We recently sat down with Eric Sussman, Founding Partner at Clear Capital. Eric joined us to discuss real estate market volatility, rising cap rates, and the future industry outlook.
What is the current state of the real estate market? And what is driving the shift? (5:52)
- Investors are in a state of price discovery. Sellers are still living in the good ol’ days, while buyers are looking for distressed assets as a result of dislocation and higher interest rates. Both are off in their timing.
Is there a correlation between rising interest rates and rising cap rates? (7:30)
- Real estate data is always lagging. We don’t have real-time data.
- We’re experiencing an unprecedented rise in interest rates. Nothing like this in history. As interest rates go up, there should be an immediate rise in cap rates.
What is the impact of rising cap rates on the types of loans acquirers can secure? (9:40)
- We’re in a period of tremendous uncertainty. Uncertainty is never good for markets. Some lenders are pulling out entirely.
- Over the last 5-10 years, real estate funds are doing more short-term bridge financing for the value-added players. As a result, those funds have floating-rate debt, and many of their assets are probably underwater right now.
Even in a market like this, deals can still get done. But, with a looming recession, how do you project growth moving forward? (12:40]
- It’s important to take a step back. Look at the real estate, at the dirt, the location. Put everything else aside and consider if you really like the asset.
- There is no question in a recession, rents decline. However, we’ve been through a recession before. Step back and think historically. Over time, the market fundamentals dwarf the short-term moves.
Will the threat of recession bring new construction to a standstill? (16:15)
- New construction is down substantially. Not all that surprising given the higher cost of borrowing, shortage of labor, and lack of available land.
- Rising interest rates also make it more difficult for developers for a deal to come together.
Has rent control ever served to provide a better housing stock? (21:20)
- Short answer – no.
- Politicians are under pressure regarding the lack of affordable housing. There are measures on the ballots to bring rent control back. Whether you are in California, Oregon, or even Missouri, Florida, or Colorado – rent control is coming.
- Economists don’t agree on much, but the one thing they historically agree upon is rent control or pricing control, in general, does not work.
Given all of this, where is there room for opportunity in real estate? (22:42)
- As Wayne Gretzky said, “It’s about where the puck is going, not where the puck has been.”
- There is always opportunity. Look for the trends – housing affordability, migration from the coast.
- The future may be in those non-traditional markets. For example, think Cleveland, Cincinnati, Detroit, and Columbus. They offer the biggest area for growth and are markets where people can go where they can afford to live.
You can watch the full episode here:
About our Guest
Eric Sussman is a founding partner of Clear Capital, LLC, overseeing the firm’s capital, equity, and debt departments and strategic planning functions. In addition to his position at Clear Capital, he has been an Adjunct Professor of accounting and real estate at UCLA’s Anderson School of Management since 1995, where he’s been voted “Outstanding Professor” 15 times by MBA students.