Many gamblers consider themselves to be pretty good at cards, and on planes to Las Vegas you'll see gamblers wearing cool, confident jackets, sometimes from major casinos, to show off that they're not new to the game.
The same goes for real estate executives. They too believe they “know the game” and have the attitude that they can beat the house any time. Why wouldn't they? They've done it in the past. Their secret to success has never let them down. Plus, they have longtime advisors who know the game inside and out. What nobody realizes is that the game has changed and their secret to success is now a first-class ticket to ruin.
To explain the real estate game, let's imagine that one property is equivalent to one card. Depending on the quality and location of the property, they can range from high-value buildings in wealthy areas or downtowns (aces and face cards) to various levels of second-rate buildings (2 to 10). 10 is a decent building with a decent occupancy rate, decent location, and good leases, but there are also poor buildings with infrastructure and amenity issues, poor management, low occupancy rates, and a consistently slow process of finding and signing new tenants.
In the new game of real estate, let's define each property as a card with a new value. The old game and its cards have no value anymore. People who bought high value cards at a discount when the last game was coming to an end thought they would get a lot of winning hands in the next game. Well, that was the formula for success in the past. Buy at a discount, sell at a high price. Now some things have changed.
Keep that in mind as you start acquiring cards that you think will rebound in value for the next game. A building at 60% off market value? How can that not be a bargain? How about 80% off market value? Grab it! Or is it technologically outdated and therefore not viable for the next big game?
Here's a basic rule for this new game: Junk is still junk, even if it's discounted.
Your current appraisers and industry “strategists” are not giving you good advice. Their appraisals are two-dimensional ratings in a new three-dimensional world. They are today's Moody's and Standard & Poor's. Their ratings are as worthless as the “Triple A” stamps they put on mortgage portfolios during the last financial crisis.
We believe that every card (building) you buy is worth the same as a higher level card in the new market. It is time for real estate brokers, appraisers, bankers, cities and civic leaders to wake up and realize that we are moving into a new game, a new trade. No one should think that this is just the beginning of a previous game that has been played in the past.
Since the pandemic, we cannot go back to “business as usual” because the workforce has been divided. The number of people commuting to downtown or suburban office campuses will never be the same as before, and 30-40% of the workforce will stay at home. Therefore, all the expertise that the above players had in the past is no longer relevant or applicable in future transactions. If you bought King at the price of 10, you probably thought you got a good deal. But with the new standard of having the technology to support corporate tenants in a shrinking demand for office space, if your building does not have intelligent amenities and other supporting infrastructure, your property may be worth even less than you paid for it.
Players end up buying most of the cards at the end of the last game, but have no idea how the value of the cards will maintain or change as new games progress. In the commercial real estate market, there is less and less demand from corporate tenants who have downsized their footprints in corporate leases, and more and more space is available. The conceptual shift in demand due to the bifurcation of the workforce is defined as the “reverse of musical chairs,” where there is more and more space available, but less and less demand for that space.
This new real estate market, just like the new card game, requires new people with new skills to identify buildings that are worthless and the parts of buildings that can be salvaged. In the previous card game, you were a winner because you knew all the angles, but this new card game requires a new skill set. Those who come to the table with their old skills and old methods and buy the “bargains” will be bankrupt faster than the drinks are brought to the table.
Unfortunately, when it comes to technology and intelligent infrastructure, there are no bargains. A building either has it or it doesn't, and if it doesn't, you should upgrade your building if possible or sell it before prices hit rock bottom.
The big card players in real estate have lost their edge because the game has changed and they no longer know the value of their cards, which is one of the reasons buildings are plummeting. As you can see, no real estate company wants to admit that they have lent large amounts of cash on worthless cards.
Anyone who thinks that their building will capture a portion of the market because they are offering it cheap will be very surprised. As more tenants turn down aging buildings, the price per square foot will go down, which will further impact the market. Potential corporate tenants will look at what they are offering and say, “This building is technologically outdated. I can't get my employees to work here.” And the building will remain empty. No one will want to move in, so the rental income will not increase.
Some people ask, “What is the new bottom in commercial real estate?” Is it 50 percent off market value? Or 90 percent? Can buildings be sold for just the land value underneath? In the past, when some cities and towns lost their economic viability, businesses relocated, people left, and towns became ghost towns. A friend of mine offered to sell him an entire town in Colorado with buildings for $4,000.
So when we talk about stakes and rock bottom today, remember that values can drop to dirt level. If economic viability drops so much that businesses don't want to stay and no one wants to live there, the property is worthless. Only the handful of us who understand this new game can evaluate the cards you have and know when to hold on to them, when to let go, when to walk away, and of course, when to run.