CA - Billionaire Jeff Greene Says All Real Estate Will Soon 'Get Whacked': Our Approach

2023-09-01 07:30:00 ET

Summary

• A prominent billionaire who predicted the 2008 real estate crash is sounding the alarm once again.
• We analyze his prediction and share our thoughts on it.
• We also share our investing approach to the real estate sector in light of his concerns.

Billionaire investor Jeff Greene - who made $800 million off of his successful prediction of the 2008 real estate crash - recently suggested that the real estate sector (VNQ) will likely face significant distress in the near future. In this article, we will evaluate his prediction and then share our own approach to investing in real estate right now.

Jeff Greene's Bearish Real Estate Prediction

In addition to expecting the arrival of the much-anticipated and hyped office real estate apocalypse due to a combination of soaring interest rates and major headwinds from the work from home trend, Mr. Greene also predicts that virtually every real estate sector will get whacked. The reason? The trillions of dollars injected into the economy during the pandemic are being gradually depleted. This situation could lead to a decline in demand across all property sectors, including retail, office, and apartments, leading him to state:

What's that going to mean for demand for everything? Retail, office, apartments - every aspect of real estate is going to get whacked, and I think we're just in the first inning.

Mr. Greene pointed out that the pandemic funds succeeded in stimulating spending, but as they continue to get spent down, the demand for commercial real estate will decline. With 20%-25% of US employees still working remotely, commercial real estate demand is expected to decrease, leading to an increase in vacant spaces as office leases expire over the next decade. In fact, Goldman Sachs thinks that office space vacancies will increase by a whopping 267 million square feet over the next ten years.

Mr. Greene thinks that the headwinds will be felt most heavily in the class B and C properties and that trophy office properties will hold up fairly well:

I think when it comes to the B and the C properties, the worst is yet to come.

These properties will instead be valued based on how well they can be repurposed rather than on their cash flow generation ability since many class B and C properties will likely completely lose their attractiveness as office spaces. His advice to real estate investors? In addition to predicting an impending recession for the U.S. economy, he stated:

I would say you know, hold on to your cash and get ready cause there'll be some - my guess is, in the next 12 to 24 months - you're going to see some extraordinary opportunities to buy.

Our Approach

We definitely agree with Mr. Greene that a recession is likely for a number of reasons, including the steeply inverted yield curve:

Moreover, we see other reasons to be skittish on the economy and real estate by extension, including the plethora of geopolitical dangers (Russia and NATO showdown in Eastern Europe, Iran vs Israel in the Middle East, North Korea against South Korea and Japan in the Far East, and the China and U.S. showdown over Taiwan) and the unknown impacts that the rapid rise in interest rates and quantitative tightening will have on the economy:

In addition, we also agree that the office space is an unattractive place to be invested right now as it faces enormous headwinds from the work from home trend as well as the elevated interest rate environment. A recession will likely also hit offices hard along with the broader commercial real estate sector, and we expect even the very best office and retail land lords such as Boston Properties ( BXP ), SL Green ( SLG ), Vornado ( VNO ), Simon Property Group ( SPG ), Federal Realty ( FRT ), and Macerich ( MAC ) to suffer considerably on a fundamental basis in the coming months and years. Major asset managers with considerable real estate exposure such as Blackstone ( BX ) and Brookfield ( BN )( BAM ) will also likely continue to suffer some hits in some of their properties as they already have earlier this year .

We also think his prediction regarding the broader real estate sector is fascinating, in particular his bearish take on apartments. While rising interest rates have certainly called into question the sustained high valuations being assigned to residential real estate (both apartments and single family homes), the housing shortage in the United States helps to offset some of these headwinds. Time will tell, and we certainly agree that there will likely be some opportunities emerging, but we do not expect the residential real estate sector to suffer the same apocalypse of vacancies and bankruptcies that will almost assuredly hit lower tier and some upper tier office properties and likely even some retail assets in the coming months and years. Moreover, we think that his blanket warning for even commercial real estate may be overblown as some real estate is truly irreplaceable and some real estate also has very conservative lease structuring in place with investment grade tenants that leaves it well positioned to weather any impending storm.

What are we buying right now? We like the more defensive names in the REIT space that have well-laddered debt maturities and investment grade credit ratings. We believe that these securities are well positioned to weather any sort of broad real estate apocalypse and/or recession that may hit in the next 6-24 months. Moreover, we expect them to continue paying and even increasing their dividends. They are deeply discounted right now due to elevated interest rates and the broader fears over real estate sweeping the market, but we expect them to rebound sharply once their fundamental strength is proven and interest rates begin to fall as recession hits.

Some of our favorite lower risk picks right now include:

• Realty Income ( O )
• W. P. Carey ( WPC )
• Crown Castle ( CCI )

O and WPC are triple net lease REITs that have vast portfolios of mostly retail and industrial real estate with very conservatively structured leases attached to them. They enjoy remarkably high occupancy rates, have very high credit ratings (A- and BBB+, respectively), well-laddered debt maturities, plenty of liquidity, and impressive multi-decade dividend growth streaks. They have also held up extremely well during past recessions and crises, with their occupancy ratings and cash flow barely flinching and their dividend streaks continuing unabated. Despite these strengths, their stocks have taken a beating this year and now trade at below the private market value of their underlying real estate despite typically trading at a 15-25% premium to their NAV.

Moreover, their yields have now climbed to 5.5% and 6.5%, respectively, making them exceptional defensive income investments.

CCI, meanwhile, is a blue-chip communications infrastructure company whose mission-critical infrastructure and investment grade counterparties leave it well positioned to weather a recession and/or real estate apocalypse. Yet, due to its association with the REIT sector, rising interest rates, and some short-term headwinds to growth that should be resolved within two years, the stock has cratered to historically low valuations and a historically high dividend yield:

Between these three picks, investors can lock in a weighted average dividend yield of over 6%, strong long-term growth potential, and ultimately acquire well-managed and broadly diversified portfolios of high quality defensive real estate assets at a discount to private market valuations.

Investor Takeaway

While Mr. Greene is certainly justified in his concerns over the real estate sector, we are finding pockets of opportunity to buy high quality REITs with strong balance sheets and management teams and very attractive and well-covered dividend yields at considerable discounts.

As a result, rather than running with the crowd, we are opportunistically moving against the crowd to buy specific opportunities that are being unjustifiably beaten down by Mr. Market. We expect this to result in attractive long-term income and total return generation for our portfolio .

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