estate?
A mushroom can predict the trends above. Look at the shape of a mushroom, its colors, and consumption.
- Shape: A mushroom is much stronger towards the middle as opposed to the outlying parts of the circle. The closer you are to the center, the better you will be in the next cycle. This relates directly to the “closer to the core” rule.
- Consistency: certain parts of the mushroom are much more consistent in shape/texture than others. As you get farther out on the top of the mushroom the colors change, pieces fall off the sides, etc… Stick to the consistent areas to excel in the next correction
- Eating too many mushrooms : As we get towards the end of the cycle, there are always people that try and consume too much towards the end of the cycle and get into “marginal” areas. It is always the final mushroom that can make you sick. Make sure you manage your consumption towards the end of the cycle and not bet on marginal areas that could turn the other direction. Moderation is key to success this late in the game!
Summary
Just as the snow is starting to fall, the economy is making a big change as well as the “nesting” phase is rapidly ending. Abiding by the mushroom theory is critical at this junction in our economic cycle. Now is the time to be a little more cautious and focus on closer core areas to ensure you can weather the next storm. By following the three simple steps that I developed during the last crisis you can position your portfolio for the economic transition we are now embarking on.
Additional Reading/Resources:
- https://www.cbsnews.com/news/worst-downhill-day-yet-for-peloton-stock-after-35-price-drop/
- https://www.geekwire.com/2021/zillow-shares-tumble-ibuying-fumble-stock-plummets-22-not-say-sky-falling/
- https://www.marketwatch.com/story/zoom-video-communications-inc-stock-underperforms-friday-when-compared-to-competitors-01636147989-38fb89427a1a
- https://www.cnbc.com/2021/04/21/netflix-falls-on-q1-earnings-what-cramer-and-others-would-do-now.html
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).