A Real Estate Death Spiral?

Should you be investing today, or selling?

Ric Edelman: It's Tuesday, August 22nd, and we've got some bad real estate news. Local malls are in what they're calling a death spiral. Values are cratering in Connecticut. Crystal Mall. Back in 2012, it was worth $150 million. It just sold for nine and a half older. Low end malls are down 50% or more in value. Some of them are down 70% since 2016.  

Here's the crux of it. There's $14 billion worth of mortgages on these malls that are coming due in the next 12 months. And all of those landlords are going to have to refinance at today's higher rates at the very moment their rental income is down, 20% of all malls are underwater, meaning they owe more on the mortgages than what the properties are worth.  

In Muncie, Indiana, a mall with a $31 million loan was just appraised for 6 million bucks back in 2015. It was appraised for 73 million. In New Jersey, Woodbridge Center is a one point 1,000,000 square foot mall. It was appraised earlier this year for $86 million, down 76% from its appraisal back in 2014. And it owes a quarter of $1 billion on its mortgages. Large anchors like Macy's, JCPenney, Sears, they closed almost 900 stores since 2018.  

That's creating what people are calling in the industry a death spiral. When you lose the anchor tenant, other stores leave. And that means consumers quit coming because there's nobody there worth visiting. And that causes more stores to close.  

Eventually, the mall shuts down. Malls have to figure out new ways to reinvent themselves. And they are some of them are converting to nursing homes, others to condos. Some are creating entertainment venues. And while previous investors have been losing money, it creates opportunities for new investors. These malls are all in suburban areas. That's creating a problem for their local economies, not just cities that are struggling with real estate, suburban areas as well. Remote work is also hurting suburban commercial real estate, too.  

In Arlington, Virginia, just across the river from Washington, DC, a five-story office tower was just sold for $60 million. The seller back in 2014 had paid $90 million for it. It's not just the investors who are losing money. So is the county of Arlington. The old owners, they paid $1 million a year in taxes, but the new owners, they're only going to pay $760 grand because of the lower assessed value. That means trouble for the county's budget. 

In nearby Crystal City, which is really close to the Pentagon and Reagan National Airport, there are millions of square feet of commercial office space on the market, but that's just office space, right? Apartments are still fine because even if people aren't going to the office, they're still living in their apartments. Nope. Apartment buildings are also starting to show signs of trouble. The problem is not lack of demand. The problem is interest rates. Most apartment buildings in the country were financed over the past ten years when interest rates were near zero. Those loans are now coming due. The landlords have to refinance at today's rates.  

So even though they're charging more rent than ever, they haven't been able to keep up with rising interest rates. The result? Apartment building values have fallen 14% in the past year, about as much as the fall in office values.  

And then there are mortgages on multifamily housing. I'm talking apartment buildings. It's now $2 trillion, nearly twice as much on mortgages of multifamily housing as there is on office debt. And half of that is coming due between now and 2027 buildings from Los Angeles to San Francisco to New York City, they've already defaulted with more to come.  

Again, it represents a big problem for those investors, but it's a great opportunity for new investors who get the rare chance to buy low in real estate. Wall Street firms are raising billions of dollars from institutional investors. The money is going to be used to buy real estate that has fallen in value, often a fraction of the price that investors pay. Just a few years ago, Cohen and Steers, Goldman Sachs, BGO, Invesco and others, they're all buying on behalf of their clients.  

Warren Buffett just invested 800 million into the stocks of homebuilders. You know his famous saying buy when others are fearful, sell when others are greedy. You're fearful about the real estate market. He's a buyer.  

Presidio Bay just bought an office building in San Francisco for $41 million. The seller had paid $107 million back in 2017. 

Invesco is doing this as well. They're not just one of the oldest and largest fund companies. They're one of the largest and most experienced real estate fund managers in the entire nation. They've been buying and managing real estate for 40 years. They have $90 billion in real estate globally, 600 professionals in 21 offices around the world.  

Real estate is a great complement to stocks and bonds. Returns are usually uncorrelated, which means you get added diversification. Rental income typically rises with inflation, which, you know, if you are a renter right now and that rental income you get as an investor, you typically get tax advantages along with it.  

Invesco has a lot of mutual funds, ETFs and private funds for accredited and institutional investors. I really like the Invesco real estate portfolio. It's highly diversified across a broad range of real estate sectors, including health care offices, multifamily, industrial, self-storage, retail, even student housing. These properties are scattered all over the country. Real estate suffering big problems right now. That's bad news for people who bought real estate in the past, but it's a great opportunity for new investors and new investment dollars. Buying low doesn't often come in the real estate market. It's available right now. You can learn more at invesco.com.

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