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Resi Wrap - Ten Surprise Predictions for 2022
December 2021

Friends of ResiShares -

Even as our day jobs have begun to truly crowd out the ability to send Resi Wrap with any sort of dependable frequency, the “predictions” note last year was so fun that we just had to try again. But first, some accountability!

Here are last year’s predictions. The goal was to hit 5 out of 10. Let’s see how we did:

1) "Tipping point" locations like Nashville, Boise, Miami, Austin, and Raleigh will significantly outperform other 2020 winners whose sole attraction was value

I’m going to give us a half a point on this. Within the context of large MSAs, the above definitely held true. Austin, Boise, and Raleigh were the clear-cut top 3, while cheaper cities like Pittsburgh, Rochester, and Detroit were in the bottom half. The reason that I don’t think we deserve a full point on this is that we failed to predict the continued success of cheap rural environments.

While vacation spots like Bend, OR and retirement spots like St. George, UT on the list are consistent with our prediction of outperformance from AirBnB-able vacation spots, we very much underestimated the persistence of the Zoomtown phenomenon in inexpensive, rural towns that don’t necessarily feature as must-visits on the hedge fund manager bucket list.

The question here is whether we were wrong on this structurally, and these locations are about to become the Bend, OR’s of the next 20 years, or if we were merely too early on the return to post-COVID normalcy. Time will tell.

It’s also interesting, looking at the relative losers on the right side of the table above, that while a Zoomtown need not necessarily be Aspen or East Hampton, it still needs to offer an attractive lifestyle (presumably weather and recreation) to a would-be migrant. No offense meant to residents of the Fairbanks tundra or the Okeechobee swamp…

2) Gateway city downtown rents will rally all the way back to their highs in a matter of months once COVID is behind us

We get another half point here. Rents are all the way back in New York

In San Francisco, not so much

As for the pandemic being over, the activity in New York suggests that the new normal has indeed been achieved. And in the new normal, as San Francisco’s lack of recovery has shown us, a city will have to offer inherent Big City Value, and not just the good luck of being located next to a lot of pretty scenery and Sand Hill Road.

3) Vacation hotspot "Zoomtowns" will accelerate their gains in the short term on the back of renewed tourism

We definitely claim a full point on this one. Ski towns and coastal Florida completely dominate the list of appreciation winners.

4) We will see the first institutional SFR vacation rental portfolio marketed

Yes. Also, Vacasa went public.

5) A major city will propose a massively extractive property tax applicable only to institutional landlords and/or AirBnB revenues to plug its COVID deficit hole

We have not yet seen any major reports of this happening. Instead, we are seeing temporary moratoria on short term rentals, such as in Truckee, CA (though notably, not in cities, yet). No point for this call this year.

6) NIMBYism will spread geographically due to rising home equity

Unfortunately, I can’t find that Wharton Land Use Index published anywhere in updated form to track this quantitatively. It feels (lol) like this call was right, but we can’t prove it, so no points for us.

7) CPI ex food and energy will hit 3%+ with increasing regularity

Also yes.

8) VC-backed "construction tech" will raise at least $10 BN, double the last 5 years combined

This definitely did NOT happen. Katerra’s bankruptcy halfway through the year gave the industry a scare, and as best I can tell, we are looking at a number closer to $2 BN. Like Billy Madison’s school principal, I award [us] no points.

9) At least one insolvent shopping mall will begin conversion to a residential or mixed-use space

This is a tricky one to rate. Adaptive reuse sits at the confluence of just about every real estate trend currently in existence, it is completely unsurprising that 2021 was a record year. That said, I can’t find a single, discrete instance of a suburban shopping mall being converted into housing that started in 2021 through quick Googling. Furthermore, California’s SB-6 and SB-15 seem to have settled into that state’s typical dysfunctional stasis since making headlines over the summer. No points.

10) Auto-refinance or "float down" mortgages will be a thing

This didn’t happen either, but in fairness, with mortgage rates rolling along their lower bound and swaption vol creeping back to levels last seen in 2017, I doubt there would have been very much consumer demand for such an innovation last year.

So 4/10 points for the good guys, versus a goal of 5/10.

And now, without further ado, we present:

Top Ten Surprising Predictions for 2022

1) COVID-19 will exit the year considered an endemic nuisance disease rather than a globally disruptive pandemic in most of the world, as policymakers observe the continuing effectiveness of MRNA vaccines in preventing severe disease during the Omicron wave.

We are now over 4 weeks out from the onset of Omicron in South Africa, and hospitalizations and deaths (above) have not followed reported infections. While the medical community will remain hyper-vigilant for a generation about the threat of zoonotic diseases and mutations, policymakers are beginning to awaken to both the national mood change around COVID risk and the ongoing disease burden data that suggests vaccinated individuals have less to worry about from COVID than from the seasonal flu. Of all the implications to real estate that could come from this prior assumption, let’s start with…

2) (Most) people will return to the office

But the office will look very different in the new normal. As HR departments around the world adjust to knowledge worker lifestyle expectations, it will become obvious that forcing people to commute to downtown New York, London, or San Francisco 5 days per week is severely limiting to the ability to attract talent. Firms with the wherewithal to build a sensible hybrid workforce policy, wrapped around a nodal network of hot-desked office locations and planned offsites, will thrive at the expense of those who can’t. Large, established firms who have committed large amounts of money to long term leases and bespoke tenant improvements will struggle mightily to convert those assets to their highest and best use.

3) Someone will disrupt transaction management in a meaningful way

Between Katerra and the iBuyers in 2021, investors have been stung by the apparent lack of fungibility between asset-light and asset-heavy management skillsets. Luckily, there are still entire forests of wood to chop in the asset-light space for appropriately-positioned technology firms in the residential real estate space, particularly in the realm of transaction management and market structure.

Today, as an institutional buyer of real estate, we are still forced to send a physical or email offer letter to listing agents to purchase a property, containing different critical legal elements on a state-by-state basis. The listing agent then tracks competing bids manually in a spreadsheet (at best) to help the seller decide which one is best. Phone calls and emails are the only method of letting buyers know where they stand and when decisions will be made. Changes require the submission of a one-page form.

A tremendous amount of money stands to be made by solving at least some portion of that inefficiency.

4) The rich (boomtowns and zoomtowns) will get richer

Real estate trends create their own momentum, and typically need a reason to reverse. The continued growth in locations that offer recreational or cultural amenities will continue to outpace any recovery in migration or home prices in industrial or agricultural communities.

5) Inflation is here to stay

The allegedly transitory supply chain disruption that drove CPI above 5% in 2021 is not only a first-order effect of COVID, but, more profoundly, the result of a building groundswell of anti-globalization sentiment over the past decade. Public policy throughout the developed world, from immigration to tariffs, has had almost the express purpose of inducing the most pernicious forms of welfare-destroying inflation. COVID was merely the capstone that brought the business world into the fold, creating a reprioritization towards resilience and away from cost efficiency.

The rediscovery of scarcity after decades of abundance does nothing good for the world, but it probably makes home prices continue to outpace forecasts until the political mood changes enough to reverse course.

6) The real estate commission dam finally begins to show cracks

Redfin is now one of the top 5 real estate brokerages in the country. They join a litany of smaller, tech-enabled brokerages such as REX, Upnest, and others, all promising various forms of lower real estate commissions, not to mention Exit, Compass, and other full-freight brokerages looking to grow aggressively. Between rising prices, the rise of iBuyers and “Zillow Tourism,” and the competitive pressures on these brokers to demonstrate growth to their investors, 2022 will be the year we finally see 6% in the rearview mirror.

7) The federal government takes action on appraisal bias

The phenomenon of racial bias in appraisal practice has been increasingly making the rounds in academic and valuation circles for several years. This blog post on the FHFA website and Secretary Fudge’s bio on the HUD website suggest that it is now in the crosshairs of policy makers.

8) SFR average capitalization rates drop below 4% in some highly desirable investor markets

The largest institutions, who can finance as low as 2% and target equity returns in the high single digits, are already buying newbuild in Phoenix, Dallas, and other favored markets well into the 3’s. The math works, and if there is one way in which the capital markets are still efficient, it is at arbitraging away free lunches.

9) A large municipality will launch a massively extractive short term rental tax

I still like this call, so I’m rolling it over to the new year.

10) A reasonably well-organized attempt to move title onto the blockchain will be made

The Title industry is extremely stable, and it will take a tremendous amount of time and money to dislodge incumbent processes that have been functioning as designed for hundreds of years. That said, I think 2022 is the year that a well-funded group of experienced professionals begin to take potshots at the status quo. My best guess is that this comes in the form of a parallel structure, where the group runs lookalike smart contracts alongside standard legal contracts to establish a track record, rather than make a full frontal assault. Still, the journey of a thousand miles begins with a single step.

We’ll see if we can get to 5/10 next year. In the meantime, we at ResiShares wish all of you a happy, healthy, productive, and fulfilling 2022.

Have a great weekend,

Michael Greene

Co-Founder and CEO

ResiShares |