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The Real Estate Wreck
Real estate’s days in a bull market are numbered.
Real estate was one of the last holdouts from the bursting of everything bubble.
But one recent indicator shows wealthy and institutional investors are running for the exits.
And it’s time to get ready for a major correction in real estate that will impact an industry that employs millions and could see trillions in value wiped away.
What Goes Up Must Come Down
The end of the real estate boom will be driven, in part, by Real Estate Investment Trusts (REITs).
REITs are investment funds that buy real estate.
The main kinds of REITs are classed as commercial, industrial, residential.
REITS buy all types of real estate. Single-family homes, apartment blocks, hospitals, strip malls, student housing, retirement homes…If there’s a type of real estate, there’s likely a REIT that buys it.
They’re just like an investment pool that buys real estate.
For investors looking at how bad the real estate wreck will be, there’s two main types of REITs that investors can buy into - public and private.
A public REIT trades just like a stock.
Investors can buy and sell them all day.
Some larger public REITs are Prologis (PLD) which has a market cap of over $100 billion and American Tower (AMT) which has a market cap of over $90 billion.
They trade just like stocks. If you want to buy or sell, you can do so quickly.
A private REIT is a much different story – and is for a much different investor.
Functionally, these are just like publicly-traded REITs, in that they buy, hold, and sell real estate assets.
The only real difference is that they don’t trade on any exchange.
There’s an advantage to that.
These private REITs claim since they don’t have to worry about the quarterly market whims, they can take a longer-term perspective.
That may be true.
But there’s a high cost to it of being extremely illiquid.
Each private REIT sets its own rules on when and how investors can redeem their shares and cash out.
This is how private REITs keep a lid on withdrawals.
Now, here’s why this matters.
Private REITs were created specifically for long-term investors.
Any rush to the exits would be a major sign real estate is headed for a major drop instead of a regular dip.
That’s what’s happening right now.
Private REIT redemptions and withdrawals have soared into the billions recently.
This chart from Robert A. Stanger & Company shows how aggressive private REIT investors have become in getting out:
This is another bad sign for the real estate market.
These private REITs control about $1.5 trillion of real estate according to REIT industry group Nareit.
This type of selling may not be enough to send property prices plummeting, but it, at minimum, will add another layer of selling pressure in a market that’s on the verge of a major decline.