- Noyack Wealth Weekly
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- The Good, The Bad and The Ugly
Sunday, December 03, 2023 |
Table of Contents
REITs are back baby! Especially nontraded REITS.
Real estate sector was the second-best performer in the S&P 500 behind tech in November, gaining 12% .
Interest-rate sensitive real estate sector saw increased investor capital inflow, expecting US Federal Reserve rate cuts in the next year.
Real estate's gain was its best since 2011, outperforming the S&P 500's 9% rise.
Bank of America is optimistic about real estate for 2024, especially REITs.
Office landlord stocks represent a small fraction of the real estate market.
Bank of America is cautious about the broader market, but sees potential in real estate for 2024.
“Real estate has seen the biggest de-rating since 2021 among all industries on concerns over office, but office is less than 5% of real estate’s market cap”, according to Jeffrey Spector of Bank of America.
So how did Cadre get it so wrong? https://tcrn.ch/46GPnHy
For context, Cadre was valued at $800 million in 2019 but its value dropped so sharply in recent years where The Information reported earlier that Yieldstreet acquired Cadre for just $100 million! That's a body blow for Cadre investors.
Why? Because it has raised more than $133 million in debt and venture funding from ‘geniuses’ such as Andreessen Horowitz, General Catalyst, Khosla Ventures, Goldman Sachs and Thrive Capital, so their investment is at least a 40% loss.
So why did Cadre fail? I have met many of the real estate professionals at Cadre, and in fact, one of our former sales associates works there. My take is that they had scant experience managing commercial real estate assets through varying cycles; they only knew low inflation and low-interest rates. They had no idea how to succeed in a high-interest rate, tight lending environment—plain and simple.
When money flows like mezcal at a bachelorette party, my toddler could succeed in CRE. Hell, even Grant Cardone could have a successful return (couldn’t resist). But when lenders pull in the reins as fast as they have, you need a decade of previous scars to know what to do. Cadre deluded themselves (and others) into thinking CRE investment is a tech play. So did Adam Neumann and WeWork raising money from the same super geniuses above (Hi Vinod!).
Quick example: our REIT agreed to a deal to buy an great industrial property in the Northeast over six months ago. A public company with stellar credit guaranteed to net lease the entire property. Local bank we had a 15 year relationship was on board to loan $10 million of the $14.6 million without a personal guarantee aka non recourse and at a decnt but still high interest rate. Then the Fed continued to raise rates, SVB & Signature Bank disintegrated and the CEO of this bank woke up one morning saying, we agreed to a deal but I'm changing it nonetheless. Need personal guarantee, loaning us much less and oh yeah, I want top drive your Lucid around for a while. Kidding on the last part but the rest all true. How did we adjust? Worked closely with seller on new price and constructed a complex, subordinated Seller's loan that sits behind a new bank's loan. This is what is needed to succeed in this interest rate environment and Cadre just didn't have the experience
One thing for ALL to remember: commercial real estate investing is NOT a growth equity investment for venture capital...and it never will be.
"We have computers with algorithms trading against other computers. We’ve got people who know nothing about stocks, being advised by stockbrokers who know even less.”
- Charlie Munger at Berkshire Hathaway 2022 meeting
Curated For You
These articles are a precursor to next week’s insights and opinions when I talk more about the massive consequences of the Great Wealth Transfer.
Read past editions here
Noyack Wealth Weekly is the leading wealth management newsletter published by CJ Follini & Noyack Wealth Club, a nonprofit dedicated to free financial literacy for younger generations. Feel free to tell us what you think of our little newsletter.
