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Trends Watch: January 18, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman. 

This week, Elana talks to Ridaa Murad, Founder and CIO of BREAKFORM | RE.

What is your outlook for real estate?

Since we have two very distinct operating businesses between what we do at BREAKFORM | RE  and what we do at BEDROCK | GROUP we get some interesting data points from the ground.  Our residential development business is so strictly focused on particular geographies (Coastal Southern California, from Newport Beach to Malibu along the Coast) that outside of it, we look at very little.  In these markets, what we do know is that there is an extremely large demand vs. supply mismatch.  Los Angeles, for example, is short 120,000 housing units, which is nearly 10 years’ worth of housing starts and deliveries based on last years’ deliveries.  While a majority of that is in the affordable category, the inflow of population to Los Angeles from other metropolitan areas also means that the demand mismatch exists broadly across the various price points.  At BREAKFORM | RE, we are focused on the "affordable luxury" and "turnkey entry level luxury" in these markets, hence first-time family homebuyers through the townhomes using the Small Lot Ordinance ($1.25mm entry points) and up to large single family dwellings in beach cities (up to $5.5mm) The demand in these segments, especially the starter turnkey homes, is extremely strong and rising, and the demand for the single family coastal dwelling is stable and will likely remain given the global demand for coastal properties.  We see rents becoming unsustainable and ownership becoming relatively more affordable against rental payments as rates remain fairly low and stable.  We still see real estate remaining one of the asset classes with some level of asset security.  While price points are now as high as they have been, we think this may stay elevated for the near term, with some price volatility in the medium-term (two-three years out).

The Manufactured Housing Community (MHC) business at BEDROCK | GROUP is one of the most counter cyclical asset classes.  When all else fails to materialize for someone, the only real housing solution is manufactured housing.  It’s the lowest cost of home ownership and the demand for affordability seems to be ever rising with median home prices surging but median incomes not having grown in a decade.  As automation takes more jobs away, as millennials have a harder time dealing with student debt and other debt burdens, as the workforce at large see their incomes stagnating on an inflation adjusted basis, and as the quality of communities continue to improve as a result of new modular homes, smart tiny homes, etc., we believe MHCs will continue to thrive with ever-rising demand in the near-to-medium-term.

What is your outlook for the economy?

I think we have had a prolonged interest rate and liquidity fueled expansion which eventually has to ease.  As banks start normalizing, we should see some softening, especially given the geopolitical situation globally, the global economic outlook of other major economies and the length and breadth of this "bull cycle."  As a big believer of reflexivity, I think all things return to the median and this adjustment will likely happen in the next 36 months.  Having said that, bank lending still remains fairly tight, borrowing standards are fairly high, and household wealth is strong as are household balance sheets across the nation.  Our largest companies are sitting on some of the largest reserves of cash we have seen as well and all those generally bode well and gives me enough hope to think any correction will be soft and short-lived.

What keeps you up at night?

In California, the thought of earthquakes keep me up at night.  In our MHC business, our daily operations keep me up at night.  In general, trying to perform as best as we possibly can for our investors and partners keeps me up at night. And, finally, having a 15-month-old definitely keeps me up at night.  President Trump's tweets don't help a lot with the sleep either!!

 

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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