A weekend topic starting with Fortune. “A new era of higher borrowing costs and more cautious lenders—coupled with slowing growth and recession fears—has frozen once-red hot segments of the U.S. economy. Logan Allin, founder of Fin Capital, a fintech-focused VC and private equity firm, told Fortune that he doesn’t see the VC space recovering fully until 2024 due in part to the credit crunch. He gave the example of the now-defunct crypto exchange, FTX, which he ‘passed on’ because they didn’t get past basic ‘checklist items’ in the due diligence process, including not allowing an independent auditor to look at their financials. But other venture capitalists invested millions in the firm without even looking at their books. ‘They were asking for financials and the team at FTX was sending them excel spreadsheets,’ he said. ‘It was just absurd.’”
“‘In 2021, and 18 months before, people were just throwing money at anything as fast as they could because there was so much cash, but in 2022, the credit markets basically froze up,’ emphasized Jim Cahn, chief investments officer at Wealth Enhancement Group, a wealth management firm. ‘And that’s why you’re seeing these industries freeze.’”
From Market Watch. “A credit downgrade wave has begun to hit the highflying $1.4 trillion U.S. leveraged loan market as the Federal Reserve’s rapid pace of interest rate hikes threatens companies hooked on cheap debt. ‘We think the last 10 years aren’t normal,’ said Danielle Poli, a co-portfolio manager of the Oaktree Diversified Income Fund. Poli pointed to potential blowback in the form of structures that ‘probably shouldn’t have gotten done’ with aggressively adjusted earnings that won’t play out. ‘At some point, we think weakness among the loan issuer base combined with elevated rates will cause an increase in defaults,’ Poli said.”
McKnight’s Senior Living. “No industry is immune to the pressures of economic uncertainty and rising inflation costs, including senior living. Whether you’re a regional provider with a mid-size footprint (6 to 10 properties) or a large real estate investment trust with more than 20 properties, sometimes offloading underperformers in the portfolio is the fiscally responsible thing to do. Blue-sky and new build construction has come to halt for many, and although some developers are on the cusp of finishing the property itself, there isn’t a pipeline to fill it. Recently, we’ve seen numerous deals come to market where a multifamily developer decided to expand into senior housing without any expertise or knowledge of the industry (other than that the person thought he or she could make some fast cash because of boomers flooding the market) and as a result couldn’t sell or fill the units. Stalled construction projects quickly are becoming sell-off assets.”
From India Today. “Amazon shocked the world by announcing large-scale layoffs earlier this month. As part of its cost-cutting spree, Amazon is now selling some of its offices. As per a Bloomberg report, Amazon will be selling an empty office in California that it bought around 16 months ago. The property was bought for USD 123 million in October 2021 in order to lock down some real estate so that it could be used in the future. Now, however, the company is selling the office and as per the report, it is under contract with a commercial real estate developer. A source told Bloomberg that Amazon might be incurring a loss on the sale.”
“An Amazon India employee recently described the upsetting atmosphere at the office after the layoffs began. The post on Grapevine, a community app for Indian professionals, by an employee writing under a pseudo name. The employee wrote, ‘About 75 per cent of my team is gone. Although I’m in the remaining 25 per cent, I don’t feel motivated to work anymore. They are firing people in cabins. People are crying in the office.’”
Bisnow Washington DC. “Atlanta-based Invesco Advisors sold a 10-year-old office building in Arlington for $30M less than its previous price, an indication of how the office market has weakened. The firm sold the 134K SF building at 1776 Wilson Blvd. in October for $59.5M, property records show. Invesco bought the building for $90.3M in 2014.”
The Scottsdale Progress in Arizona. “Managing some 5,000 short-term rentals in Scottsdale was a monumental task for the city’s staff and elected officials in 2022, and it looks to be just as daunting a job in 2023. That’s why Mayor David Ortega used his annual State of the City address Jan. 18 to call for a new zoning category for short-term rentals. He blamed the short-term rental ‘debacle’ on the state Legislature. ‘In 2015, actions taken by the Arizona Legislature essentially legalized short-term rentals everywhere, pre-empting local zoning oversight,’ Ortega said. ‘Unregulated short-term properties violate our outstanding neighborhood livability.’”
“Over-construction of multifamily complexes is just as big of a crisis for the city, Ortega said. ‘Similar to the short-term rental debacle, which originated at the Arizona Legislature, there are forces at the Legislature attempting to pre-empt our oversight of dense apartments,’ he said. ‘This a concerted national campaign by multi-housing interests to subvert our zoning rights. Their aim is to overwhelm cities like Scottsdale. Essentially with the flight of populations from dense urban cities, the multihousing interests want to cut their losses there and bring massive density here. Their lobbyists and elected sympathizers blame mayors and city councils from Peoria to Gilbert to Chandler and in-between,’ he said.”
The San Francisco Chronicle in California. “The Bay Area did not take home as many spots as you’d think on a recent report of the most expensive places to rent in the country. In fact, we barely made it to the top 50. ‘In San Francisco, the median one-bedroom rent was close to $3,500 in July 2019. That number dropped to $2,767 by July 2021,’ said Shane Lee, a RentHop analyst who worked on the report.”
The Mountain Democrat in California. “Homeowners aren’t responsible for the policies that led us to the highest inflation in 40 years. They didn’t ask for historically low mortgage rates, high energy costs and $31 trillion in federal debt. Sure, sellers directly benefited from inflationary policies and all homeowners experienced a substantial increase in their home’s equity, but it wasn’t homeowners, builders or Realtors who initiated or advocated for an inflationary economy. They know better. Whenever we have inflation above the Fed’s target of 2% the Fed starts raising interest rates. Real estate sales and property values are the first to feel the effects and the Fed action is usually followed by a recession.”
“That correction of the housing market began six months ago. The median selling price for an El Dorado County home in June of last year was $700,000. It’s been downhill from there. July’s median selling price was $634,000 and by December the median selling price had dropped to $535,000.”
From KCRG in Iowa. “Buying a home can feel intimidating, especially for first-time homeowners and after the wild market we saw last year, but people looking to buy a home in 2023 likely won’t have to deal with low inventory and rising prices like in 2022. Demand was so high that homes were selling within hours. ‘People weren’t making great decisions,’ said Robert Stiles with Revolution Reality in Cedar Rapids.”
From CTV News. “An Ontario man says he is ‘devastated’ after spending his entire life savings in an investment scam he got involved in from a YouTube video he watched. ‘I’m devastated. It ruined me, and it’s my life savings gone,’ said Stephen Carr of Meaford, Ont. Online investment scams continue to be a massive problem in Canada, and Carr is one of many victims. According to the Canadian Anti-Fraud Centre, 2021 saw $379 million in fraudulent losses in Canada, with the number one cause for loss being cryptocurrency fraud.”
“Carr said he was on YouTube when he saw a video that promised he could make large amounts of money trading commodities, foreign currencies and cryptocurrencies. He said he contacted the company and started off with an initial amount of $250 to invest. When that appeared to be growing, he put in another $2,500. At one point, Carr asked for a $1,000 withdrawal, which he received and gave him confidence the website was legitimate. After that, from a period in October 2022 to January 2023, Carr invested his life savings of $498,000.”
“‘What I didn’t know at the time is this trading platform I was on was a simulation, it wasn’t connected to anything, like a flight simulator that’s not connected to a real airplane,’ he said. Carr became concerned when he thought his funds had grown to 1.3 million and wanted to take some out. But, he was told he would have to pay a $150,000 liquidation provision to get his money. ‘I got conned, and in hindsight, I put a ridiculous amount of money in this and a ridiculous amount of trust in these people,’ said Carr. ‘I’m devastated. I’m in the process of selling my house and have to reorganize my life. I’ve got maybe two or three months of useable cash left, and that’s it.’”
Stuff New Zealand. “House prices might be in reverse right now but there are still plenty of people who think the property ladder is more like a golden escalator. And they expect regular escalator service to resume. At the end of last year property prices fell at a decreasing rate because some thought the market had hit bottom and tried jumping back in.”
“But a lot has changed since 2020 when a tidal wave of demand met a static wall of supply and prices shot up: there are tax changes around interest deductibility, faster consenting processes, allowances for more density in big cities and a ramped-up public housing build. Even if interest deductibility is reversed the Reserve Bank could pare back lending on residential property by implementing debt-to-income limits – curbing the ability of property investors to borrow on their existing portfolios to buy new properties. That has CoreLogic’s Nick Goodall thinking that when the market bounces back we might not see the same rapid price escalation as in the past; instead prices might just rise in line with incomes.”
“‘When you look at a lot of analysis that’s been done on the main factors that have caused the strong increase in house prices over the last few decades, you do start to think, actually, maybe some of these fundamental factors are starting to change,’ he said.”