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607: Real Estate Disruptive Trends

March 21, 2022bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 607: REAL ESTATE DISRUPTIVE TRENDS

The face of U.S. real estate investing has changed dramatically in the last 7 years, however, even bigger changes are on the horizon!. In today’s podcast, real estate syndicator and influencer Neal Bawa shares how tokenization and other disrupters will revolutionize REI and syndication in the next 3 to 5 years!

What You Will Learn

Is there really a housing shortage?
How cryptocurrencies will radically transform real estate investing as we know it today
Where is the major population growth occurring in the U.S.?
How did crowdfunding lay the foundation for crypto in real estate investing
Why are annual multifamily values increasing 4X while population growth is only increasing at 4%
How crypto will help syndicators to raise significantly more funds than ever before
Why is real estate becoming a tradable commodity?

About Our Guest

Neal Bawa

Last show where Neal was a guest on the Old Dawg’s REI Network Podcast: 453: Real Estate Investing in the Coronavirus Economy

Neal brings extremely strong strategic and operational experience to his role as CEO at Grocapitus Investments. Neal sources, negotiates and acquires commercial properties across the U.S., for 700+ investors at more than $1 billion. Current portfolio has over 4,140 units. The portfolio includes multifamily and student housing properties in 17 metros and 11 U.S. states. Neal is a nationally recognized, in demand speaker at Multifamily events, IRA events & meetups across the country. Nearly 5,000 students attend his multifamily seminar series each year and hundreds attend his Magic of Multifamily boot camps. Neal’s nationwide Meetup network (Multifamily University) had thousands of members pre-Covid. Neal leads Grocapitus Investments where he is driving the syndication and acquisition of multifamily properties.

Other previous Old Dawg podcasts featuring Neal include:

What’s Happening in Real Estate Today?

The disruption in real estate has been under way for the last 7 years
Most people still haven’t noticed
In 2014, the Jobs Act passes
- Crowdfunding portals open
  - The first one that opened and scaled was called CrowdStreet
    - It grows at 50-200% per year
    - The last time they published their numbers was in July of last year
    - They raised $641 million in a single year
    - 15% of all real estate today is crowdfunded
      - It’s expected to be 50% in the next 3 years
  - Crowdfunding is a technology process
  - CrowdStreet is up and down in terms of quality
    - But, in terms of quantity, the numbers are there and people are actively participating
  - U.S. population growth is up less than 1/2% a year
  - U.S. GNP grows at 1 to 2% per year
  - Crowdfunding is up 50-100% a year
    - It could be 50% of the U.S. real estate market in 3 years or less
This is just the introduction – the real game hasn’t even started yet
- The true disruption has yet to happen
- $15 billion a year using pure technology to connect millions of accredited investors to commercial real estate assets all in just 7 years
- Now it’s compressing and now it’s accelerating
Take a look at the pricing
- 2014, the Jobs Act passes
  - Prices were at around a 7 cap rate
  - Today, they are around 3.5 cap rate
  - For example, the same building just doubled in price
  - The price of a building today is at 3 to 4 times more than what it was in 2014
  - Our population has only increased by 4%
  - Our commercial property prices are up 4X – 400%
    - All because of the impact of technology
From the moment you go from a completely illiquid asset class that provides cash flow to somewhat of a level of illiquidity
Crowdfunding has provided an opportunity for average people to invest in
- Commercial
  - Industrial
  - Data centers
  - Cannabis growing buildings
- And hundreds of other asset classes
  - (i.e. student housing, senior housing, etc.)
And we’re just at the beginning of this process
These investments are still illiquid
- Unlike the stock market, which is liquid
- Unlike crypto, which is liquid
Just having the access to 200 million accredited investors has caused prices to go 4X in 7 years

Is There a Housing Shortage?

Neal says it’s very nuanced
- We’ve seen a significant reduction in the U.S. birthrate since 2018
- U.S. population growth is slowing dramatically
The projection of 5 million homes short has reduced to 3 million short
- By 2025, he projects that housing will be short only 1 million homes
The housing shortage projections were based on birthrates that don’t exist today
He doesn’t think there will be a shortage forever
- In the next 5 years, it will be dramatically low
- However, he thinks that in some areas of the U.S., the shortages will be just as bad as it it is today and even worse
If you look at the housing market in the 70s and 80s, they didn’t look at a “U.S. Housing Market” – they only looked at housing on a market-by-market basis, not a national market
- You could have a meltdown in Houston
- And, in California, the market is doing great!
- Seattle could lose Boeing and you’d see housing lose 20-30% of value
- While the New York market is booming
- Neal predicts that, in the next 5 years, we will return to that same place
Neal lives in and loves California but he has not invested one dollar of his billion dollar portfolio in California
- California has no population growth, despite what you are hearing about immigration – legal and illegal
- People are leaving the state in like a flood due to
  - Liberal politics
  - High taxes
- Silicon Valley had no population growth in 2020-2021
- San Francisco lost 50,000 people

Where Are People Moving?

It’s going southward and eastward
The parts of the U.S. where there is massive growth is called “The crooked smile”
- It starts in Eastern Idaho, goes down through Utah, through Arizona, passes through parts of New Mexico, to Texas, Alabama, Georgia, Florida, to North and South Carolina
That’s where almost all of the growth is happening
Cities like:
- Phoenix
- Austin
- Tampa
- Orlando
- Dallas
- Houston
- …are seeing enormous growth
- Their growth is 3X and 6X that of the U.S.
- It’s also the area where housing shortages will be seen
And in cities where there is no growth…
- They are still expecting prices to go up like they have in the last 5 years
- They have their heads in the sand thinking that they will continue to get price growth WITHOUT population growth!
  - It makes no sense whatsoever
  - To assume that cap rates won’t figure this out is outrageous
  - People aren’t looking at the data
Five years ago, the top real estate metro markets for lowest cap rates/highest prices per unit were:
- Boston
- New York
- Los Angeles
- San Francisco Bay area
Today, the number one market in the U.S. for lowest cap rates is either Dallas or Phoenix
- And the one racing up the charts is Austin
  - They have 4 Seasons condos, 3 bedrooms, for $9 million
  - Austin is currently the hottest metro in the country for rich people who want to buy second homes
- New York is no longer in the top 10 markets in terms of lowest cap rates/highest prices – it’s number 11!
- California will be out of the top 10 in the next 2-3 years

Real Estate in the Next 10 Years

It will be really great in some areas and not so good in certain places
New home construction should catch up in some areas
- There will be less shortages because the projects based on birth rates is off
In the next 4 or 5 years, we are going to have to “re-draw” perceptions of housing demand
People think that, because real estate survived Covid, that it is strong market – that’s a misperception
- Things will be weakening in areas over the next 4-5 years
That’s why it’s so important that you keep your eyes on demographic trends and make your bets on metros that are extremely strong – because you’re safe there!
- Go where there is massive population growth
- Phoenix is 6X US population growth – same as Austin and San Antonio
Everything that happened with crowdfunding over the last 7 years was a preamble to what is coming – it’s going to get more complicated
- Real estate is illiquid
  - For example, if you invest $100K in a real estate syndication, that money is stuck there for 5 years
  - Five years from now, there will be no commercial real estate syndicator that will be illiquid – by 2026
  - Just as every commercial real estate syndicator uses software to manage their investors (investor management software), an investor will not invest in your project if it is illiquid
    - How will they create that liquidity between now and then?
      - The answer is… tokenization!
        
        Everyone has to tokenize their product
        
        Alliances and groups will be formed
        
        Investors will be able to trade their tokens
        
        In 2009, an unknown programmer created Bitcoin
        
        That created the crypto rush that you now see
        
        Bitcoin could be used as a currency but it was terrible in terms of its intelligence
        
        In 2015, another group created Ethereum or “Ether”
        
        Conversely, Ether was very smart
        
        It had smart contracts
        
        It had the ability for an issuer to say, “Instead of certificates for my syndication, I’m going to issue tokens. And if someone’s certificates get hacked and stolen, I can reissue them because of that smart contract. And, if I want to sell this building, I can actually pay the profits to the token issuers and make the tokens null and void ”
        
        So now you get the benefits of Bitcoin
        
        The decentralization
        
        The transparency
        
        The access to every transaction on a worldwide ledger that no government can change
        
        You get a worldwide audience of people who have gotten very, very rich on Bitcoin and other crypto who are looking to buy something tangible
        
        You get all those benefits AND you also get the control that we have had at this point in time
        
        The money goes into real estate!
        
        Nothing changes except that people now have liquid access to those tokens
        
        In five years, that is going to completely change commercial real estate again

What Will Crypto Real Estate Investing Look Like?

It won’t be as different as most people think
Look at what happened with crowdfunding in just 7 years
Right now, there are hundreds of start-ups offering the ability to “white label” your multifamily community and sell tokens
These same communities then tie to these mega-exchanges
The beauty is Bitcoin!
- Bitcoin is a $2 trillion asset class
- But you don’t have to worry about the volatility of Bitcoin because your token has an underlying asset – it’s not like Bitcoin!
  - Real estate tokens have an underlying value – the building itself!
    - If the token drops 50% who do you think will buy the tokens? The other investors in the project
      - It has a floor
      - But it doesn’t have a ceiling!
- This will internationally flow in real estate
- Unlike stock markets, however, which are government regulated, that same restriction does not apply to crypto!
- Crypto trades 24-hours-a-day in real time, in dozens and dozens of exchanges, with hundreds of millions of customers
  - What if those hundreds of thousands of customers could buy multifamily with their tokens?
In 2018, the first multifamily project was tokenized
- It was in New York
- And it was a dismal failure
- They tried to sell tokens to non-U.S. customers
- It failed because the movement hadn’t taken off yet
Today, there are about 100 properties in the U.S. that are at some stage of tokenization
- But there are steps that have to be taken
  - If you want to sell to non-accredited investors, you have to wait a year after your offering is completed
    - Therefore, tokenization is not a way to raise money yet
    - Existing syndication investors are happy with the way they already do things
    - But younger investors, with crypto wallets and who are already actively trading crypto currencies, are going to be the ones who will drive real estate investing tokenization
    - It’s a process
    - It was younger people who drove crowdfunding too
    - It will be quicker with real estate tokenization because if provides the “liquidity option”
    - Plus they can invest with the same sponsors that they are already familiar with
    - But, with tokenization, they will have the liquidity
    - Neal is convinced it will only take 5 years to ramp up to tokenization
The SEC currently allows you to tokenize your commercial real estate syndication investment and, one year after the raise, to trade your tokens on “t-ZERO”
- Anyone can, after a year, buy them
- Neal thinks the one-year waiting period is good
  - Because he would never want to release tokens on his own projects in their first year
    - He wants to show a year’s worth of progress
      - If it’s a new construction project, he wants to show the project being built
      - If it’s a value-add deal, he wants to show rents being higher
    - He wants to control that listing on t-ZERO for the first year and…
      - show all the upgrades he has done
      - show a graph with his rents going higher
      - show a graph with his net income going higher
        
        and let people see the Net Income from $100,000 to $139,000 in one year
        
        to see that the Value has gone up
- With syndication, you never had that opportunity
  - You could look at proformas
  - You could look at track records
  - But with tokenization, you can invest after progress has been made
  - There will be a strong emphasis on performance the first year
- With tokenization, an investor can have a choice
  - An investor can choose to get their monthly or quarterly dividend transferred into their bank account (the old syndication way)
  - On an investor can get their payment in the form of Bitcoin or Ethereum
    - The crypto can always be changed into US currency whenever they want

Tax Benefits

There may be tax benefits by receiving payment via crypto but Neal feels the U.S. will quickly find a way to tax you
However, non-US investors may be getting the biggest tax advantage, depending on how their country may try to track the crypto income
- Foreign investors may flock to those crypto payment syndication opportunities
  - Which will significantly increase the value of the tokens

Real Estate as a Tradable Commodity

How is it that population is only increasing at 4% but multifamily properties are increasing in value 400%?
- Because real estate is becoming a tradable commodity
  - Tradable commodities, by their nature, goes up because they are being traded
  - The average multifamily hold 20 years ago was 8 years
  - The average hold today – less than 3 years!
  - And it’s because of trading!

Stay Informed!

Things are evolving and changing very rapidly
We need to keep up with the changes ahead for real estate investing
The 2020s are going to be much more challenging for real estate than the 2010s were, even though 2020-2012 were pretty challenging
After that, we have had “one long party”
- Some will keep partying
- Some will have trouble
Education is key!
Neal has a portal called: MultifamilyU.com where you will find:
- Thought-provoking articles and webinars
  - They have presentations on:
    - Trends
    - Disruptive Trends
    - Tokenization
    - PropTech (something that is changing how property is being sold and purchased around the U.S.)
- Go and register and you will receive notifications on exciting upcoming webinars, articles, etc,

How to Reach Neal

For investors: GroCapitus.com
Google him: Neal Bawa

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Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com

bmanassero

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