ECONOMIC UPDATE

Over the past two years, the Federal Reserve has taken unprecedented emergency response actions not seen since the US recession erupted in 2008.  The goals have been, and not limited to, the loosening of credit, the supplementation and/or replacement of household income, the promotion of consumer spending, ensuring the solvency of our banking system, and providing stimulus for “Main Street” businesses. 
 
As a reminder, a significant amount of money has been thrust into the economy:  Notable federal support efforts have included the $2.2T CARES Act (3/2020), the $483B Paycheck Protection Program and Health Care Enhancement Act (4/2020), the $920B Consolidated Appropriations Act of 2021 (12/2020), the 2021 $1.9T America Rescue Package and most recently, President Biden’s $1.0T infrastructure bill (signed 11/2021).  The Fed also rolled out 9 support facilities in 2020.  To highlight, the MSLP (Main Street Lending Program) helped SMEs and non-profits, the MLF (Municipal Liquidity Fund) supported local governments, the $750B PMCCF (Primary Market Corporate Credit Facility) added liquidity to large businesses and the TALF (Term Asset-Backed Securities Loan Facility) supported loan securities such as student, auto and credit card debt. 
 
On the policy front, the Federal Funds rate was cut by 150bps in March 2020, lowering the benchmark for short term rates to 0.00% - 0.25%.  This led to a strong rally in the longer-end of the US Treasuries curve.  Forward guidance from the Fed signaled “near zero” rates until inflation and unemployment data demonstrated stability and growth.  In March 2020, the Fed shifted their QE program to loosen the flow of credit by committing to the purchase of $500B in Treasury debt and $200B in government guaranteed MBS securities.  

The tapering started this past November and should persist over the near-term.  With QE now underway, the real estate market will use UST bond yields to closely monitor borrowing rates.  While luxury markets have a high incidence of all-cash deals, more than 62% of Americans carry a mortgage accounting for ~ $10T in debt (US Census Bureau).  Rates remain at relative historical lows but broader economic factors like inflation and overall credit availability could add pressure on consumer income levels.

The S&P500 has now exactly doubled from the 2,305 3/20/20 low to 4,620.  The combination of higher rates causing cash-flow and balance sheet challenges for corporations with a more risk-averse investor may pressure equity valuations in 2022.  With scarcity in competitive fixed-income yield products, it seems a strong possibility that investors rebalance to lower beta, dividend paying non-cyclicals.  Further diversification into hard assets like residential and commercial real estate will be a strong alternative, as we’ve already seen.
 
The market is combating high inflation levels, now at 6.8% (11/2021), the highest point since 1982. The Federal Reserve has indicated three rate hikes in 2022.  While there are 5 million fewer jobs since pre-pandemic levels (loss of -20.7M jobs in 4/2020), job openings are at record highs even with pay in some sectors rising 10% y/o/y.  As income supplementation programs end, children having returned back to school/college, the market will monitor key developments in:  parent care responsibilities, health concerns, early retirement and relocation rates (to more affordable areas), wage increases, student debt burden, luxury goods spending and overall household savings levels.
 
Lending conditions for high quality borrowers remain favorable, despite a more hawkish Fed speak.  30-year fixed rates averaged 3.72% on (1/2/20) and are now 3.12%, only +47 bps vs. their 1/7/21 low of 2.65% (Freddie Mac, FRED).  The 10-Year US Treasury Note now yields 1.407%.  JPMorgan estimates that the 10-Year Note will climb to ~ 2.00% by H1’22 and ~ 2.25% by YE’22. The move higher could be amplified by more containment of COVID variants, more aggressive Fed policy, accelerating inflation or tightening in bank credit lending. 
 
Personal savings rates do suggest strength in the recovery.  PSRs (USBEA) indicate the portion of income that is generated but not used on taxes and consumer spending.  Higher savings rates can suggest poor consumer optimism, higher fixed yields and low spending on luxury and substitution goods.  Personal savings rates peaked after the first round of stimulus at 34% in 4/1/20.  By Fall 2021, the rate had declined to just 7%. 
 
The pandemic did accelerate digital adoption and has forced major companies to “get online”, further proving our business plan that we began writing in 2017.  Global E-commerce spending (Shopify) is a $4.9T market and 19% (2021) of total retail sales, up 13% (2019).  As I think about our business, I am very excited about the growth in Mobile-Commerce sales, which we’ve seen through real estate transactions and, more specifically, in sales of our educational courses.  The 5-year projected CAGR for m-commerce is an impressive 27% per year.  There are 6.43B mobile users in the world!  Over 53% of US E-Commerce sales ($424B, 2021) are done over mobile devices.  Globally, $3.6T of sales in 2021 were conducted on phones and tablets as compared to just $970B in 2016 (Staista/Oberlo).  The ongoing shift to digital is more than a hedge – it’s the future, and it’s why SERHANT. is built for the marketplace of tomorrow.

THE FUTURE IMPACT OF BLOCKCHAIN, CRYPTO AND THE METAVERSE

Globally, businesses are hyper-focused on the blockchain, NFTs and the concept of Metaverse integration.  Still, there is much criticism and skepticism around these technological advancements.  Regulators and politicians in Washington along with conservative money managers and risk-adverse corporate executives seem less willing to see the potential for value creation.

The market size of cryptocurrency and Blockchain is staggering and is growing exponentially. The cryptocurrency market cap today is $2.2T.  NFTs (non-fungible tokens) will generate ~$20B this year (Loup) but the total addressable market NFTs participate in is over $1T (art, music, sports, gaming, etc).  Bloomberg estimates that the Metaverse was worth $478B in 2020 and is estimated to reach $800B by 2024.  And projections don’t account for a lack of historical context.  In fact, Bloomberg analysts believe that the video gaming space alone could boost the value of the Metaverse 2.7x.  Okay, but what is it?  @meta writes “The metaverse is the next evolution of social connection. It's a collective project that will be created by people all over the world, and open to everyone. You’ll be able to socialize, learn, collaborate and play in ways that go beyond what’s possible today.”

It feels like there is a lack of buy-in around understanding the value in what is new, decentralized, progressive, and unarguably, complex.  We are most threatened by the things we don’t yet appreciate and understand…  Sometimes, the cost of our inability or unwillingness to pivot causes a business or sector irreparable harm. (i.e. Blockbuster Video, blacksmiths, Borders Bookstore, Sears, indoor retail shopping malls and brick and mortar traditional real estate brokerages!).  

There are 15K different tokens across 484 global exchanges.  Bitcoin represents about 40% and Ethereum, 21% of total market cap respectively.  Many of these tokens and platforms will not survive.  In fact, the 15 largest tokens account for 84% of the total cryptocurrency market cap (CoinMarketCap).  To provide some current and potential scale:  The global equity market is valued at ~$97T.  There is $296T of global debt.  The market cap of gold is ~$10T (Bloomberg).  The value of all US residential real estate is $36T.  As the blockchain becomes central to the way we transact and build, there is a massive wallet for capital investment.  

To comment a bit on scale, impact and penetration, the Pew Research Center believes that nearly 90% of Americans have heard of cryptocurrency and 16% say they have invested, traded or used cryptocurrency.  To put this in perspective, Pew polled the market on Bitcoin in 2015, too:  Only 48% of Americans had heard of it and less than 1% had interacted with it!

This year, the mayor of Miami proposed a rule that will allow residents to pay property taxes or city fees with cryptocurrency. Then, a Miami apartment at Arte Surfside sold to an anonymous buyer for $28 million — paid fully in cryptocurrency (Fun fact: we sold the Penthouse for $33M in the same building, albeit in US dollars). This marked the most expensive known residential crypto real estate transaction in the U.S. to date. Our agents are currently working and many wallet-to-wallet crypto transactions now, both in NYC and Florida - a trend you’ll read a lot about in 2022 as wealthy crypto holders look to diversify into hard assets.

Here are some ways we might see the blockchain support the real estate market. Security and speed will enhance the transactional side of deals. Decentralization can reduce liquidity risks and may even begin to even the playing field with large banks. Expensive “middle-person” services could be disintermediated, significantly reducing closing costs. Algorithms will help buyers and sellers combine requirements across legal, documentation and financing. And through tokenization, the real estate blockchain platform can be used to document, store, and verify ownership stakes. The tokens can then be more easily traded, sold, and liquidated. Our technology team at SERHANT. has been working diligently on this front, with more details to come in the new year.

Cryptocurrency, blockchain and the Metaverse all converge on what is referred to as Web 3.0, something we have been slightly obsessed with here at SERHANT., as a mobile-first firm. The below evolution shows the progression from the AOL and Netscape days we all remember but shows amazing potential as we shift from “cloud” and “social” to “AI” and “Decentralized”. Edge computing is a distributed computing construct that brings computation and data storage closer to the sources of data – and that increases bandwidth, response times and speed.

I’m excited to interact with the blockchain and to implement these technologies as SERHANT. grows. There are some really innovative real estate companies and servicers that are already succeeding in leveraging the blockchain. Built-in.com defines this as: “Blockchain’s inherent system of trust makes it the ideal technology for real estate. Real estate companies all over the globe are using blockchain’s smart contracts and ledger abilities to transparently and efficiently facilitate renting, buying, investing and even lending.” For example:

RealT is a fractional real estate investment platform that allows investors around the world to invest in the US real estate market through a fully-compliant, token-based blockchain network.

RealBlocks uses blockchain to create new avenues for real estate investing. Through tokenization, its platform lets investors buy fractional interest rather than entire portfolios or assets.

As a mobile-first real estate firm, in a business that hasn’t always been known for its honesty, I couldn’t be more thrilled to build our company during the birth of Web 3.0. The Metaverse provides the opportunity for uniting our virtual community of salespeople with a virtual culture instead of just content. Cryptocurrency has created the largest wealth transfer of our lifetime, and thus many of our buyers in 2021 have either used those profits to make home purchases or actually transacted in crypto, wallet to wallet.

I see a world very soon in which 50% of all real estate transactions are done with crypto (as I famously told Yahoo! Finance the other day), and where contracts are recorded on the blockchain and “signed” as NFTs. Can you believe that we still sign contracts and transmit them with paper, or via PDF, which anyone can alter and is ripe for fraud? The PDF was invented in 1991 during the first ‘paper to digital’ revolution! It’s been 30 years - it’s about time to innovate!

THE REAL ESTATE MARKET

Despite early concerns around COVID’s impact on the luxury real estate market, the housing market’s resilience was evident from the beginning of the year.  2021 has brought a surge of activity across all luxury markets, with special attention given to low-tax states.  To kick off the year, I personally sold the most expensive home in the history of Florida for $122.7M to a major private equity titan.  That transaction kick-started what was to come.  

Buyers are seeking additional square footage and livable space, especially in more “work-from-home” geographies like NYC and urban centers but continue to find high barriers to entry.  Major transactions in cities around the globe have shown this.  More amenities, outdoor space and customizations demonstrate that COVID has increased collective creativity and willingness to pivot and change. 

By Fall of this year, NYC showed her resilience with 4,523 condos and co-ops sold in Manhattan in Q3, exceeding the 2007 record (3,939) and representing the strongest quarter in 32 years. $9.5B in quarterly revenue was generated, the most in any quarter ever.  The 12-months ending 10/2021 saw 3 times as many sales than the same period ending 10/2020 (NYT Real Estate).  

The 2021 NYC sales figures were 76.5% higher than the 12-months ending 2019 and before the pandemic.  The incidence of all-cash buyers fell to a 7-year low of 39.3% at the start of 2021 and has now rebounded to 48.6%. Median Manhattan sale prices climbed to an average of $1,115,000 this Fall, now up 8.8% from pre-COVID prices.  I am optimistic around the pipeline and market dynamics ahead.  It would have taken 20 months to sell off the entire existing inventory in Q3 2020, the 2nd worst pace in over 20-years.  In Q2 of 2021, the rate fell all the way to 5.1 months, 2-months below the trailing 10-year average (7.2 months).  When there’s a market, there’s a market. 

Home prices advanced across all major US cities through 2021.  Inflation-adjusted home price increases ranged from +5% to 25% and averaged +12% y-o-y (through 9/2021) on the Case-Shiller 20 CIty Home Price Index. New York City prices rose 9% while warmer weather city prices performed notably better: Phoenix (+25%), Tampa (+20%), Miami (+18%), Dallas (+17%), and San Diego and Las Vegas (+17%).  

With more Americans working from home, buying stretched further away from city centers putting more upward pressure on already high home prices.  Younger workers are supporting favorable pricing dynamics by increasing commuting rates to non-urban zip codes by relocating job locations or working from home.  Going forward I believe there will be less occurrence of this migration in the largest urban centers like NYC, LA, Chicago and SF where a higher percentage of workers will still want to be in their city.  However, workers 29-54 have supported the dispersion out of cities like Tampa, Orlando, Phoenix, Miami, Philadelphia and Baltimore (US Census Bureau, LEHD LODES).

Globally, the rental market has underperformed ownership. NYC rents had declined -14% by January 2021 with London and Hong Kong down -8% and -3.8% But closing prices in NYC have actually climbed 2.2% in the same period ending February 2021 (Bloomberg, SPX, Core Logic). It’s an interesting juxtaposition as oru firm has personally seen luxury rentals escalate in price and absorption all year, with no sign of slowing down. SERHANT. handled the lease-up of a new 31 unit luxury rental building in SoHo at 11 Greene, where rents averaged over $10,000/month - we were fully leased within months.

We are beginning to see finance and banking jobs return or begin to head back to physical offices and expect this to add back demand that was reduced during COVID. The update is significant. The NYT estimates that this past November, only 8-10% of Manhattan office workers had returned to the city.

Supply and demand in the US housing market Demand for new home purchases has been robust as market activity has normalized and we learn to adapt to COVID’s complexities. Demand for more space, schooling dynamics and livability, coupled with historically low interest rates and rapid-rising inflation have driven a robust bid throughout all property types. Price appreciation has advanced to all-time highs and a transitory dynamic has prompted buyers to migrate to states like Florida and Texas.

In residential neighborhoods, multiple same day bids at significant premiums continue to win. Buyers who can close all cash or without contingency are at a significant advantage. 2022 should be even more competitive than 2021 as early feedback and client engagement suggests that a large wallet of foreign money will return the US luxury market.

Not all of this is a good thing. Per the WSJ, Wall Street has spent north of $60B buying single family homes across America this year, squeezing the “Main Street” buyer and renter. Prior to 2008, Wall Street was able to capitalize on the housing market through mortgage backed securities (MBS) issuance and through other high margin securitized products. Post-housing crisis, the banks couldn’t provide substantial relief to the real estate market. Instead, we were given stricter lending requirements and saw bank balance sheet commitments increase significantly.

Essentially, Wall Street became a hedge fund of sorts, using access to cheap, diversified funding to purchase inventory out from under individual buyers, and often as levered investments. This is what has happened exponentially throughout 2021. And if banks struggle to find liquidity or need to sell large positions of properties, we are in a position where pricing could be impacted by highly concentrated pockets of institutional ownership (much like Zillow is doing right now after the crash and spectacular burn of their iBuying program). The American Dream is home ownership and the ability for owners to supplement income during retirement years. On Wall Street, strategies include mass inventory purchases and sometimes rapid sales. This behavior usually comes at the expense of home owners.

I wanted to discuss a few dynamics in consumer income that may help our market when projecting and identifying. Moody’s Analytics / CNN Business created a 37 input model to create a state and national “Back to Normal Index”. The Index bottomed on 4/20/20 at 57%. By 1/2021 it had increased to 74% and as of 12/14/21, it sits 38 pts higher vs. the low at 95%. I value this consumer-focused Index for real estate because it has weighted, diverse inputs measuring categories like US GDP (customized), OpenTable diners, Google’s Workplace Mobility Index, airline traffic, unemployment data, MBA’s mortgage applications, new home listings from Zillow, and Homebase’s small business hours worked.

LinkedIn was able to track users who were updating job information such as removing a current job and adding a new one into a “Getting Hired Index”. On April 14, 2020, -44% fewer users vs. the prior year (2019) were updating profiles with a new acquired job. By 11/2020 the index improved to just -10%. At the end of this past November (2021), the index had reversed it’s entirely decline to +11.8%. LinkedIn also reports that their job postings are up 118% (2/2020 vs. 11/2021). Interestingly, I was able to refine the data to isolate Real Estate (US). Our industry hit a low on 5/5/20 -41% but has outperformed the broader index at +136%. As a solid sector indicator for real estate, the Finance sector has had the best performance, -33% (6/2020) vs. +143% (11/2021).