What Real Estate Bubble? It Just Burst!

Full Transcript:

 

Hi, this is Attorney Roy Oppenheim, and we’re here today to discuss the current real estate market. And in connection with that, I want to give you a little background on why I’m giving this lecture today and how the presentation has evolved over the past 60 to 90 days. So, originally we were being asked to give a presentation of whether or not there was in fact a real estate bubble, and we started the presentation sometime in September for an early November presentation. And because of a hurricane here in South Florida, we had to reschedule it, and we named it “What Real Estate Bubble? Do You Hear The Air Seeping Out of The Bubble?” And since we got canceled, and now today is December 9th, we had to rename it and today it’s “What Real Estate Bubble? It Just Burst.”

So, as a way of background, I have been a practicing lawyer in the real estate area for some 30-plus years. I’ve been in the title business through Weston Title, and through my partners Ellen Pilelsky and Jeff Sherman for 30 years, where Weston Title has done approximately $3 billion worth of transactions. And prior to 2005, 2006, we were discussing at that time what was going on with the real estate market. And I started giving lectures on whether or not there would be a bubble. And in fact, one of the things people remind me that I said was that there would be some exogenous events, some external event, that would somehow change the way people perceived real estate as an investment. Back then, real estate prices were going up literally about 1% a month, and there was very easy lending, the Federal Reserve was being very lenient, banks had what were called liar loans at the time where there was basically no real background checks on people’s ability to repay. And of course, the crisis ensued.

But one of the things that changed people’s psychology back then, and I just wanna remind everyone, was an exogenous event, an external event, and that was Hurricane Katrina. And back then the internet was evolving, but people still were watching news, and it was called the CNN effect. And people just watching these graphic images of what was going on down in New Orleans at the time, really affected people’s psyche. And the real estate market kind of lost its edge. And then, of course, the banks just froze up, particularly with Lehman Brothers collapsing and banks stopping to lend money. And so, we’ve been able to basically track all of this for many years. And today we have a number of real serious storm clouds. And yes, the bubble has burst, it probably burst in the last 30 to 45 days. And we’re at the beginning of a paradigm shift where things were originally going up, up, up, and now they’re gonna start in some markets start to come down, and they have already, and we will go through that very carefully so you can visually see it.

So, this presentation is gonna discuss really people’s purchasing power and the decline of their purchasing power, the negative wealth effect that’s occurring, the macroeconomic impact to homeowners in terms of rates, inflation, insurance costs, flood maps have an impact, and of course, condo buyers and cash buyers. And then we’ll talk about commercial real estate a little more briefly, but we’ll talk about different segments of the real estate market, warehouses, retail, office, hotel, and multi-family. And I hope that this is as much fun for you to listen to as it is for me to present. So again, thank you very much for this opportunity.

What can we buy? So one of the big issues today is that purchasing power for the average homeowner if they are borrowing money, has declined very substantially. Substantially declined because A, prices have gone up so dramatically. And that’s of course, because of inflation, and B, interest rates have gone up very substantially. And so what someone could buy before they can’t buy now. And so attainable housing has become very difficult. So, most people are shocked by this statistic, and as was I, and that is that approximately 49% of all home buyers in the United States are first-time home buyers, which means almost half the market is catering to people who can buy their first home, a starter home, affordable home. And the new term, because affordable just doesn’t sound great.

Used to be called workforce, which is terrible, is called now attainable housing. Homes that people who are buying their first home, who are creating a household for the first time can afford. And that has become very problematic because if you can’t get people into their first home, the homes they’re typically buying are not necessarily new homes, but they’re buying homes from people who want to trade up. And people can’t trade up if they don’t have a market for people to buy their first home. And so if the first-time home buyer doesn’t buy the first home, then the second home buyer can’t buy their third home, and then that third home buyer can’t start to scale back and maybe buy their fourth home.

And then, so in general, people are staying in their home seven years. So, if you do the math, an average family’s gonna own three to four homes in their lifetime, they may own more if there’s a lot of movement going on. And we’re gonna talk about some demographic shifts that are very important in terms of the economics of real estate, particularly residential real estate in the United States.

So, let’s go over some interesting statistics here. So, in terms of inflation… Let me move my head here so I get out of the way. This may be helpful here. Okay. So in terms of inflation, we’re seeing that in terms of household spending, going back to 2020, that there was this real decline in consumption. And obviously this was during the lockdown, during the pandemic, and so people were saving a lot of money. There was a huge amount of money that was coming into the economy through the EIDL loans, the PPP loans, different programs that the government was providing people with one-time grants, and of course unemployment insurance. And we see that people were consuming less.

And then starting in the middle of March of 2021, as the vaccines were being rolled out, we see this heyday of people starting to spend a lot more money. And it just kept going up. And this runup right here is what has caused really the inflationary effect. So had the government… And they did the right thing, of course, try and preserve the economy and save the economy, poured an unbelievable amount of cash into the economy that people initially hoarded and saved, and then they start spending it. And we all know what we all spent it on. And so that has caused a massive amount of inflation.

And then we look at the personal savings rates. We see here, too, that in 2020 there was a huge spike in savings and then it went down. And then of course there was a second period of the pandemic of COVID. And so again, people started saving when they were locked down because they’re just not going out. They’re not going out to restaurants, they’re not going to movies, they’re not traveling, they’re not going to the cruises, not going out on planes, so money gets saved and then boom, we see that people stop saving money right here. And the savings rate now is becoming an issue once again because it has declined so dramatically. It’s dramatically declined to way below what it was in 2015 to 2020.

Home buyers now have a 29% less purchasing power than they did in early 2021. Home prices remain elevated, as we said, due to low supply, but early demand signals weakened sharply last week. And that was in October 6th. But in fact, they have declined tremendously since then. With monthly mortgage rates, payments are now 75% higher than they were last year, and so many first-time home buyers are completely locked out of the market, and they’re unable to find homes with budgets. They have lost $100,000 in purchasing power this year. And this was again in October 2022. And this situation has just magnified itself since that time.

One of the things I also wanna talk about, and this is very particular to South Florida, and most of what we’re talking about today is for South Florida. But there are a lot of things we’re talking about that we can talk about in terms of the rest of the country, is that the climate here in South Florida, both in terms of weather and in terms of taxes, has been critical to this net migration in from people all over the United States. And we have two types of climates, we have the weather climate, and we also have the tax climate. And the net migration to Florida has been dramatic as it relates to people who are leaving high-tax states as well as people who are now working partly from home because of a shift, not just in our climate, but our social climate, and that is that people now don’t just work from the office. And in fact, I heard today on the radio that you can work in the… You know, that you should work in the cloud, but live in the sun.

And so we have a lot of that where people are telecommuting from anywhere in the world, and they’re here in south Florida. So we’ve had this net migration in, which of course has created this huge increase in prices, which of course has of course reduced the ability for the first-time home buyer to come into the market because there’s been such demand for a home. But climate has also had an impact because it is starting to affect the condominium structures that are along the coast. And as we saw on Surfside and the tragedy that happened there, there’s been a whole new approach towards condominium living, especially older condominiums, and in terms of what condo associations need to do to maintain their condominiums. And one of the problems that we’re going to see is that many of these condominiums over time will have difficulty getting insurance. They’re gonna have massive amounts of money that are gonna be assessed against these condos and many of these older condominiums have people who are on pensions, or they’re on fixed income, they’re teachers, and they’re retired doctors and lawyers, and people who’ve worked in civil service. And they will not be able to afford the huge maintenance costs to maintain their condominiums.

And so condominiums that are over 20 years old are gonna have big issues, and they’re not necessarily gonna be able to get insurance. Mortgage companies are gonna limit the number of units that they’re going to insure in these units, and condo associations are not gonna be able to raise the kind of money that they’re going to need to re-establish these places as safe. And when that happens you’re going to have situations where these buildings will either be condemned or the alternative investors will come in and will buy out the unit owners. And eventually, the buildings will either be completely redone or in some cases they’ll be torn down and new structures will be put up. But we’re going to have a used condo market in South Florida that’s going to be somewhat different than the rest of the real estate market, the residential real estate market, compared to new condos and even homes.

And so there’ll be opportunities, but also there’ll be a crisis dynamic that’s going to cause and we’re gonna see an increase in foreclosures ultimately in the used condo market. And people ought to be very cautious if they’re buying condos. They ought to definitely have seasoned attorneys involved with looking at the minutes of meetings and seeing what kind of assessments are coming up, what the structural engineers are saying about future needs before getting into a used condominium. Because you could be facing $50,000, $100,000, $150,000 assessments in some cases, and people will not be able to afford to continue to live there. And new homeowners could be shocked by massive increases in association fees. And again, mortgage companies are gonna be reluctant in some cases to insure condos. We’ve had a few closings that fell through specifically because of that. And you also are gonna have insurance companies that are going to limit their exposure to these kinds of buildings.

And in addition, of course, you have the climate change situation itself, where some buildings are going to continue to be flooded and they’ll be a continuous situation where the streets are flooded, and ultimately there’ll be some buildings that will need to either completely rebuild itself or in some cases, there could be losses. And of course, the first place we will see that happen will be probably in the Keys where the rise of the ocean will have some impact, but it’s not just the rise of the ocean that we’re concerned about. We’re concerned about the surges that you have during hurricanes and even not even during hurricanes, but just crazy storms and tornadoes that spawn also that are causing more problems. In the past, people were just concerned about wind, and it seems that the real risk of these hurricanes now is more tidal surge, which could go inland for a few miles, and of course these isolated tornadoes. So, the climate situation is something that we need to be very mindful of when we’re looking at and valuing south Florida real estate and what’s going on in the market.

Home prices are still higher than they were a year ago, but gains are shrinking at the fastest pace on record, according to the Shiller index. Home prices over the last three months, and this is brand new data, are declining at 8.5% annually, a pace which is exceptionally fast and really hasn’t been seen in 30 or 40 years. So, if I move my head a little bit right here, maybe move myself here for a second, we can see that the gray areas are the recessions. We had the 2008 recession that we were talking about previously. There was a recession, of course, in 2001, 2002, that many people weren’t even around for. I recall that it didn’t affect real estate that much. It just reduced the velocity of transactions. It was kind of like just a slow-motion situation. Oh wait, it was a real crisis for homeowners here. And while some people called it a recession, it was really a great recession, in some cases a depression in terms of people’s psychology back then. And it was a tough time for anyone in the real estate sector.

And then in 2020, we of course had a very, very short recession during the beginning of the pandemic. And so we see back here in ’08, you know, a steady, steady decline for almost from ’07, let’s say. And Katrina was in ’05, and it had this effect right here in ’06, ’07, and we had a steady decline through really 2008, 2009, for about three, four years. And so here we have, right here, this is where we are, the beginning of this decline. And unlike the stock market where sometimes you get a little dip and then it goes up, real estate works in cycles. And so we had this cycle here from 2006, let’s say, to 2009, which is like a three-year cycle. And here we have a cycle that’s beginning in 2022 and is just beginning. And so we’re seeing right now a lot of buyer remorse for people who have recently purchased homes. Yes, they got good mortgages at a low rate, you know, sometimes 2.5%, 3%, 3.5%, 4%, not 6%, 7% that we have now. But they will have found that they have overpaid. And of course, how much they overpay will be a function of what market they’re in and what demographic effects exist in those particular markets. But rest assured that this is the beginning, the telltale sign of a shift, a paradigm shift in the economy.

And while I was suggesting that this could be the case back in September, I had no statistical data except just my sense of intuition that we had. And so, because this presentation has been pushed out 60, 90 days, we now have the empirical evidence right here to suggest this, this paradigm shift. Now, anecdotally, we’ve seen in our title business, and other realtors, and real estate lawyers, surveyors, mortgage brokers, all telling us, obviously things were slowing down as interest rates were shooting up. But when you have basically two things going on, as we have here in rising inflation, very high interest rates, clearly you are eliminating a good part of the market. Now, one part of the market you’re really not eliminating is people who buy for cash. And we’ll talk about that a little further as we get into the presentation.

Let me move myself again here. Here we go. “The Wall Street Journal” recently suggested that the South Florida real estate market may end up only being a playground for the very wealthy who can afford to assume the kinds of risks that we’re talking about. We’re talking about insurance risks, we’re talking about risks in terms of dealing with climate change, and just the risk of the market kind of moving in different directions. The article further suggested that most people end up only renting their homes or apartments so that they will no longer have to assume the insurance risks, and that such risks may ultimately be absorbed by large investment funds, such as real estate investment trusts or sovereign wealth funds.

So, one of the things we’re talking about is that in the United States, and if we go back to I guess the early 2000s, there was this notion, this public policy notion, that home ownership was good for neighborhoods. It was good for individuals to build equity in their homes, and that they could pay off their mortgage over 30 years, and that when they retired, they would have a home that’s fully paid off. And so there were lots of government programs, and all the Fannie Maes, the Freddie Macs, all of them were geared towards trying to create as much liquidity as possible in the real estate market so that folks could own their homes.

But by doing so, you ended up with people who now have to assume the risk of expensive insurance and insuring that those properties, and in some cases the insurance costs are going to be cost-prohibitive for individual families. Having said that, you have lots of institutions that have gone out to buy homes and are renting them out, and they can insure however they so choose. They can self-insure, they can have their own insurance, they can reinsure, there are lots of different ways that large institutions that own homes can shield the risk of home ownership because they have a large portfolio and it’s not necessarily all concentrated in one place.

Having said that, we see long-term home ownership not necessarily being tied to the American dream as it has been for probably, you know, the last 75 or 100 years. And that many folks are gonna opt to rent a home. And the cost of renting a home could be less because you will have centralized management, pools will be cleaned by centralized companies, you know, pest control issues will be dealt with. Same thing for landscaping, because it’ll be done on a wholesale basis. It’s like you can get cable TV cheaper if you live in a homeowner association that has negotiated a cable price than if you’re just calling Comcast on your own, it’s the same concept, but insurance will be the big issue.

The fly in the ointment could be real estate taxes. Here in Florida, if a large company is renting their home, and it’s not a homestead owner, that property is subject to 10% increases a year as a capital. If it’s a private home and it’s homesteaded, your home can only go up a maximum 3% a year in terms of taxes. And so legislatively, there may have to be some changes as we go forward in seeing how individuals and corporations are now working together to provide the equivalent of home ownership, but in a rental kind of scenario. And so it’s gonna be very interesting to see how that works. But the insurance problem is probably the 1000-pound gorilla.

So you have insurance, which is a big problem, of course, it’s the climate that’s causing the insurance prices with all the hurricanes that we’ve had in the past few years and the kind of destruction that we’re having. Now, let me add again, that if you are a cash owner of your home, many of our clients who have been cash owners and buyers do not necessarily fully insure or insure at all their homes and take that risk because they can afford to do that. And in the long run, many times they come out ahead because even if they do have a loss, the money they’ve saved over 10, 20, 30 years is money that they can then put back into a home if they have a catastrophic loss or a partial loss.

So again, cash homeowners are going to be a different buyer in this real estate market from someone who’s borrowing money because their purchasing power may actually have improved during this crisis, especially when prices start to drop. People with mortgages, even if prices drop, still will not be able to afford necessarily to purchase their home unless prices precipitously drop. And we’re talking probably somewhere in the area of 20% or 25%. So, let’s talk about the macroeconomic impact to homeowners. We’ve talked about the rates of mortgages, we’ve talked about inflation, we’ve talked about the condo construct and what’s going on there. And we’ve already talked about insurance costs. One of the things we haven’t talked about are flood maps. And the flood maps keep changing. And as they keep changing, flood insurance becomes a wild card.

So, many folks don’t necessarily live in flood zones yet. We’ve seen 100-year floods, 500-year floods, 1000-year floods in the past two or three years. And so the maps don’t necessarily adequately portray the new risks that people have. And so if it were up to me and I was giving advice, I would say, if you can buy flood insurance, you know, you should buy flood insurance because you really don’t want to trust the flood maps. Now, as the flood maps change, if you get into a flood zone, don’t kid yourself, the value of your property decreases because the cost of getting into that house has now increased. Because now not only do you need insurance, but you need flood insurance and your mortgage has gone up. So as the maps increase and if the flood zones increase, that will have some negative pressure on the values of property. We’ve talked about cash buyers, and again, they are in a world all to their own.

Now, lurching mortgage rates, spook homebuyers. This is just a graphic portrayal of what we’ve been talking about. There’s been a 29% drop in purchasing power since January. It’s probably a little bit more than that now. We take the red line, we’re seeing that a home price afforded on a $2,500 monthly budget, you could almost buy a $500,000 mortgage, the house in 2015. And then when interest rates completely dropped in the middle of the pandemic, you could almost buy a house for 533,000 when rates were like 2.5% or 3%. And now with that same budget, what can you buy? You can buy a house for 378,000. And that’s because interest rates aren’t that much lower. Let me see what this is here, two, three. And then the mortgage rate. Here’s the mortgage rates. As we can see, the mortgage rates drop to as low as around 2%. And now the blue line shows that they’re at 6.6 or actually were as high as seven.

So as mortgage rates go up, your buying power goes down. There’s this inverse relationship between the two here. Again, so you have the affordability of homes, you could buy something for a little under 500, you could go up to 533. And today with that same budget due to inflation and increased interest rates, assuming you’re buying a home with a mortgage, you are now down to a purchase price of 378. And that’s a problem because it’s tough for people to find something if they have a family right now with $378,000. And one of the things people don’t wanna talk about, and we might as well talk about this other 1000-pound gorilla in the room, and that is how do we create more attainable housing

And the answer is we need to look at the zoning laws throughout the United States and well, maybe some people may think this is political, it really has to do more with urban planning. And urban planners are saying, “Hey, if we could get more density and we could put more homes on a piece of land and go vertical, we can reduce the cost per unit as opposed to only building like maybe three or four homes on a quarter of an acre.” And all of a sudden we could build 20 homes. And so the cost of the land amortized over each unit, each door as they like to call it, will go down.

And so the problem is no one in their backyard wants to have the shadow of a big building, an impact issue of whether or not, you know, you’re gonna put more traffic on the streets, you’re gonna put more kids in the schools, you’re gonna put more people in the hospitals. And so you need to create an infrastructure if you want to have higher density. And so it’s gonna be very interesting to see how we’re able to deal with that problem. But the attainable housing issue, no one talks about it, but it is a real problem and it’s a real problem due to inflation and high interest rates. And the two of them are double deadly duo that that really can have a negative impact.

And by the way, you have all these companies moving down from New York, right? And these companies come down because it’s sunny, because you’re working from anywhere, because your taxes are back. And then guess what? And this is true, some of these companies have to move back because they thought that everyone would come along with them and they said, “Oh yeah, we’ll come along.” Well, they try and come along and they can’t find a place to live that’s in commuting distance to whether they’re moving to Boca, whether they’re moving to Palm Beach or whether they’re moving to Miami. The reality is that they can’t afford to live where their company is and they need to come in to work, whether they’re coming in three days a week or five days a week, they’re not able to find that. And so, the attainable housing is a real issue if we wanna sustain South Florida.

I also wanna talk about in terms of purchasing power, this wealth effect. And I think I mentioned it in the card earlier, but I didn’t go into it. And so people feel less wealthy right now. Why they feel less wealthy? Either stock portfolios or 401Ks, their pensions are way down. They’re down 20%, 30%, 40%. And of course, even if you had a small percentage of crypto, and a lot of people, you know, got into it later, they could be down 40%, 50%, 60%, 80%, 90%. And so you’ve had, you know, already some large crypto companies that have gone under and people are losing their money. And so between, you know, the crypto market and the stock market and everything in, and interesting, I’m not gonna get into bonds, but the bond market where people think is the safest place on earth has also been hurt. So, the only place that really hasn’t been hurt yet is the real estate market.

And so every asset class has seen a reduction. And so to think that real estate is gonna be an immune asset class is just wishful thinking. So, we’re gonna have our comeuppance and it’s gonna have a drastic effect on people who are employed in the real estate industry. Whether, you know, you work for survey companies or mortgage brokers, or you’re a realtor, or a real estate attorney, or a title company, you’re going to see an impact on your business probably, you know, for the next few years. And that’s what happened last time. And we are a boom-to-burst cycle, particularly in south Florida. And we just came out of a boom cycle and we’re now clearly entering what is unfortunately a bust cycle, but, you know, how bad it’s going to be? We shall see.

I wanna talk about another phenomenon that no one really talks about. It’s called the freeze effect. Homeowners are frozen. Some Americans are hesitant to sell their homes as mortgage rates soar because they have a lower interest rate locked in. A lot of people locked in low interest rates, either 30-year mortgages or as adjustable rate mortgages, and they lock them in at 2.5% or 3%. And if they move, you see in the old days, you used to actually be able to take your mortgage with you, but forget that, you know, there are due on sale clauses now, you can’t take your mortgage with you. Because you can’t take your mortgage with you, you move, you’re going to have to go from a 2.5% mortgage to a 7% mortgage, which means that you’re gonna end up in a house that’s maybe half as valuable as your own old house.

In addition you’re gonna have issues concerning real estate taxes, where if you have tremendous equity that you’ve built up and you can take the portability with you from your homestead, if you have a huge gain, you can only take up to a half million dollars of portability with you. And yes, oh, that’s a lot, but some people have a lot more than a half million dollars of portability and they lose it, so they can move to a new house, pay capital gains taxes, and end up with a house that is half as large, and they may be paying the same or more your real estate taxes and then a mortgage rate. And so you have this freeze effect that encourages people not to move. And that’s a problem because it means that the furniture companies are building up unbelievable inventories. It means that the moving companies are not moving as many people, and the entire economy slows down because of the freeze effect.

And this impact is not just because of high interest rates, but it’s also because of capital gains taxes, and now you’re gonna say, well, you got a half million dollars of capital gains taxes, but a lot of people have more than a half million dollars of capital gains, and they’re gonna pay 20%, 23% on their capital gains over a half million dollars. Just like they’re going to pay real estate taxes more than their home was currently assessed. And even though they have portability, which is again, a half million dollars, they could end up doubling their real estate taxes, doubling their mortgage, paying capital gains taxes. And so at the end, people say, you can move and end up with a house that’s half as nice and twice as expensive. And so that’s called the freeze effect, and people should be familiar with it.

Insurance rates are exploding. We’re talking about why they’re exploding. It is primarily because the insurance companies have to make up for losses in connection with these hurricanes. And again, we’re gonna have a predicament because mortgage companies are not necessarily going to want to have a home that they’re going to provide a mortgage on unless it’s properly insured. In some cases, it’s just gonna be cost-prohibitive to get that insurance. And in some cases it’ll cause a default. If you are already an existing homeowner and you can’t get a mortgage, they’ll put what’s called force-place insurance on your property. And if you have forced-place insurance on your insurance, on your property, you gotta watch it because it’s could be three or four times as expensive. And in the last foreclosure crisis, and by the way, I will digress in a second, that was the cause of a lot of foreclosures in the last foreclosure crisis.

And by the way, we, during the last crisis in ’08, were primarily representing homeowners and lenders in connection with real estate. And when the music stopped in ’08, we started to represent homeowners who were in foreclosure. And some of the lenders initially were upset with us because how could we do this? How could we turn our back on them? And slowly but surely, we would get phone calls from lenders’ parents and lenders’ brothers and brothers-in-law and sisters and lawyers who represented banks and their brothers-in-law and their sisters, and asked us if we could help their family members defend foreclosures. And we got into what was at that point, a cottage industry that previously never existed, and for really 10 years defended homeowners in their foreclosures. And what’s more interesting is that that came almost to a conclusion back in 2018, 2019. And I will tell you today, with no uncertainty, that we will be back in the foreclosure defense business. Hopefully not as crazy as it was last time but many people are suggesting and predicting that it will be ugly. And we’ll wait and see. But more importantly, if that does happen, you can rest assured and know that we will be there once again to defend homeowners, and that’ll be our privilege and our honor to do that.

I’ll move this over here. Here again, is a Case-Shiller National Home Price Index. It shows how much prices declined in the different crises here. Prices declined in the ’08 crisis by approximately 21% overall, and wiped out more people’s equity. Here, we’ve seen already a 2% decline and it’s just the beginning. And most economists are now suggesting that it will decline anywhere between 5% and 20% depending on what market you’re in.

This is Miami. Miami saw 47% decrease during ’08, almost 50% in home prices. We’ve seen only 1% so far. And what’s keeping the market up is foreign investment to a large extent. There’s a lot of foreigners, especially from Central and South America. A lot of countries down there are experiencing tremendous political instability, and people feel that the most comfortable place to put their money is real estate in Florida for two reasons. One, they can live here, and two, it is a long-term hedge against inflation, even if they’re overpaying right now, you know, in 5, 10, 15 years, they’ll be fine. And certainly, that cash will be safer here in a piece of real estate that even if it loses 10% or 20%, safer than being in an economy where their money could potentially become close to worthless.

This is the Case-Shiller, again, National Home Price Index. And what we’re seeing is that there’s already been an 8.5% national decrease in the past 90 days. And again, that’s market by market. And so in some places like Seattle or in San Francisco, you’ve already seen 20% decreases, 1% as we have seen it only in Miami, but nationwide, it’s already 8.5%, and that is staggering.

Home appreciation in major cities. Red is what has declined since September, and blue is what it looked like in March. So, if we look, you know, for example, in Miami, we’re seeing that prices had increased close to 30% in March, 2022. And now since September ’22, they’re down only 1%, but some of the largest markets that have been hit really hard, San Francisco down 32%, Seattle down 25% in ’22, but they had been up, you know, up as much as 40%, 45%. So, they went up 45% and are now down 32%, which probably brings it back close to where they originally were when this all started.

But it is rather, I guess unsettling is probably the best way to put it, but during crises and in economic times like this, there are opportunities, people who are… I mean, the first folks who came into the west coast after the last hurricane were investors who were buying up people’s land so that they could rebuild and restore it. And so you have these tremendous opportunities and you’ll, of course, have institutions and those mom and pops are gonna buy foreclosures if and when the next foreclosure crisis begins.

So, that’s the end of our discussion of residential real estate. I think I hit most of the points one way or the other. I do want to spend just the next 10 minutes, and I’m probably gonna go over here and I apologize, on different categories of real estate and the impact that we’re gonna see in the next year or so in these particular sectors. Industrial continues to be probably the shining point of real estate in the United States. It’s true that folks like Amazon are cutting back, and so there is little less warehouse space, but warehouse space, the last mile and all kinds of infrastructure issues in terms of warehouse spaces is continuing to be a strong point.

In areas like Miami or Broward or Palm Beach, it’s tough to find land that makes sense. And so, you know, there aren’t that many places left where you can invest in warehouses, but there are many other places around the country. Net absorption in the last 12 months has been 6.1 million square feet. Rental growth has been 20%, and the cap rate is 5%. So, we’re seeing, that, you know, industrial real estate is probably the highlight of real estate right now. And it’s everything we’ve talked about in terms of residential real estate has nothing to do with industrial real estate, but we’re probably gonna see some flattening there as consumption goes down, the need for as much inventory is gonna go down, particularly in the area of anything concerning home purchases and formation of households. So, the entire furniture industry, where they usually have a lot of warehouse spaces, is going to be I think utilized less once the inventory is brought down and they won’t necessarily bring in as much inventory. And so I think we’re gonna cap out on industrial real estate very quickly.

Key takeaways, fundamentals vary amid extraordinary demand. Vacancy rates are at new lows, though through new supply is quickly coming online. Rising rates should temper price appreciation, which is what we’ve just said despite sound fundamentals. And I guess if I move my head out of the way, you can all look at this here, but you can study this later on when we post this online.

Retail. Now, net absorption the last 12 months has been 67,961 square feet. Rent growth in the last 12 months has been 10%. And that 67,000 doesn’t sound right. We’ll have to check on that. I’m not sure about that. But more importantly, we’re seeing like a tale of two cities on retail. In some cases where you’re dealing with experiential situations, whether it’s a karate class or a place for kids to congregate in some organized fashion through a program or in restaurants of some experience, those kinds of situations seem to do well at strip malls.

But even driving here today, the local OfficeMax Office Depot is closing here in Weston, which I found fascinating. A lot of big box retailers, whether it’s Bed Bath & Beyond, etc, just not doing very well. Certain malls, high-end malls, discount malls seem to be doing well. And again, it’s a tale of two cities. Those that are high-end are attracting a certain class of people, the same class of people that would probably be buying for cash. And so those malls should do fine. And then other malls where people are preferring to have their stuff delivered to them through Amazon or online, those malls, I think are going to have more difficulty. And so retail’s gonna be spotty. And I don’t think I’m saying anything new there.

Now, key takeaways are retail sentiment has helped thanks to a constrained supply environment and that supply environment is, of course, changing. Construction spending has trended lower for five years. It says caution may be warranted. Yeah, I would definitely say that. And then we have, you know, grocery-anchored retail. You know, I think for a while people were cooking at home and enjoying it, and then they started going out to restaurants, but of course, they’re gonna go back and start cooking again because of the price of going out.

So, all the best to you. Thank you for this opportunity and we wish you all a healthy and happy holiday and a great new year.