A Slowdown is Inevitable – Prepare With These Investments

Investing Strategies

It’s coming. You cannot stop it.

The media cannot stop it by declaring it will not happen.

The economy is going to slow down. A recession is still more likely than not.

Even if the Fed stops raising rates (which is almost entirely dependent on energy and rent prices at this point), they will not lower them anytime soon.

As the economy slows, headlines about real estate will read like dispatches from Poland in the fall of 1939.

Predictions about the collapse of real estate leading to the end of banking and Armageddon will be everywhere.

After all, everyone knows that interest rates have risen, which will be bad for real estate.

Massive amounts of commercial real estate loans are coming due over the next couple of years.

A slowdown in the economy is going to be terrible for real estate.

That is just common sense, isn’t it?

Well, no. And therein lies our opportunity…

While it is true that Commercial Real Estate markets may not be as robust as they have been with interest rates at almost zero, most segments of the market will muddle through the refinancing cycle. While cash flows may flatline for a period, they will not dry up completely.

A lot of the cost of higher financing rates will be passed onto tenants, who will pass much of it on to customers.

Downtown skyscraper office properties will be the only area that will suffer semi-permanent damage. Working from home has changed their tenants’ real estate needs, and it will be a problem.

Residential real estate sales will continue to slow as buyers adjust to the new normal. Mortgage rates have more than doubled in less than two years.

Rates are almost three times what they were back in 2020 when the current housing boom kicked off.

However, if we look at a long-term chart of mortgage rates, current rates are on the low side of normal for the past fifty years.

My Mom had double-digit rates on all four homes she purchased in her lifetime. Two of the three had double-digit interest rates.

She had excellent credit, so she got a great rate for the market at that time.

Rates were higher, so she paid them for a nice house in a good neighborhood with decent schools.

Today’s buyers will eventually acclimate to the new normal and do the same.

The headlines about the multifamily market would have you believe that no one will ever rent an apartment again.

The truth is that multifamily occupancy rates across the United States are about 94%.

New supply is going to dry up as the economy slows.

Most banks and REIT lenders have already stopped funding new projects.

Rent growth will probably slow.

Existing properties, especially Class A properties with high-demand amenities, will be fine no matter what the headlines suggest. As of right now, Class A occupancy rates are comfortably above lower-grade buildings and improving.

As the economy slows, it will be the lower-end apartments that have occupancy problems. The Class A buildings should remain full.

In retail real estate, the same will hold true. Class A malls will be fine, while malls in less populated areas with lower incomes will struggle.

Open-air shopping centers with a strong tenant base in upscale areas will not just be okay.

They should be fantastic investments.

Lower prices because of headlines and uninformed selling of REITs will be an incredible opportunity.

We have added some high-quality real estate to The 20% Letter portfolio this year.

As prices fall, we will add more.

Real Estate has created more millionaires in the United States than any other asset class.

Buying real estate in weak markets has created enormous fortunes for patient-aggressive investors.

We will take advantage of the opportunity created in commercial and residential real estate.

You can either listen to the predictions of those who have predicted 22 of the last zero collapses of the United States, or you can get ready to take advantage of the massive opportunity currently being created.

It will be more than just Real Estate Investment Trusts.

It will be lenders.

It will be commercial real estate mortgage REITS.

It will be agency and multifamily mortgage REITs.

It will be commercial and residential brokers.

Property managers and real estate services companies will offer massive returns when purchased at bargain basement prices.

So will the global commercial real estate services and investment management companies. As the economy slows and the headlines darken, I expect panicked selling of real estate-related securities and assets to price at levels that allow massive long-term gains for patient, aggressive investors.