by recentricrealty | Jun 23, 2022 | Capital Markets
The Federal Reserve has decided it’s time to start fighting the worst inflation since the 1970’s, by announcing on June 15, 2022, a 75-basis point increase in the Federal Funds Rate. This is the largest increase since 1994 and one that should not be overlooked. To give you additional historical perspective, the 10-year treasury is the standard to which most lenders in the commercial real estate industry peg their loan rates, and today this number stands at 3.25%, and has increased by 117% in 9 months. Here are a few indicators to provide insight as to where the industry is heading.
Negative leverage in commercial real estate
The single most important aspect of investing in commercial real estate is net positive cash flow. Negative leverage is when the capitalization rate is less than the interest rate assigned to the debt. This becomes an untenable situation for investors. If a buyer currently has a property under contract, and has yet to lock in an interest rate, they may have to trade down on the price, or walk away from the acquisition.
Possible Outcome 1: More properties coming back on the market at lower prices.
Commercial loan term cycles
As interest rates rise, and debt becomes more expensive, overzealous buyers who paid a premium at the top of the market, and leveraged with debt to excessively high levels, are now being forced back into an increasingly hostile debt market with tighter lending criteria and more expensive debt service. According to Trepp, an estimated $450 billion in CRE loans will mature in 2022, a new annual record.
Possible Outcome 2: More properties falling into default by lenders.
Small Business Defaults
Higher interest rates not only affect real estate markets. They affect small businesses that rely on debt to finance their business, from receivables, to equipment and leasehold improvements. According to Markus Lahrkamp, a managing director at advisory firm Alvarez & Marsal, “The first wave of real distress is probably going to hit us kind of mid-year. For the first ones, they might have too much leverage, they were not prepared, the companies were not operationally sound. And then from there, it will probably trigger into more and more.” When businesses don’t pay rent, commercial real estate suffers. Watch the Business Bankruptcy Meter to help determine the health of the overall CRE market.
Possible Outcome 3: Small business bankruptcies may cause more commercial real estate to default on loans.
The inflation tax is inescapable, and extremely hard on the poor and middle class, especially seniors who live off fixed income. We could argue who caused this inflationary environment, but I would rather talk about how to profit from predictable factors that may cause distress in the commercial real estate market.
Disruptions in the marketplace are when opportunities arise, and this may be one of the best times to start thinking about where and who to invest with in commercial real estate.
by recentricrealty | May 26, 2022 | Articles, Capital Markets
The US economy seems to be at an inflection point and heading downward. Inflation rates are reaching levels we have not seen since the late 1970’s. The US consumer, which accounts for two-thirds of our domestic economy, is struggling to keep up with the cost of living. The easy money policies of the American central bank are coming home to roost. Many experts including Elon Musk are calling for a recession.“This will probably be tough for some, and this might go on for a year, or may be 12-18 months.” Cryptonewmedia.
Instead of hiding from the storm, now is the time to create a plan for investing before the recession begins:
Dance 1: Keep your powder dry.
Now is the time to start paring back on non-essential purchases (this does not include Fine Wine for those wondering). Call for a family or company meeting and discuss ways to cut back and start allocating money to a “rainy day investment fund.”
Dance 2: Choose your dance partner now.
Sam Zell, the king of commercial real estate, made his fortunes in down economies. In his article, the Grave Dancer, he illustrates the eerie similarities of today and the high inflation environment of the early 1980’s, real estate oversupply and a short term infusion of capital into the markets. Do your research now to align your interests with investment managers who focus on opportunistic areas of real estate. As the markets begin to stress, opportunities will begin to materialize. When there’s blood in the streets, that’s the time to buy. Recentric is in the process of exploring an investment fund to capitalize on distressed market conditions, should they arise. Stay tuned for more information.
Dance 3: Move those inflated investments to gold.
While gold may have lost its luster to the cryptocurrency industry, no other form of currency has as much of a history as a tried-and-true medium of exchange and store of value. For example, during the Great Recession, the value of gold increased dramatically, surging 101.1% from 2008 to 2010, according to a report from the Bureau of Labor Statistics. Be sure to consult with your investment adviser before making any decisions with your stock portfolio or any other investments.
In my April 2022 newsletter article, Control What you Can, and Plan For What You Can’t, I explained that you can create a plan for things you can’t directly control. We have seen this movie before, as recently as 2008, and we know how the movie ends. If we know we are going into a recession, you might as well not hide from the storm, but instead dance in the rain and when the clouds clear, you will be in a better financial position.
by recentricrealty | Apr 27, 2022 | Perspective
Life can throw some wrenches your way, especially when you live in a post-pandemic world with financial uncertainty on the horizon. When it comes to your financial game plan, it’s always a good idea to focus on areas where you can direct the course of events. When you are unable to control a situation or outcome (like most things in life), it is best to have a plan to deal with it.
Here are three myths and ideas to have a strong plan for the uncontrollable:
Myth 1: Controlling People
I have learned from operating companies as large as 50 employees, that you must focus on people’s strengths, and accept them for who they are and how they operate. This applies not only to work, but to every single relationship in your life. Fortunately, I was raised in a high acuity personality environment. My mother analyzed personalities for a living. Barbara is an expert consultant helping large companies to analyze personality profiles which help them understand why people behave in certain ways, utilizing the DISC system. Additionally, we have been using the Culture Index extensively through our business partner, Don Dalrymple in very effective ways.
You cannot change people, nor should you try. Understand how they operate and bring out the best in them.
Myth 2: Controlling the Markets
If you decided to sell your real estate back in November 2016 because the S&P/Case-Shiller National Home Price Index pointed to the top of the market, you would have missed out on the largest real estate bull run in the history of real estate. The Index climbed from 184 to 284 in four years. When planning for real estate, you must consider liquidity needs, demographic growth projections, and tenant rental income.
Devising a plan to continue to cash flow your property over 10 years or more is the best way to accumulate massive amounts of equity without worrying about how to time the markets.
Myth 3: Controlling the Government
As discussed in my previous blog dated April 21, 2021, Uncle Sam’s Deadliest Tax, Inflation, we are currently witnessing unprecedented inflation as a result of relentless deficit spending and irresponsible fiscal and monetary policies coming out of Washington DC.
You can hedge against the government’s predictable tax, print, and spend policies by investing in real estate, commodities, and non-US denominated foreign stocks and currencies.
We all want more control, but at the end of the day, what matters most is that you have a plan to manage the challenges in life that you cannot control. This will help you to enjoy your life in a way that is much more stress free and informed. And when you have your plans in place, I recommend the following book by Dale Carnegie, How to Stop Worrying and Start Living. One of my favorites.
by recentricrealty | Mar 22, 2022 | Capital Markets
Predicting the financial future of the world is impossible but paying attention to certain historical trends which are repeating themselves right now can indicate where the future is heading. And then throw in the likes of digital currencies such as Bitcoin, that have no allegiance to any sovereign nation, and you get the feeling that all currency hell is about to break loose. Paying attention to the following indicators can help you start to make moves to protect your portfolio.
Keep your friends close and trading partners closer
The US trade deficit measures the net balance of imports vs. exports with a particular country. The following chart shows the extreme imbalance the US currently trades with China, which makes us vulnerable to trade wars and supply chain disruptions. On top of this, we are exporting our US dollar for goods that are imported. Should China decide to no longer to accept the US dollar as payment for goods, we could find ourselves in an unwinnable trade war.
Dollar Warfare
As US fiscal and monetary policy of massive dollar printing continues with the Biden administration, the inequities between the rich and the poor have accelerated. This social instability is seen as a weakness by our global adversaries. In fact, according to CurrencyTrading.net, there are seven nations planning a dollar coup against the United States which should raise alarm bells for our citizens: China, Saudi Arabia, South Korea, Venezuela, Sudan, Iran and Russia. Should China alone call in its approximately $1 trillion in US debt, the demand for the dollar could plummet, disrupting markets worse than the 2008 financial crisis.
The Black Swan – Cryptocurrency
According to author and hedge fund manager Ray Dalio, in his book, The Changing World Order, the last three major powers who held global reserve currency status were the Dutch Empire in the 1600’s, the British Empire in the 1800’s and now the United States Empire which has held reserve currency status since the 1930’s. Many are predicting that the Chinese Yuan is the next currency to be held as a global medium of exchange. However, it may not be a sovereign nations’ currency which holds that next top spot. It may be cryptocurrencies because of their decentralized nature, transportability across national borders, and the fact that they are impervious to government corruption.
There are some strong warning signs that the 200-year run as the preferred global medium of exchange for the US dollar may be coming to an end. I would strongly encourage you to watch this video, from Ray Dalio to understand historical trends and how it relates to the rise and fall of global powers. History has a way of repeating and recognizing the patterns in modern day life could be the best way to predict your financial future. However, this historical shift may have a crypto twist!
by recentricrealty | Feb 24, 2022 | Articles
Have you ever reached into a coat packet to find that a $20 bill you lost a few years ago had turned into a $50 bill? Or, you hadn’t driven your car for a few months and the gas tank went from half full to completely full while just sitting in your driveway? It happens to me all the time . . . in my “alternative” world. When it comes to investments, wouldn’t it be nice just to write a check, and let those dollars grow without doing anything? The world of alternative investments can do just that and may be something you’re missing out on!
The one thing I have learned in my 30 years of investing is that if I want exposure to alternative assets, I leave it to the professionals who make it their business to master the art of these asset domains every day. Here are some examples of investments to help you get “Alternative”!
Secondary Investments
Secondary investment funds such as Akkadian, High Gear and Ion Pacific offer the accredited investor the ability to invest in late stage, pre-IPO companies such as Uber, DocuSign and Boom Supersonic. Essentially, these companies approach founders and early employees with the opportunity to sell some of their shares at a discount to realize a liquidity event. This allows them to enjoy some cash now for all their hard work, while the remainder of their shares await a major liquidation event such as a SPAC buyout or an initial public offering. The multiples on these investments can be tremendous with very controlled and mitigated risk.
Private Equity Investments
Private equity real estate firms such as our company, Recentric, offers accredited investors the opportunity to invest directly into medical office buildings in the Western region of the United States. We offer units of investment directly into the Limited Liability Company that acquires such medical office buildings. This investment vehicle offers exposure to one of the safest sectors of commercial real estate, with a 7–10 year horizon. This provides plenty of time to create equity for our investors that can hedge inflation and generate exceptional returns.
Blockchain Technology
Now, you may have read my newsletter Today’s Peacock is Tomorrow’s Feather Duster from July 2021. While cryptocurrency is still relatively new and no one knows its future as an accepted currency in the global economy, an indisputable fact is that Blockchain technology will transform the world in ways we never imagined with technology such as Web 3.0, MachineFI, GameFI, and DeFI. Since I started Winebid.com back in 1997, I have not had this overwhelming feeling of intrigue, excitement, and fascination with a disruption in our economy and literally the way we all function in a society. Fortunes will be made, and sovereign countries will be forever changed, and may even dissolve as a result. While the alternative investment options in this space are limited, I am committed to sourcing a reliable expert in the space to invest. Stay tuned on this topic in future newsletters.
Alternative investments can be very risky. I encourage everyone to consult with experts, do your own homework, and trust your instinct. If it’s too good to be true, it probably is. Having part of your portfolio exposed to unique investment offerings with competent and trusted sponsors may find you waking up one day, living out your dreams because you made the right choices earlier, than later. And if you ever want to grab a cup of coffee and talk alternative investments, I am always ready for that conversation!
