Most gamblers think they are pretty good at cards. You see them on the planes going to Las Vegas looking confident and wearing a cool jacket, sometimes from one of the major Casinos to show “this isn’t their first rodeo.”
Real estate execs are no different. They, too, believe they “know the game” and have that attitude that they can beat the house any time they want to. Why wouldn’t they? They have done it in the past. Their formula for success has never let them down. Plus, they have long-time advisors who know the game as well. None realize that the game has changed, and their formula for success is now their first-class ticket to disaster.
To explain the real estate game, let’s assume that one property equals one card. Depending on the quality of the property and where it’s located, it could range from high-worth buildings in affluent neighborhoods and downtowns (Aces and face cards) to various levels of second-rate buildings (two through ten). A ten would be a decent building, with decent occupancy rates and in a decent location to command good leases, down to lesser buildings with problems of infrastructure, amenities, and just poor management, which leads to low occupancy and a constant time to find and sign up 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 card values are gone. Those who bought high cards at a discount while the last game was winding down thought they were going to have a bunch of winning hands in this next game. Well, that was usually the formula for success in the past. Buy at a discount and sell high. Now, some things have changed.
Remember that, as you start to grab cards for the next game that you think are going to gain back their values. A building at 60 percent off market value? How can that not be a deal? What about 80 percent off market value? GRAB ‘EM! Or are they beyond being viable in the next big game because they are technologically obsolete?
Let me give you a cardinal rule in this new game coming up: “Junk is still junk, even at a discount.”
Your current appraisers and industry “strategists” are NOT giving you good advice. Their appraisals give a two-dimensional assessment in a new three-dimensional world. They are the Moody’s and Standard & Poors of today. Their assessment is worthless, just like the stamps that said “Triple A” on mortgage portfolios back in the last crash.
All these cards (buildings) you are buying, you believe they’re going to be worth a higher-level card in the new market. It’s time for real estate brokers, appraisers, bankers, cities, and civic leaders to wake up and realize we’re moving into a new game and a new deal. No one should think that this is just another beginning of the previous game which has been played in the past.
There is no going back to “business as usual” because the workforce has been bifurcated since the pandemic. There will never be the same number of people commuting to downtown areas or suburban office campuses, and 30 to 40 percent of the workforce will remain at home. So, all the expertise the above players had in the past is no longer relevant and no longer applicable in the deal going forward. If you bought a King at the price of a Ten, you probably think you made a good deal. But with the new criteria of having technology supporting corporate tenants in shrinking demand for office space, if your building lacks those intelligent amenities and other supporting infrastructure, your property might be even worth less than what you paid for.
Even though the players will be buying up most of the cards at the end of this last game, they have no idea of how the cards’ values will remain or change as the new game progresses. In the commercial real estate market, more and more space will become available with less and less demand from corporate tenants who have shrunk their footprints in corporate leasing. That conceptual shift in demand due to the bifurcation of the workforce is defined as the “reverse of musical chairs,” where more and more space becomes available, but there is less and less demand for that space.
In this new real estate market, just like in the new card game, you need new people with new skills to identify worthless buildings and some of the buildings that can be salvaged. Even if you were a winner in the previous card games because you knew all the angles, this new card game is going to require new skill sets. Those who come to the table with old skills and old formulas buying up “the bargains” are going to go bankrupt faster than when their drink gets delivered to the table.
Unfortunately, there are no bargains when it comes to technology and intelligent infrastructure. Either you have it in the building, or you don’t, and if you don’t, you need to upgrade the building if you can or sell it before it hits bottom.
All the great card players in real estate just lost their edge because the game has changed, and they have no idea what their cards are worth any more. That is part of the freefall buildings are taking. As you can see, no House wants to admit they loaned huge amounts of cash for worthless cards.
Those who think their building is just going to get a piece of the market because they’re offering it cheap to the market are going to be very surprised. As more tenants decline the obsolete buildings, you will see price-per-square-foot dropping and that will impact the market even more. Potential corporate tenants will look at what they’re offering and say, “This building is technologically obsolete. I cannot have my workforce work here.” And the building remains vacant. There is no gain in lease revenues as no one wants to move in.
Some people have asked, “What is the new bottom in commercial real estate?” Is it 50 percent off market value? Is it 90 percent? Can a building be sold for just the dirt value underneath it? In the past, when some cities and towns lost their economic viability, businesses moved on, people moved out, and the town became a ghost town. A friend of mine said he could sell me a whole town with buildings in Colorado for $4,000.
So when you talk about the stakes today and where the bottom is, remember we can go down to dirt level as a value. If the economic viability has dropped off so much that no business wants to remain and no person wants to live there, then there is no value to the property whatsoever. Only a few of us who understand this new game can assess what cards you have and tell you when to hold them, when to fold them, when to walk away—and, of course, when to run.
