The Future of Inflation in Real Estate
Author: Shawn Parker Sr, April 14, 2020
So, COVID-19 is here, the world is headed in a different direction than everyone thinks, or is it?
The smart investors are trying to make heads or tails of what all of this means to their portfolios and the future; not just for themselves but for the general free market system. What we can do is analyze what we know and how the markets should behave based upon the information at hand.
First, interest rates are classically explained as a “measure of risk." Since they are artificially low it should translate that there is no risk in the market. Well, let’s throw that textbook definition overboard for now, to the gasps of the PhD’s in finance!
Intermediation in the market has occurred at record levels. The vast money being thrown into the market should by all account cause prices to rise by themselves; add the fact that the investments are still throwing off cashflow are limited to pharmaceutical companies, grocery/food chain suppliers, and, yes you guessed it Real Estate. Old fashion, boring, shelter still pays because guess what, you can forsake the latest Nike shoes and the cool car, but you have to eat and you have to have a place to sleep and do business.
This means that the market will go back to the basics so far in time that it will stop somewhere between 1930 and 1939 to understand that real estate is real value and will continue to hold real value.
The run up in the stock market will not return swiftly, in my opinion. The profit taker who is sitting on all that money that drained out of the market (30 percent of the value) will re-enter in a steady flow so they get whacked. Remember, these were the people who were smart enough to exit the market at the first sign of COVID19 trouble.
Many of them will diversify and find predictable real estate to shelter in. They will seek high quality class A property in top locations. The only location that may be looking at real trouble is New York City. New York had been flat and topped out already on the real estate growth when looking at price per square foot in Manhattan and I don’t think people will be looking to move there in the short run. This will create buying opportunities in this sub-market. New Yorkers know the New York game, and there is vast international money there, so I suggest you let them play it out among themselves as it is generally an “inside” baseball game.
The $2.5 trillion (could be more) that has been placed into the hands of business owners and others will be used to push forward most elements of society. The challenge is that these funds will create a huge opportunity for the business owners to have incremental purchasing power. Many businesses could net benefit from the stimulus monies as they are being distributed. This will give immediate investment power to them once they deem the marketplace has returned to, “open status."
Manufacturing of critical industries absolutely has to return to our land. Small factories will creep up particularly in the red states that have the lowest overall tax costs. The south will continue to grow, and I believe that the traditional red Midwestern states will see jobs return. The political situation will reward Ohio, Michigan, Indiana, Pennsylvania and Wisconsin to secure those voting blocks with jobs. Minnesota will have to work extra hard and at the same time clean up the recently tarnished image of hometown hero 3M.
Additionally, as people look at what withstood the economy, their Disney and banking stocks may not look so shiny, but the businesses they drive by will have a new gleam. They will look at REITs and the smartest people will look for private equity or outright ownership opportunities.
I believe that this pressure will lead to property value increases of 5% to 8% a year for the next 5 years in quality markets. On top of this a continued near zero real unemployment, an infrastructure stimulus package that will be in the trillions. Real estate will continue to be the main vehicle that produces american millionaires.
Bottom Line: More money in circulation means prices rise. Real estate is more appealing than before, so it will go up fast. Foreign capital will continue to run into the US for safety.
Look out for reduction of capital gains benefits and 1031 benefits to help for the freight (not in the short term, but 5 years out as the government looks for a way to pay for it all).
Shawn Parker Sr. - Principal
Lonicera Management, LLC
April 14, 2020
More about Shawn Parker Sr.
Shawn Parker is Founder of Parker Realty Associates, and a Managing Partner in Lonicera (Private Equity Real Estate funds). Past President of the Ohio Commercial Real Estate Exchangors, and co- founder of the Ohio Neighborhood Preservation Association. Shawn has serves as Receiver to the Courts of Common Pleas and Municipal Courts on multiple real estate and operating business matters.