Real Estate – Part 10: Le Magnifique

“Hockey is a tough, physical game, and it always should be.” –Mario Lemieux (greatest hockey player of all time 😊)

In his native French language, he’s called “Le Magnifique.” Pittsburghers know and love him as “Mario the Magnificent,” or simply, “Super Mario,” and it’s tough to overstate what the number 66 means to those of us who grew up watching him transform the culture of hockey in western Pennsylvania. Thus, I thought it appropriate to dedicate this 66th edition of Alt Blend to the man who – despite not speaking English when he arrived in the ‘Burgh in 1984 – managed to create and lead one of the greatest NHL teams in history, persevere through cancer and severe back issues, and create incalculable economic benefit for his adopted home of Pittsburgh by saving the team from leaving the city in the late ‘90s.

To be fair, I’m very biased, having grown up in Pittsburgh as a hockey player and dedicated Penguins fan during Lemieux’s rise to prominence; however, there are legitimate arguments for why he may be the best who has ever played the game (yes, even better than Gretzky). Some of my favorite stats include being the most productive player of all time (highest career goals and points per game average) and scoring five goals five different ways in a single game (even strength, shorthanded, powerplay, penalty shot, and empty net – and he happened to assist on the other three goals scored in that same game) – voted as the “greatest moment” in NHL history. So, here’s to you, Mario: Thank you for the priceless memories and all you’ve done for the city of Pittsburgh, hockey, and society. We could use more people like you, but only a few are called to be such genuinely great humans.

Relative to relatives

My value judgment of Mario Lemieux may differ significantly from others – particularly people without Pittsburgh roots or love for the Pens. But that doesn’t make my perspective wrong. Instead, it means I give a higher value to “Number 66” because of where/when I grew up and how important he’s been to me, my friends, and my family.

Similarly, Real Estate prices can benefit or suffer from personal biases. Suppose a house you love is for sale, but it’s next to your relatives’ home. That location may either boost or decrease the price you’re willing to pay, depending on your relationship with those particular family members. For the average buyer, however, there are “less-squishy” ways of valuing a property, and that’s what we’ll cover now. Here we go!

What is this house worth?

I like the start of this Zillow article because it’s a straightforward way of conveying just how subjective home prices can be: “There are three values for any home on the market: What the seller thinks it’s worth, what the buyer thinks it’s worth, and what a professional appraiser will think it’s worth.”

While Teddy Roosevelt astutely asserted that “comparison is the thief of joy,” considering the value of a property based on others around it (“comparables” or “comps”) is an inevitable part of the home-valuation equation. Comps will mainly help you arrive at a house’s fair market value. Still, it also may be challenging to find a proper comparison, depending on specifics, like when other properties were sold, exact location, age, unique features, and size (of both the home and lot). It’s a starting point.

A buyer can pay any amount they’d like for a house, as long as the seller will accept it – and as long as it’s all cash! However, real estate purchases often involve borrowing money (aka mortgages). When using other people’s money as part of the purchase, the amount one can borrow is highly dependent on the appraised value of a property. In other words, a bank won’t accept your opinion of what a house is worth. Instead, they’ll introduce the perspective of a third-party professional (the appraiser) as the basis for lending ratios. When we hear of banks lending 80% of the value of a home – complementing the typical 20% homebuyers invest as a down payment – that’s based on the purchase price being less than or equal to the appraised value. Otherwise, the buyer may have to bring more money to the table to make the math work.

A third valuation – the assessed value – is also vital, as this is the value upon which property taxes are based. It should figure into a buyer’s and lender’s decision-making process, as taxes can be a significant part of the home’s cost. While, in many areas, property taxes may amount to only a few hundred dollars per month, here, in the greater NYC region, they are commonly an extra $1-$3k/mth for houses in the $500k – $1.5M range – on top of principal & interest payments, of course. Assessed values tend to be lower than the market or appraised value and are adjusted less regularly – often at the time properties change hands. There may be legal elements specific to each locale (e.g., a law limiting the increase in an assessed value at the time of a home sale). Potential buyers should ensure they aren’t in for a property-tax surprise due to an outdated assessed value.

We interrupt this regularly scheduled program…

Next time, we’ll get right into commercial property valuations, but there have been a couple of pertinent updates to this ongoing real estate topic in the news lately. I think it’s nice to have some “real-time” updates in Alt Blend once in a while, so let’s go on a slight tangent to finish out this current edition.

The ongoing commercial default conversation

A topic revisited throughout this series has been the suffering of (some) commercial real estate (CRE) in light of the higher interest-rate and work-from-home environment. The media, analysts, and others are attempting to assess the valuation impacts and second (or third) derivate implications (e.g., investment losses, credit losses, more bank failures?). With that in mind, I’ll call your attention to the latest memo from Oaktree’s Howard Marks, Lessons from Silicon Valley Bank. The piece’s last page is dedicated to examining the state of CRE. Notably, he states it may be estimated that “CRE loans represent approximately 8-9% of the average bank’s assets, a percentage that is significant but not overwhelming.” Importantly, that number a) excludes commercial mortgage-backed securities exposure (CMBS), b) is generally higher at smaller banks and lower at larger banks, and c) may be as much or more than the average bank’s capital.

Mr. Marks goes on to say that “notable defaults on office building mortgages and other CRE loans are highly likely to occur” and closes with the following, which reinforces what we’ve covered in previous updates: “No one knows whether banks will suffer losses on their commercial real estate loans, or what the magnitude will be.”

If you were to twist my arm for an opinion: I expect that select banks will suffer losses significant enough for them to fail. However, this represents exceptional situations of smaller banks with outsized commercial lending and concentrated or lower-quality loans. In such cases, larger banks will absorb those banks – just as we’ve seen with SVB, Signature, and First Republic – and it will be far from a systemic event.

Not your mother’s shed

In Part 8, we touched on distribution centers as one aspect of Industrial property types, but – bringing a different perspective on warehouses – this recent Bloomberg article is worth the read (h/t to David Bahnsen for bringing it to my attention). It outlines Blackstone’s foray into the market of smaller warehouses in Europe (aka “sheds”), where they utilized 3rd-party data to create a scalable strategy for identifying and purchasing properties. Conceptually similar to the “last mile” large fulfillment centers we discussed, Blackstone’s approach involved identifying properties in prime locations that could command much higher rents via clean-up and/or conversions of outdated structures. The compilation and digitization of data made that opportunity possible; thus, it’s another example of technology’s effect on real estate, but a very different one than the e-commerce impact we covered before.

The GOAT

As a wealth manager, I find that people LOVE real estate more than any other investment type, often having a more profound connection with property than I see with other holdings. It’s not uncommon to come across families with tens of millions (or more) worth of real estate that is concentrated and levered but with minimal liquid investments. And I’m not surprised when those same investors – with most of their eggs in the real estate basket, so to speak – will also split their smaller, liquid investments across multiple advisors or custodians for fear of having “all their eggs in one basket.” I don’t fault them for it, however, as I think it comes down to what they know and a sense of (real or perceived) control that gives them comfort. For many, it is a passion, a vocation, a calling, and indeed Le Magnifique of investments.

Until next time, this is the end of alt.Blend.

Thanks for reading,

Steve

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About the Author

Steven Tresnan, CAIA®, CFP®

Private Wealth Advisor

Steve is a Certified Financial Planner as well as a Chartered Alternative Investment Analyst®. He is also an Accredited Investment Fiduciary, which helps him offer guidance to clients with fiduciary responsibilities, such as board members of trusts, foundations, and endowments. Steve earned a Bachelor of Science degree in Industrial Engineering from Penn State University.

Steve serves on the board and finance committee of New Music USA – a national nonprofit devoted to the development and appreciation of new music in the U.S. – and volunteers as the Treasurer for Campus Fun & Learn, a child development center on the campus of Rockland Community College in New York. 

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