🏠 The Rent is Too D*** High!

Here’s what you will find in today’s email:

• Quote: Ray Dalio on the debt ceiling

• Tweet: StripMallGuy reminds us of market valuations

• Chart: We’ve hit new highs in the rent-to-income ratio

• Venture Capital: Fifth Wall’s fund aims to decarbonize real estate

• Architecture: The award for ugliest building in the US goes to … Subscribe now

🎤 Quote

“We all know that there is no real debt limit because what is called a debt limit never actually limits the debt. It’s a farce that works like a bunch of alcoholics who write laws to enforce drinking limits, and when a limit is reached, they do a farcical negotiation that temporarily eliminates the limit which allows them to have the next drinking binge until they reach the next limit at which time they go through the next farcical negotiation and continue to binge. I gather that this is the 79th farcical negotiation that has taken place.” 

- Ray Dalio, Founder and Chairman of Bridgewater Associates

This is a sample from Ray Dalio’s piece about the debt limit, published on Linkedin. Dalio is a great thinker and writer on subjects like business, debt, and the macroeconomy.

The Takeaway: This quote sums it up very well- each time our country has hit the debt ceiling times, we then raise or suspend the debt ceiling. Now, our politicians and the public have been lulled into thinking the debt ceiling is meaningless.

Dalio’s fear is that our country and leaders may be too complacent when it comes to this “debt bingeing”, and unfortunately, it may take a real debt crisis to shake us out of this.

🐦 Tweet

StripMallGuy is one of the best in the Real Estate Twitter space (#retwit). He’s always full of great real estate insights. This tweet serves as a reminder of the current market environment that we’re in and what these increasing cap rates mean for valuation.

The Takeaway: For those unfamiliar with cap rates (short for capitalization rate), this is your expected rate of return. It is calculated by taking your NOI (net operating income) divided by the asset value. Over the past year, with interest rates increasing, cap rates have also increased.

This means that if you bought a building at a 4 cap, and now these buildings trade at a 6 cap, that represents a 33% loss in value.

Conversely, if you find a building at a 6 cap that was previously at a 4 cap, you may think of this as a 33% discount to its peak valuation.

When looking at deals in this environment, pay attention to deals that may be trading at a discount.

📊 Chart

The latest rent data from Moody’s show that the average rent-to-income ratio in the US has now hit 30%. This is the threshold for what is considered “rent burdened”.

Inflation is driving up prices, debt is rising, and the cost of buying a house is also out of range for many.

The Takeaway: The rent is too damn high! This chart highlights the growing disparity of rent and income over the last 20 years. Beyond this chart, the Moody’s report shows cities that exceed this ratio, such as NYC (68.5%), Miami(41.6%), Fort Lauderdale(36.7%). Los Angeles (35.6%).

🤝 Venture Capital

Fifth Wall has quickly grown into one of the world’s top venture capital funds, with over $3B under management.

The firm’s core thesis has been to seek financial returns at the intersection of real estate and tech.

Now, they’ve raised $500M to focus on climate tech in real estate. The goal is to help reduce the 40% of CO2 emissions caused by the real estate industry.

One example of an area of focus is the concrete industry. Making concrete emits 7.5% of all global carbon emissions. The firm recently made an investment in Brimstone, a company making carbon neutral cement.

The Takeaway: The cost to decarbonize the U.S. commercial real estate industry is estimated to be $18 trillion. The next 20 years will be focused on helping us achieve this goal. The focus on sustainability and climate is a growing need in the industry with a big upside for winners in the space.

🎙️ Architecture

The J. Edgar Hoover building that houses the FBI was named the ugliest building in the US, as measured by twitter sentiment.

Other buildings on the list include:

Takeaway: While they may serve a utilitarian purpose, people just aren’t fond of big, bland, blocky architecture.

Also, we can do without Trump’s tacky gold buildings.

That’s it for this week! Thank you for reading.

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