Hey There Income Hunter,
I spent 25 years working on Wall Street while living on Long Island.
I had a 35-minute ride on the Long Island Railroad to Penn Station, followed by a 20-minute battle on the subway.
I got used to it after a while, but today’s generation … not so much.
Now add in Covid and working from home for two years, and you have a looming commercial real estate nightmare.
This cultural change is having massive ramifications for the economy. It has already wiped out 100s of billions in the value of the office space in big cities.
Meanwhile, the economic recession is expected to deepen significantly next year.
This trend has some legs and impacts the job market, real estate values and obviously the stock market.
Today, we’ll take a look at the data and how you can take advantage of these trends.
New York, New York
New York City is the poster child here …
According to the National Bureau of Economic Research (NBER), office property values in NYC have declined nearly 45% …
Since Covid lockdowns have ended only 40% of the workers have gone back to the office.
The NBER report suggested that these dramatic changes in valuation will have repercussions for local public finances and financial sector stability ..
This downturn will cost NYC $50 billion.
So, we can expect the government to step in and rescue many of the city’s going through a similar drawdown …
However, the real accident waiting to happen, in my opinion, is in the private real estate sector. Think companies like Blackstone Inc. (BX), KKR & Co. Inc.(KKR) and Apollo Global Management, Inc. (APO)
Blackstone Inc. (BX)
I want to focus on BX because I think they are the best sale of the group. Just imagine having $350 billion invested in real estate with one of their largest holdings being 80 office buildings in NYC, San Diego, LA and Chicago …
Just the work-from-home trend alone has crushed revenues … Now, they will face a prolonged recession that will hit property values.
The reason this is so important to understand is because private equity and private real estate is not a liquid business …
BX and others have been forced to write down billions of dollars from the value of their bets as asset prices drop … Now, financial regulators are looking into whether they are overcharging investors, such as state pension funds and university endowments, when deals lose value.
We are talking about the SEC here and if they find something BX assets under management will collapse.
BX Technical Set-up
BX has had an incredible run as real estate prices soared in 2021… It was fueled by the $6 trillion injected into the economy during Covid …
Now all that is being reversed and more. We are witnessing the fastest global tightening in monetary policy in history and we are just beginning to see the damage to the global economy.
The chart below illustrates the 2022 downturn, BX is in the midst of a relief rally and I think this presents a good opportunity to play for lower commercial real estate prices to come.
Notice the 50 DMA at $97 and also the 50% retracement of the rally from $50 to $150 since mid-2021.
Technically BX offers an excellent risk/reward for a bearish strategy … Consider a put spread once it tests the 97-100 price zone.
I believe we will see BX head back to the lows of the year in the months ahead.
Bring It Home
The pain that Jay Powell talks about is spread out through many areas of the economy. All the money printing from 2020 and 2021 created enormous bubbles.
Commercial real estate was certainly one of them and inflation and higher interest rates are popping it.
The illiquidity of real estate in general makes it difficult for private equity funds to mark their assets appropriately …
However, if you have regulators questioning your valuations and whether you are over-charging pension funds and university endowments when deals lose value then their stock valuations will take a massive hit.
The large institutions have had massive economic advantages for decades now it’s time for traders to beat them at their own game.
Stay tuned for more on this and as always …
Live and Trade With Passion My Friend,
Griff