Neal Bawa – Disruptive Trends In Real Estate! Ep. 247

Synopsis

This is Neal’s second time on the show; he was here on episode 69 when we discussed utilizing data-driven approaches to find different markets.

For those who missed Episode 69, Neal is a data scientist. He analyzes massive data sets to determine the best places to invest in the United States. His work also includes identifying the finest asset classes. Join us in this episode as Neal shares with us the disruptive trends in real estate.

Key points

Recent Updates in the Market

Multi-family rentals have increased by 2% annually in the previous three decades. During the following ten years, they had a 3% growth. Their growth rate grew by 12% in the last year, six times more than the 30-year average. Given these figures, multi-family occupancy should be declining; yet, last month had the highest occupancy in multi-family history, with 97.3% of all units filled. We are now seeing the highest rent growth and occupancy rates in history.

In another story, capitalization rates in the United States are compressing at a pace never seen before, although we have been experiencing cap rate compression for the last ten years. We know that lower cap rates indicate higher prices, so we want cap rates to decrease. They’ve been falling fairly steadily over the previous decade, but they’ve been dropping at an unbelievable pace in the last six or seven months. Class C assets that are 50 years old are now regularly selling at a 4% cap rate. These are value-add assets that people expect to add value to, but no one was selling class C assets at a 4% cap before the pandemic.

Additionally, we have seen fewer delinquencies over the last six months as more people return to work. The government continues to offer substantial assistance to tenants who cannot pay, especially in blue states, contributing to the current figures.

Growth in Multi-family Rentals

There are now 333 million people living in the United States, of which 210 million are employed. The remaining population comprises children, the elderly, or individuals who don’t want to work. Amongst those 210 million people, around 80 million are white-collar workers or those who sit at a desk all day. About 22 million of the 80 million people no longer have to go to work on-site, which means they may work anywhere they want. Of them, around 2 million individuals, or 10%, have already relocated, and the movement of those people had a considerable influence on the real estate market.

What will happen when the remaining 90% leaves? The movement is expected to occur in the next three to four years due to the concept of hybrid work, where employers either just allow employees to work from home or give them a lot of flexibility on where they want to work. We are now in the first year of this hybrid work experiment, where 300 million CEOs worldwide run their companies remotely because they had no choice. This concept turned out to be very beneficial for multi-family housing. It isn’t good if you’re investing in gateway metros like San Francisco, Los Angeles, New York, Boston, or Miami—the big gateway metros—but it’s great if you’re investing elsewhere. And if you’re investing in tertiary markets, it’s phenomenal for you because they’re now in an 18-month accelerated time frame.

Taxes

Is it becoming more difficult for some landlords to hang on to their properties as prices soar? As long as the growth is constant, living in a fast-growing area, according to Neal, compensates for the massive increase in property taxes.

Is Real Estate Expensive?

From 2011 through 2020, the real estate market had a phenomenal run. Everyone who participated in the race earned a lot of money. During this time, the Federal Reserve printed $4 trillion worth of money which they called quantitative easing. They started buying mortgage-backed securities amounting to about $4 trillion, so the real estate market rose for ten years.

In 2008, the financial crisis was not a global disaster; instead, it was a U.S.-based crash. Other countries went into recession due to what’s happening in the US, but there was no global financial crisis. When COVID occurred in 2020, it was a global collapse. To minimize the damage, the world, as a group, has plugged in $15 trillion of liquidity into the global financial system. The question is: if $4 trillion generates a 10-year boom, what does $15 trillion lead to?

Neal believes the answer lies in the current price of bitcoin. Despite being a speculative asset, Bitcoin provides insight into where the market is headed. Bitcoin’s price has risen from $7,000 on January 1 of last year to $63,000 today. So bitcoin may be worth nine times more because we’re printing money and want to buy some kind of fixed asset, but real estate, which is also a fixed asset that generates income, has only gone up by 40% in the same time, and we’re concerned about it being too expensive? People fail to understand that growing real estate prices are due to changes in macroeconomics and other variables unrelated to real estate. If people want to know if real estate is excessively costly, they have to first look at macroeconomic trends.

Fallacies

Many people believe that if income increases by 3% per year, rentals can only increase by 3% per year. According to Neal, the majority of pay increases are going to two things: rent and food. They will not acquire new technologies or purchase new cars since people are doing so with their current income. Half of their new pay is going toward rent and the other half toward food allowance because of inflation in food prices. What is occurring now, and has been happening for over a decade, is that 50% of all additional income is going to rent, which implies that if incomes rise by 3%, rents may climb by 6%.

References

More from our guest

• If you want more information from Neal, you can visit his website at multifamilyu.com.