The Year to Prepare, Not Predict.
As the housing market, along with nearly every other asset class, continues to grind higher into the beginning of 2022, several of our clients and colleagues are asking what I see on the horizon. While I have many opinions, I prefer to prepare rather than predict. I will begin by laying out how I currently see the larger macro-picture.
It’s tough to make predictions, especially about the future.
– Yogi Berra
Coming into the end of 2019, the yield curve had inverted, and economic growth was already slowing significantly. In March of 2020, as the pandemic raged through the world’s population, U.S. Capital Markets were crumbling until the Fed stepped in (right or wrong) and bailed out nearly everything possible. In the United States, stimulus checks and PPP loans kept many individuals and businesses afloat. All that helicopter money spurred the economy and created a lot of speculation in financial assets. I am not debating the merit or moral hazard of such assistance. However, the Fed proved they could curb a financial disaster by injecting a massive amount of liquidity into the system. What I believe is they simply postponed a financial disaster that we will eventually have to pay for, with penalties and interest.
Inflation vs Deflation
It seems like most finance and real estate professionals I talk to are firmly rooted in the inflationary camp. It’s completely understandable given the Fed’s recent pivot from “transitory” to “persistent” inflationary pressures. Personally, I am not sold either way and I fear Stagflation as the highest probability. Currently, I hold plenty of real estate, commodities, Bitcoin, precious metals, and hard assets, but I believe the deflationary spiral that the Fed has been fighting against since the Great Financial Crisis is still the largest looming threat.
We saw, firsthand, in 2021 that printing a massive amount of money and injecting it directly into the system will indeed trigger inflation. In this inflationary case, lockdowns and major supply chain disruptions led to more dollars in circulation competing for even less goods. Time will tell if all that quantitative easing can create sustainable economic growth.
As we kickoff 2022, inflation continues to represent a monumental issue while asset markets run hot. The economy is growing but considering how much debt we are taking on to achieve that growth, it’s a negative return. The Fed has announced they intend to taper asset purchases and raise rates to now combat the inflation they created. How anybody takes these people seriously at this point is beyond me. I hypothesize quantitative tightening will likely put an end to the debate. My best guess is we must hit peak inflation without continued financial support from Fed and Treasury. If the Fed raises rates three to four times this year, it’s very likely we will have a recession on our hands.
The Real Estate Market
Despite the potential headwinds I see in the coming years, I remain very bullish on real estate. In particular, entry level housing is the largest opportunity for our investors over the next decade, in my humble opinion. There continues to be a shortage of affordable housing in almost every market, but the shortage in and around resort and luxury markets is worse than I have ever seen.
Looking ahead, we require a few key things in upcoming projects.
Anything that is considered speculative or focused on the mid-to-high-end housing market must be a bite-sized project that we can move quickly and presale at least a portion of. I don’t see housing demand subsiding anytime soon, but I wouldn’t want to be building a multi-year luxury condo project, considering how expensive land and construction prices have become.
The multi-year projects I intend to pursue in the short term will be focused on entry-level rental and for sale housing where there is very little competition and large amounts of demand. They will be capitalized in a manner that allows us to ride out any economic storm, developing a product that has very little sensitivity to interest rates. I plan to build an income producing portfolio that will thrive regardless of who wins the inflation debate.
The Road Ahead
Investors can expect to see the following from Fortius Capital in 2022:
- Commercial – We will continue to be opportunistic in the commercial market. Our Rocky Mountain Commerce Park project has been very successful, and we hope to wrap up lot sales by Q2 of this year. We are looking at similar projects in other mountain markets and are also considering developing a portion of the remaining land at Rocky Mountain Commerce Park.
- Luxury Residential – We are currently underwriting a higher-end condo conversion project that, if we move forward on, should provide a solid return within a reasonably short timeline.
- Entry Level Housing – We will be closing on a 200+ tiny-home/RV park in Q1 of this year. The project is located in Eagle County, and we intend to develop and hold this asset as a long-term cashflow investment. The barriers to entry for a project like this are extremely high, and a development of this size will likely never be replicated again in this market. Because we intend to hold this project in the long run, we will strictly limit the number of investors and set a higher minimum on equity investments than previous projects. If you are interested in learning more about this project, you may request early access, here.
- Land Stream Fund I – I won’t go into a lot of detail on this just yet, but we are working to launch a fund that is focused on entry level housing with a residential ground lease (RGL) in place, rather than a fee simple, for sale model. Basically, we are going to sell units well below the current market price, placing these communities under a long-term ground lease that we’ll hold with our partners. We are currently working on entitlements for the first potential project in this portfolio. This represents an income-driven approach to entry level housing in resort markets that, I believe, will change how many workforce housing projects are built, funded, and financed in the future. If you would like to receive early updates on the Land Stream fund, you can sign up, here.
I will leave you with this: as deal sponsor, I require investors to write checks in support of Fortius Capital projects. Thus, it puts me at odds to say this, but I believe it’s a good time to be holding cash. Many financial assets are extremely overpriced under any metric, and the Fed is telling you they intend to let some of the air out via tightening. Will they be able to do that without a run for the exit? I guess we will find out. I do think that holding cash will become wildly popular again in the next 24 months. Here’s to the road ahead.
President, Fortius Capital