Yes, I did just ask that question.
Have we been wrong all along?
Because, according to our 18.6-year Real Estate Clock cycle clock, we are expecting the best years of the cycle (the most frothy, speculative years), are still in the (near) future.
And the cycle is intrinsically linked to land, and therefore the real estate market.
But one part of the market is on the brink of collapse. At least according to the news.
They say that it can no longer sustain changes to working patterns induced by the pandemic (and technology). And prices in this part of the market were set when interest rates were near zero.
And, in case you hadn’t missed it, they are nowhere near zero now….and unlikely to get there anytime soon.
I am referring to commercial real estate.
Remote working has crushed demand for expensive office space in central business districts. In some cities, vacancy rates are the highest they’ve been in decades.
Some commercial real estate (CRE) loans are going to go bad.
And this will influence the banks that lent them out. Leading to banking problems and then a crisis.
Are we on the brink? Has the end of the cycle come early?
The answer is very important for you. And that same answer will in fact surprise you!
So, let’s look.
The cycle always finds a way.
Regular readers of this newsletter know that I am based in Australia.
Australia is my home. But in terms of my interest in what’s going on, I am a citizen of the world. Because the cycle is now a global cycle and so what happens in other countries gives me vital clues about what’s happening everywhere.
In fact, the Australian cycle lags the US and Europe; so even IF I were only interested in Australia, I’d have to be alert to what’s going on elsewhere, to give me advance warning of what’s around the corner back home.
And thus, can better inform you about it via this newsletter.
Therefore, I was very interested when I found this story from the other side of the planet – in the UK.
But its significance is relevant everywhere.
CRE is one of the most contentious sectors in the real estate world. And, to underline the point, the media have consistently been predicting an utter and complete collapse.
But what have market forces done instead? Quite the opposite?
By the time you finish this newsletter, you should see, once again, the incredible advantage you can have with just a little bit of knowledge about the land markets.
Because here’s another valuable lesson straight from the history of the cycle; the land market always finds a way.
Learn to trust the dirt you stand upon.
If you want to measure the economic changes caused by the pandemic, then London’s financial districts are a great place to start.
London is unique in that it has not one but two financial districts – the traditional City of London. And the newer Canary Wharf district, some miles to the east.
Close to a million people travelled to and from work in those areas EVERY SINGLE DAY before the pandemic. This is about 10-15% of the city, heading to those two areas.
Financial services, more than any other industry, relied on cramming people into offices to eke out as much labor output as possible. This is why land prices are so high in such places.
Because every square foot of commercial space here is fully used for productive uses.
And around the offices a rather large economy depended on them – cafes, pubs, restaurants, after-work leisure activities.
The changes from the pandemic killed this economy.
Take inner city restaurants. The number of restaurants in the wider city fell by 28 per cent over the past four years, outpacing the rate of closures across the capital. This was a clear sign that there were far fewer workers going out in the evenings in the city.
The same thing was going on in Canary Wharf.
Once viewed as a less desirable but cheaper alternative to office space within the city, Canary Wharf has also struggled mightily with the tendency towards flexible work and the combination of falling rents and land values.
Vacancy rates soared. The media gleefully reported the fact that companies such as HSBC were moving out of the area, because they could downsize and didn’t need the massive buildings that could be found in the area.
And this pattern has mirrored problems elsewhere, such as in New York. It has 20% vacancy rates in Manhattan offices.
This breeds a narrative of a real estate sector struggling to cope.
You can understand why some have even called for a complete commercial real estate collapse globally!
But is this really the case?
You can’t survive if you insist on swimming against this tide.
It never ceases to amaze me that folk think that businesspeople will happily place their collective hands in their pockets and watch on as their businesses fail.
Same with the banks that wrote the business loans they rely upon to do business.
But that’s the media’s narrative. It’s like they never stopped to ask what a market-based economy would do in situations like this. Well, here comes the answer.
There were a lot of empty buildings for a time.
But things are now turning around. Back to the City of London’s restaurants. In the past year — it has lost just 1.3 per cent of its sites, the lowest rate of decline for any London district.
What’s going on? Because remote working is still here to stay.
Source – FT
Believe it or not, the reopening of premium and upper market restaurant reopening is being led by London’s financial district, as it presses ahead with efforts to redefine itself as a destination for restaurant-goers, day trippers and tourists in a push to offset the drop in office workers’ footfall since the shift to hybrid working following the coronavirus pandemic.
You heard that right. An area that was exclusively catered to the Monday-to-Friday economy, and the office worker, is reinventing itself.
A higher demand for corporate lunches from workers in the office between Tuesday and Thursday, as well as increased footfall from tourists on weekends, is behind this drive.
This was once an area of London that had virtually nothing going on during weekends. That has now completely changed.
It does appear that the winds of change are also sweeping outwards towards to the other financial district, Canary Wharf.
Source – FT
Canary Wharf has shifted away from its traditional bank-heavy mix: financial services tenants now make up 55 per cent of tenants compared to 70 per cent a decade ago. The group has joined forces with the Eden Project to revamp public spaces, is adding leisure facilities and the estate has 3,500 residents compared to NONE three years ago.
There are plans for more housing, and a primary school, as well as a new life sciences quarter on North Quay.
Not to mention the new railway line (the Elizabeth line) that runs through here to Heathrow airport. Is it too soon to mention what infrastructure like this does to the surrounding land?
Markets found a way to repurpose space.
Commercial real estate in London is not collapsing; it’s evolving. Will it work out in the long term? We shall see. Here is something else this proves to me.
You can call for a collapse in real estate. Other can worry if the end is nigh.
The 18.6-year Real Estate Cycle is indeed still turning. A collapse is not imminent. Those who are worried about their own cities, London is showing how things can continue.
The financial media have got this wrong. All they wanted to push down our throats was one side of the argument – the negative side. I have tried to redress this some today.
But you must ask: what else are the media wrong about today?
If you invest in this area of real estate or own a business like a restaurant, should you still be nervous and apprehensive about your near-term success? Or is this a sign that the turnaround has begun and plans for the next few years should instead be laid out for future growth?
Where would you find the timing to best guide you in make such important decisions?
Well, that starts here; a membership to the Boom Bust Bulletin (BBB).
Give me the opportunity to take you in depth into the cycle.
Learn about the history of both the 18.6-year Real Estate Cycle and the real reasons why interest rate rises, house prices, and stock markets are so indelibly linked.
It will teach you how to decipher the news that we get bombarded with every day to focus solely on what truly matters.
No more negativity and noise, just the science of the economic rent and the timing inherent in the real estate cycle.
This is all you need to succeed.
Here, in broad terms, is the advice the Property Sharemarket Economics (PSE) team have given its UK (and global) members these last 12 months and longer.
Should history repeat and land prices reach their peak later this decade, it isn’t global residential real estate that outperforms. Its global commercial real estate that produces the largest gains at this time.
You must trust in over 200 years of real estate cycle history and remain patient as the land market finds a way. Have you heard that advice anywhere else?
Because the land market dictates the timing, what you should expect to happen next, and when. Granted, it’s been tough to clearly see these things with so much else affecting the UK economy.
But imagine for a moment that over these last 12 months you could have replaced fear, uncertainty and anxiety with clarity and confidence because you had your timing in place and knew what you really needed to focus on to prove the tide was turning in your favour.
That’s how the BBB can help.
As a Boom Bust Bulletin member you will receive 12 monthly editions a year detailing all the key turning points of the cycle, a deep dive into the most important markets across the globe and ways that you can personally benefit from this knowledge.
All derived from our unique and proprietary research – which you’ll not find anywhere else.
Plus, you’ll receive exclusive invites to BBB member-only webinars when we run them.
All this for just US $4 a month, less than a takeaway coffee.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team