“Buy land, they’re not making it anymore,” Mark Twain once said. That investment advice doesn’t look too smart lately, but then again, Twain wasn’t known for his financial acumen.
Commercial real estate used to be a great investment. You didn’t hit any home runs, but you got a dependable income stream and fair price appreciation that almost never lost money. Real estate and REITs didn’t correlate with stocks or bonds, so you also got a good diversification.
How does that look today?
Last week the Federal Reserve warned in its May 2020 Financial Stability Report that “asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge.” It highlighted commercial real estate as one asset that was particularly vulnerable.
“Prices of commercial properties and farmland were highly elevated relative to their income streams on the eve of the pandemic, suggesting that their prices could fall notably,” the Fed said.
That warning shouldn’t come as a major surprise for those who have been paying attention for the past three months. Most shopping malls are closed. Other than supermarkets, Walmart, Target, and dollar stores, most retailers are closed. JC Penney, Neiman Marcus, and J Crew have already filed for bankruptcy, and likely more will follow them. Restaurants are closed except for takeout. Many of these establishments may never reopen. Millions of people are working from home, but likely a high percentage of them will never go back to the office. Continue reading "A New Lease On Life"