"What did we get for this $30 trillion of debt?"
“It worked until it didn’t.”
This is a buffet. You don’t have to eat everything.
“I don’t know that anyone really knows if our economy is booming or
if we’re in a recession right now and it’s a very strange time.”
Though the Nasdaq 100 sits only 6% south of its November 2021 peak following the index’s 42% year-to-date leap, a mere 14% of the IPO bumper crop from that year traded above their respective offering price as of Tuesday, Fortune reports, citing data from Renaissance Capital.
“Investors are no longer willing to pay gigantic multiples against future cash flows,” Joseph Endeso, president of private investment platform Linqto, tells Bloomberg. “Those things happened in the last bull market, but I think hard lessons have been learned.”
Where’s our Hoover Dam?
“We've just loaded $30 trillion in debt over the past generation - where's the Hoover Dam that we've built? What did we get for this $30 trillion of debt?...When you pile on debt, it has to be for productive stuff."
“Unwavering Support”
“If you look the highest education people, they’re reading the FT and everything that says, “Oh no, there shouldn’t be any inflation, that doesn’t exist anymore.” And so, they all believe it.”
And there is, there’s always uncertainty about these things. And the masses, who are seeing people make decisions that affect them, that these people are disconnected from, are getting really upset about them. That’s what’s driving all of this.
Meanwhile, it’s creating this circular bubble among the elites that’s almost reactionary. “Oh my gosh, they hate experts. Let’s tighten our ranks and further consolidate our control as experts, and revert to our models, and we believe in science and models.” And it’s like, “Yeah, of course we believe in science, but come on, have some humility. Accept that sometimes you’re wrong.”
That I think is a big part of the difference you see in that inflation. It’s just a microcosm of that. If you look the highest education people, they’re reading the FT and everything that says, “Oh no, there shouldn’t be any inflation, that doesn’t exist anymore.” And so, they all believe it.
Whereas to your point, the person on the street who’s like, “The price of bread just went up, I have to deal with this.” They notice it.
Marvin Barth with Grant Williams
“I dont know how people are buying all these new cars”
"What I found was arguably the shadiest, sketchiest outfit in the history of the hedge fund business, and that is not a phrase I throw around lightly."
- JG_Nuke (intriguing video about Nvidia, Coreweave, Magnetar, Blackstone and other black boxes)
See also: The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going
Blackstone unwound itself from a struggling multifamily portfolio and the threat of foreclosure last week, selling off a majority stake in 11 Manhattan buildings where rising rates had whacked revenues.
Buyer Atlas Capital Group scored a 51 percent interest in the properties for $142.4 million, PincusCo first reported. A Blackstone spokesperson confirmed the purchase price that also included $90 million in mezzanine debt…
“The sale basically means Blackstone had decided to move on,” a broker said. “Atlas controls the ownership and it bought the loan so it can take the properties pretty quickly.”
…Brokers extrapolated the $142 million purchase price for a 51 percent stake to peg the portfolio’s total value at $278 million — a 43 percent decline from the $487 million Blackstone had paid in 2015. PincusCo’s back-of-the-envelope math arrived at the same result.
That decline would mean the equity in the deal had been wiped out and the buildings were worth just $7 million more than the senior debt.
“High bond yields imperil America’s financial stability”
“…the threat is growing with every strong piece of economic data. Take commercial property…”
The situation faced by commercial-property owners may deteriorate even if the economy further improves. One or two extra percentage points of growth will bring back few tenants. But the resulting increase in interest rates will put pressure on businesses unable to refinance the debt they accumulated at low rates in the covid-19 pandemic. Newmark, a property-services firm, identifies a maturity wall of $626bn in troubled commercial-property debt (where the senior debt of the borrower is worth 80% or more of the value of the property) that will come due between 2023 and 2025. Without a let-up in the bond market, plenty of companies will smash into the wall. [i.e., capitalism is coming - rh]
The "A" special shares are held by individual shareholders including the Cadbury, Layton, Rothschild, Schroder and other family interests
Also, I’m told that the Agnelli family (Exor) owns 45%.
‘Riding the unprecedented wave of rent hikes’
“A buy-and-flip apartment investor acquired a pair of Atlanta area complexes less than two years ago riding the unprecedented wave of rent hikes triggered by the COVID-19 pandemic. But the Cobb County company could be facing a wipe out triggered by rising interest rates meant to temper inflation.”
You pays your money and you takes your chances.
“MSC’s website boasts of quick flips and sizable profits.”
These leveraged-up investors - whether in real estate, stocks, whatever - are so full of hubris and present themselves as geniuses when they can get money with “no limit” - as Kashkari told us - at zero rates, but they are then the first to cry for a bailout, either via a return to ZIRP and QE, or a more direct cash-infusion.
All the Barry Sternlicht CRE-types want is to keep their gravy train going, hence the cries for a return to ZIRP and QE. Screw the renters.
From Starwood last year:
"Our market rate multifamily portfolio experienced rent growth of 18% year over-year on new leases and mid-13% on combined new and renewal leases over the trailing 30, 60 and 90 days ended June 30, 2022."
“There are folks who came in late to the game and were simply trying to flip a commodity,” said Ladson Haddow, managing partner at Atlanta-based real estate consulting firm Haddow & Co. “It worked until it didn’t.”
“…Henry Lorber, a distressed real estate expert with Henry Lorber and Associates, said the rapid increase in interest rates could quickly upend the budgets of aggressive owners, while those with long-term strategies and deep pockets are more likely to endure.”
This is exactly how things should work.
Tides Equities
I mentioned Tides Equities in American Dream For Rent. Here’s a LinkedIn thread by ‘CRE Analyst’ on the topic:
TL;DR: "We wouldn't be surprised to see very significant levels of defaults, lawsuits, and/or expensive rescue capital.”
Tides purchased $6.5 billion of apartment properties in Texas, Arizona, and Vegas since 2020.
Google searches for "Tides Equities" are up 15x over the last year, likely due to an increase in headlines such as, "Tides Equities flew too close to the sun" (The Real Deal).
We recently created a case study on a Tides property in Austin that was purchased a year ago and is now 114%+ LTV, 0.4x DSCR, with a floating rate and near-term maturity, which made us want to keep peeling back layers.
“Cheap capital and capital misallocation go hand in hand like lock and key...We are living in the times of Icarus…Wings are melting all over the place...” - Broderick Adams
If you’re trying to get out of BREIT, they paid out 43% of your request last month. The good news is that the NAV might be a bit stale.
Bethesda-based development firm Washington Property Co. has defaulted on its loan tied to a 14-story Silver Spring office building, the latest in a series of distressed situations in the region's office market. The developer failed to pay off its $35M loan on the building ahead of a July 11 maturity date, and the CMBS loan was then transferred to special servicing and a letter of default sent to the borrower…
The building was underwritten with $4.3M of cash flow and 87% occupancy. The property lost tenants during 2021, and with 73% occupancy as of the end of 2022, its net cash flow fell to $2.8M…
The company isn't the only large developer to default on a D.C.-area loan in recent months as the region's office market goes through turmoil. Brookfield in April defaulted on a $161M loan tied to a portfolio of 12 buildings, many of them in the D.C. suburbs. Monday Properties in June defaulted on a loan tied to a $1B Rosslyn office portfolio. Last month, lender JPMorgan foreclosed on a Downtown D.C. office building at 1850 M St. NW owned by an affiliate of Manulife Investment Management.
U.S. Commercial Property Prices
U.S. CRE Distress Levels
Y’all got any more of that…Urban Doom Loop?
CRE Rundown: Transactions, Office Value Reductions, Puerto Rico Mall Loan Pay Off, Delinquency Data Trepp has probably the best regular CRE podcast. These guys are always glass half-full (which is understandable,) so it’s interesting to hear them now that the worm seems to have turned.
They are so preternaturally positive that I actually bookmarked their episode back in August 2021 as the epitome of the CRE and general real estate mania. In the current episode, “Peak industrial” is mentioned - industrial was considered the safest category of CRE in the last year or two.
“What are the next couple of years going to look like?”
Record Case-Shiller National Home Prices
Since the Fed's peak (so far) holdings of MBS hit $2.74T in April 2022, they've "run off" $242 Billion, about 8%, over 16 months.
In just TWO months in 2020 they monetized $500 Billion. At that time, Case-Shiller home prices nationally were up near 5% YOY, on their way to 22%.
The Fed owned no MBS until 2009.
As we’ve noted previously, the FOMC’s decision to “go big” in 2019-2021 ties the Fed’s hands today in terms of fighting inflation. If the FOMC was selling $50-100 billion per month in mortgage backed securities, then mortgage coupon rates would be over 8%, home prices would be falling slowly, liquidity would be reduced and there would be no need for further short-term interest rate hikes. And BTW, the markets could easily absorb the SOMA assets. But a chastened Chair Powell is not selling.
“In previous default cycles, leveraged-loan providers would expect to get 70% to 80% of their cash back from failing companies,” writes Lisa Lee of Bloomberg News regarding a leveraged loan loss by KKR & Co (KKR). “Those days are over.”
GenesisCare was an international cancer treatment company backed by the private equity firms KKR and China Resources Group. Earlier this year Genesis Care filed for bankruptcy under Chapter 11, with reorganization plans to sell its 130 U.S.-based practices.
Lee reports that KKR could take as much as 80% loss on debt to GenesisCare. This is a far higher loss severity that experienced a decade ago, suggesting that there is significantly less equity under later vintage deals.
Villa Bella homeowners in Pueblo express mounting frustrations at flaws in new homes
Matthew Hepworth has a leaking furnace and air conditioner combo unit. The water has soaked a portion of the carpet in a bedroom next to the utility closet. Leticia Sandoval’s home had broken floor joists and a section of shingles blew off her roof. Adrian Sanchez and his wife Louise had a broken air conditioner. A piece of siding has blown off Chris Bodemer’s home. His fireplace doesn’t have the required vapor barrier, and without it condensation could build within the walls and lead to mold growth. Patrica Garcia and her husband Esteban Gomez had loose siding flapping in the wind on three sides of their home. It took seven months for repair work to be done and “to this day it is still not fixed properly,” Garcia told the Chieftain. The homes are far from old. They were built by Richmond American Homes just one and a half years ago or less. Their costs ranged from nearly $400,000 to $600,000.
So I looked around for “Richmond American Homes”…Here’s Yelp:
Read the reviews yourself. I did see a positive review:
154 mostly awful reviews here too:
These reviews seem slightly more balanced, though the 5-star reviews seem A.I.-generated.
I see a lot of new construction going on now, and wonder if poor build-quality is a systemic problem. Another thing I’ve noticed is a number of sad stories of people who put deposits on new homes and then their builder goes bust.
…Green Hills is full of modest homes on spacious lots that have become prime targets for real estate investors to tear down, rebuild and sell. For those who could raise capital and stay organized through a mess of construction costs, invoices, contractors and leveraged debt, it was possible to double or triple investment in the upper echelons of Nashville’s boom housing market. [Cantillon-effect at work again here - rh]
Brian Layton couldn’t. His bankruptcy case has left a trail of million-dollar homes in visible states of disrepair across 12South and Green Hills. A spate of lawsuits has revealed tens of millions of dollars in debt spread out across a vast network of LLCs connected to Layton in various states of legal and financial trouble.
Scottsdale wants to limit amount of short-term rentals in community Good.
“The San Diego Case-Shiller index has the largest YTD increase in America, and is the only higher-end market with a 50%-plus increase since March, 2020!
A whopping 53.75% increase in three-and-a-half years!”
Meanwhile, in the UK: “UK house prices fell 5.3% in August compared with the same month last year, the fastest annual drop in 14 years, according to Nationwide Building Society.”
‘From mid-2020 until early 2022 when interest rates started going up, hedge funds bought up a ton of properties and immediately turned them into rentals, pricing out local buyers. Now a big portion of our homes are owned by investors, but they’re not adding to their portfolios.'”
“For 2 years the toilet has been flushing directly into the small crawl space.”
“You’re gonna walk away with a 15 percent annualized return.”
I can get that in crypto, no?
The Real Estate Hustle-Culture Con I see people mention this Grant Cardone guy often. Not personally that familiar with him.
A Cardone video from 2019: “You’re gonna walk away with a 15 percent annualized return. If I’m in that deal for 10 years, you’re gonna earn 150 percent. You can tell the SEC that’s what I said it would be. They call me Uncle G, and some people call me Nostradamus, because I’m predicting the future, dude: This is what’s gonna happen.”
The trouble with this sort of commentary is that Cardone is not Nostradamus—and guaranteeing a 15 percent annualized return is exactly what the SEC had warned Cardone against in a July 2018 letter the agency sent him—nearly a year before these dazzling claims made it into his video…
Cardone has ratcheted up rents, skimped on property maintenance, survived off wide-scale evictions, and engaged in dubious investment practices. While his mix of light entertainment, investment advice, and manosphere life coaching might seem fringe, his ability to thrive within the world of corporate real estate reflects a lot more poorly on the world of real estate than it does on Cardone himself. Funneling savings and retirement funds into an aggressively managed real estate portfolio only serves to inflate an already ballooning property market. Cardone’s rentierism represents a new evolution in the world of the financial influencer—and one more type of financial predator on the hunt for easy marks.
Good times…
'Where ambition goes to die': These tech workers flocked to Austin during the pandemic. Now they're desperate to get out.
The grass isn’t always greener on the other side:
"When we started hitting 2022, what we started seeing was people had a whole year here in Austin and they realized they don't like the weather," Fountain said. "It doesn't have what they wanted in California."
When he lived in Los Angeles and the Bay Area, Chang said he took for granted being able to go for jogs outside or go hiking year-round. In Austin, he's been forced to spend much of the year inside to avoid extreme temperatures and had to buy a treadmill to go running in the air conditioning.
"Literally, I can't leave my house during the summers," Chang said. "During the winter, it's freezing relative to California."
"The heat is something else," Sam Parr, a founder and podcast host who is spending his first summer in Austin, recently tweeted. "I'm shocked how much it bums everyone out (myself included)."
Thanks to Jim Davidson for some comments on my last post:
Happily, the stars are always there and so navigation, especially for coast running, remains possible. The prototype global positioning satellite was launched in 1978 but it requires at least three satellites in the sky at the same time for you to get a good position fix. The sats are at about 50% of the distance to geosynchronous orbit so not trivial to shoot down. Also they are not co-planar so you can't just blow up one and have the rest slam into the debris field the way you could with geosynch satellites.
The system of Navstar satellites was "complete" in terms of filling the design in 1993. Replacement and upgrade sats have gone up in the years since, totalling 75 of the birds. I worked on a bid for launching some back in 1987. We lost.
They still sell paper maps and navigation charts. I still know how to use them, the compass, the astrolabe, and the sextant. The astrolabe is not as versatile as the sextant but is easier to make from scratch. So the art of finding a path is likely to survive the metaphor of lost navigation knowledge.
Of perhaps greater concern is the loss of interest in reading. Younger people seem to be immersed in three minute videos and not interested in knowledge, rhetoric, logic, or language. Maybe a few still look at books?
A reminder that our financial media is generally awful:
“We can identify a new socio-pathological syndrome called The New Yorker Syndrome: if all is right on the Upper West Side, all is right with the world. In other words: since me and my top 2% pals are doing great, everything's going great.”
Rudy, what makes 2023 great is that I no longer have to choose between (1) reading the newspaper and being misinformed or (2) not reading the newspaper and being uninformed. There are many excellent independent thinkers, like yourself, to follow.
Seems I better caution my young adult son who enjoys reading the economist. Skepticism is a life skill in today’s world.