A Real Estate Veteran Highlights Industry Trends
March 17, 2020
Joe Rubin, a senior advisor in EisnerAmper’s Real Estate Group with 30 years’ experience, examines the impact on the real estate sector of key economic indicators, liquidity, demographic trends, inventory and more.
DP: So give me a couple of economic indicators that you follow closely that have a big impact on the real estate sector.
Joe Rubin:Well, the first thing we always look for is employment, which drives demand across all the sectors of real estate. And of course today unemployment is really very low. In fact, last week we added another 273,000 jobs, which was way above expectations, so the employment market looks excellent. And of course the other great boost for real estate investing has been historically low interest rates, which seem to be getting lower every day these days. That enables investors to borrow more cheaply and it boosts up their returns.
DP:Okay. Now what are you seeing with respect to liquidity?
Joe Rubin:There are just enormous amounts of capital out there. Equity capital is abundant. We see ourselves though at the top of real estate market, so when we're at this point in the cycle, returns are razor thin. You really have to pick your spots and there's not much room for error. So everybody's a little bit skittish and there's over a hundred billion of dry powder waiting in the wings. Debt capital is also abundant. Everybody's lending money. It's coming from traditional and nontraditional lenders and it's being put to work as investors are very actively refinancing their properties and also doing work on the properties. The CMBS market is coming back strong last year. It's doing very well again this year. Mortgage REITs, real estate funds are all providing capital and so there's just a lot of money out there for real estate investing.
DP:So now whether it's tighter trade policies or something exogenous like let's say the Corona virus, what could the impact of that be on the real estate markets?
Joe Rubin:Real estate is a very cyclical business. I've been through many up and downs over my career. Everybody for the last number of years has been trying to guess what will turn this cycle. What I've learned is that cycles turn very, very suddenly when an investor wakes up in the morning and they suddenly say, "Oh, the risk environment today is different than it was before."
And so once that happens, yields aren't adequate and spreads could jump. Now the Coronavirus epidemic, if this continues to expand as people think, it's possible this will be the event that pushes up risk premiums because no one understands or has experience with this type of risk event.
DP:It's unchartered ground.
Joe Rubin:A sudden spread blowout could stop the commercial market dead in its tracks, just like what happened in 2007.
DP:Okay. Regulations are always a big area of conversation. What's the trend there? Where do you see regs going? Tighter, looser, tell us about those.
Joe Rubin:Well, I think maybe we're at a kind of even track on that now and in terms of tighter and looser. We just finished a period where there was increasing tightening. We finally have conclusion on high volatility real estate loans, HVCRE loans as they're called. The regulators recognized in the last recession that lending on land and construction projects is more risky than lending on fully occupied buildings. And banks should hold more capital to cover those loans. So that's in place now and I think as a result, hopefully those rules will help protect banks from being caught in the real estate downdraft.
Joe Rubin:There's also a lot of focus, of course on rent regulations in response to the affordable housing crisis in this country. In fact, last year in New York and California and post significant rent regs. The unintended consequences, however, is that real estate investors in those States have pulled back and they just don't know what kind of returns they can get. So the regs are not encouraging development, but instead took much needed capital away from the residential markets. I'm confident though, hopefully this year the governments will work with industry in developing new regs that will be more focused on promoting development of units for affordable and workforce housing.
DP:Okay, great. Let's change topics a little bit. Let's talk some demographics. Are we going to continue to see those in Gen Y flock to urban areas, to live in those mixed use buildings near entertainment facilities and transit hubs? Or are we going to start to see them move out to the suburbs and start raising families. The traditional model that's been in place for decades.
Joe Rubin:So the Millennials are 80 million people. It's a really big group. You can't generalize what they're going to do, but we find that typically they do like urban living and they don't want to be tied down. So rental living is actually a perfect solution for them. What will be interesting to see over the next few years is whether this translates to renting houses rather than buying houses. And of course the other elephant in the room that's out there is student debt, which now has topped a staggering 1.5 trillion dollars. It's handicapping a whole generation and it may prevent them from establishing the credit they need to buy homes. So the growing single family rental industry is waiting for them with open arms. In the past decade it's been institutionalized and consolidated and families can now more easily find high quality, well maintained rental homes, pretty much anywhere in the country.
DP:Yeah, it seems like a group or a demographic that is not as hung up on equity.
Joe Rubin:It's not. And they're also not as hung up on being predictable.
DP:Yeah. Yeah. Interesting. Okay. So now if you combine how more and more people are working remotely, and possibly throw in a possible economic contraction in the not too distant future, do you envision any kind of glut of real estate inventory? If so, where will that take us?
Joe Rubin:Well, working remotely obviously mostly impacts demand for office. And it's only one concern in the office sector because over the last decade or two people have been squeezing workers into smaller and smaller square footage. So the utilization of office has really gone higher. In the last few years. I was very concerned about this and felt the office market would really get hurt by both technology and utilization, but it's actually doing quite well, frankly to my surprise, due to continued job creation, as I mentioned earlier. And also the seemingly inexhaustible need for space by the tech industry. Tech companies are just starved for great talent and they're finding more space, lots of it, particularly in urban areas where the young people are. So I think the dire predictions of a deteriorating office performance have been a little premature.
DP:Okay, good. Well, Joe, this has been interesting and thank you for looking into your crystal ball for us today.
Joe Rubin:Thanks for having me, Dave. It's been fun.
DP:And thank you for listening to Breaking Ground as part of the EisnerAmper Podcast Series. Visit eisneramper.com/RE for more information on this and a host of other topics and join us for our next EisnerAmper Podcast where we get down to business.