What is going on in the investing world?

Are wealthy investors selling stocks, buying properties and keeping cash ready? I am hearing clients say most asset classes are fully to overvalued at the moment.

Client with deep portfolios are beginning to sell stocks, or not buy more stocks. Instead they are opting to place their cash into single family homes, triple net properties or on the sidelines laying in wait for a decline in the economy. To boot, one client let me know yesterday he thinks there will be a deep recession in the next two to three years. What to do when asset prices have soared thanks to historically low interest rates and a soaring jobs market? Most people I know are sitting on the sidelines saving cash for a time when asset prices become more reasonable.

The number one determinant for real estate prices are jobs. With the job market continuing to be robust, real estate prices should continue to find support for the time being. If jobs begin to get cut, look out below. There are recent high profile companies announcing lay offs. These companies include, Lowe’s, Amazon, Credit Suisse, Deutsch bank, JP Morgan to name a few. Political turmoil may add to this momentums of layoffs. A very talented hard working and experienced friend of mine in the manufacturing business based out of Hong Kong has let me know the recent political turmoil ranging from a US trade war with China plus Hong Kong protests have led many Hong Kong companies to declare a hiring freeze. The mayor of Hong Kong recently warned the protestors they are ruining the city and economy. Cathay Pacific reported cancelling 140 flights in one day in and out of Hong Kong.

Against this back drop, how is real estate to perform? Long term is no longer a sure thing particularly with commercial real estate. Examples are the recent filing for bankruptcy by the venerable and proud purveyor of luxury goods, Barneys. The ripple effect of this are felt throughout commercial real estate. Who will be able to survive to pay the high rents asked in and around 660 Madison Avenue? How many pairs of luxury pants and shoes does Barney’s have to sell to make rent each month? Think about Tesla, ambitious with pools of burning cash renting commercial spaces to showcase their flagship models S, 3 and X. In a recent move to save cash Elon Musk declared Tesla would be shutting most of its brick and mortar store fronts. Seems someone forgot to tell Mr. Musk Tesla had signed leases for these spaces which legally binds them to continue with the terms of the lease. The landlords let Tesla know this and lo and behold the Tesla Brick and mortar stores decided to stay open. From Bloomberg: “In Hawaii, the Tesla store at the International Market Place in Honolulu reopened Monday after shutting its doors on March 3, according to Taubman Centers Inc., the real estate investment trust that oversees the lease. A smaller store in Palm Desert, California, which closed March 2, is slated to re-open, a Taubman spokeswoman said…. The company reported having $1.6 billion in operating lease obligations in its latest annual report, with $1.1 billion due by 2023.” Does $1.1 billion in lease obligations sound like a lot? How many cars does Tesla need to sell in order to meet just the lease obligations by 2023 not to mention interest on its debt. All things to consider when choosing a tenant. Barney’s and Tesla at a point in time seemed like the hottest most fashionable tenants a landlord could hope for. Does fashionable and hot at the moment pay the rent long term? It would do landlords a great service to think long and hard about what tenant could be everlasting.

Another client of mine who is a seasoned and experienced commercial real estate investor of over 50 years said “I am scared”. He owns a Walgreens NNN property in Ohio that has gone dark. 15 years remain on the lease. Walgreens offered to buy him out for $5 million. He said no. He is gradually selling his investments and purchasing single family homes. His rational is this diversifies his exposure. He no longer has the stomach or instinct for a single NNN tenant. More on investing thoughts later for commercial real estate. Do your best and prosper.