This is how the meme goes:
At the time of writing this post, Bitcoin is up ~129% YTD. One Bitcoin is now US$101,256.70, which is a big deal in that it's a nice round milestone and it sounds like an impressive number to most people, including me. The result is that more people now want to buy Bitcoin, hence the above image. Now, this may turn out to be a good time to do this, or it may not be, I really have no idea. But as a crypto believer and long-term holder, I'm certainly happy to see this momentum.
At the same time, the current crypto market makes me want to buy less of it. Ethereum, which makes up the majority of my holdings, is also up this year. But I was dollar-cost-averaging more of it over the past few years when it was dropping and sentiment seemed to be against it. That, to me, felt like a better time.
My favorite investing framework is one that I have written about many times before on this blog and one that people far more successful than me like to talk about. It goes something like this: you want to be right about things that most people think are wrong. Said differently, you want to aim for non-consensus bets, and that's because it's pretty hard to find value when everyone else is chasing the same thing. Markets are competitive.
So as a general rule of thumb, if you can find opportunities that you believe wholeheartedly in, but that many people think are dumb, then directionally, you're probably getting warmer. Obviously, you can't believe in something and then be wrong about it. That's not productive. But if you start with something that many/most people are critical of and then work backwards, you might find something interesting.
I am reiterating all of this today because of our current market dynamics: crypto is way up, as you know, but many real estate markets are way down. For example, here in Toronto, few people are buying pre-construction homes, whereas a few years ago, they were lining up and banging down the doors of sales offices. We have moved from consensus to non-consensus.
This is making for a challenging development environment. But at the same time, I think it's a wonderful opportunity for people looking to buy/rent a home and for real estate companies willing to grind it out and be creative. Legacy deals will need to get worked out and competition is only going to lessen as groups leave the market to focus on other things, like buying Bitcoin above $100k.
More specifically, this is what I'm excited about right now as a developer:
It is significantly easier to buy wonderful real estate. There's far less competition, and so the opportunity is there to structure creative deals. This is especially valuable for smaller companies like ours.
You have to know what you're doing to be successful. The market isn't going to bail you out. You need to roll up your sleeves and execute on your strategy.
Creativity and new ideas are now being rewarded. A red hot market only strengthens our bias toward the status quo. Everything is working, so why change? Except now it's not. So what are we going to do?
Market cycles are a healthy phenomenon. And I think we'll start the next cycle in a better place. Housing will be more affordable and projects will be better tailored toward end users, among other changes. But in the interim, there is now this great opportunity to be right about things that most other people think are wrong. And that's because so much feels wrong. But that's okay. Because it's actually the exact precondition you want.
Disclaimer: Nothing in this post should be construed as investment advice. I am long Ethereum and Toronto housing, and I don't plan to change this, but you should do your own homework.
Cover photo by Saad Salim on Unsplash
In years past, it was relatively simple for Toronto condominium developers to underwrite pre-construction sales (which, as most of you know, is a requirement for construction financing). Notwithstanding the temporary blips, like at the start of the pandemic, it was easy to feel generally confident that the sales would be there when you needed them. It was just a question of 1) pricing and 2) how quickly could you get there (i.e. get through the zoning and entitlement process).
This is not the case today. And it's happening in many (most?) markets, not just Toronto.
Today, the market clearing price for new condominiums is below the cost of actually building them. So no developer knows what the pricing should be, because no developer can price there and still have a feasible project. In addition, the question of timing is no longer dependent on approval timelines (though please don't take this to mean that approval timelines don't impact projects). At this point in the cycle, there are lots of zoned sites available. The question is now: When will the pre-construction condo market return?
It is impossible to know the answer to this. If you have a truly differentiated product catering to a specific buyer pool, then it is possible the answer could still be today. But if you look at the number of condominium suites under construction in the region (more than 85k) and the number of suites expected to finish construction this year (around 27k the last time I checked), most people are broadly assuming the answer is, at the very least, a few years from now.
Not surprisingly, this is having a meaningful impact on high-density land values. If you don't know when and for how much you can sell for at the back end, then it's pretty challenging to run a residual land value model today. Because it's a lot harder to have conviction in your assumptions. What this also means is that, if your assumption is the market will take years to return, then you need to add in this additional cost of time into your model.
To provide an indicative example, let's say that you're buying land today for $75 per buildable square foot, but that you don't anticipate being able to launch condominium sales for a few years. The result could be that once you add in interest charges and other carry on the land, your effective land basis could end up being somewhere closer to $125 pbsf. (Again, these are just indicative numbers.) The end result is that you have to pay that much less today.
In today's market, you need to have the flexibility of patience. So this is one of the ways that developers are thinking about new acquisitions, assuming they're still active. And it represents a significant discount on land (>50% in many cases) compared to where we were a few years ago.
This week it was reported that a South American family has bought and closed on ~$27 million worth of residential condos at Waterline Square in Manhattan. Apparently they went into contract (after the online showings) and closed on the same day, which I suppose you can do when it's an all-cash deal like this was. The agent, Maria Velazquez, didn't disclose who the family was, but apparently they're from Peru and they wanted a safe place to park their money during this pandemic. Uncertain times usually create buying opportunities, and it sounds like the family did get a bit of a bulk discount here. But it's also interesting to see where capital is flowing right now and what is perceived as a safe haven. Residential real estate in one of the world's preeminent global cities probably won't come as a surprise to any of you.