A Look at Real Estate Over the Decade—With Mitch Rosen

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Since its inception, Yieldstreet’s real estate business has raised over $385M in capital across 66 deals and has returned more than $198M in principal and interest. At the helm of this speeding ship is Mitch Rosen, Senior Director of Real Estate at Yieldstreet. When expanding to a new asset class, Yieldstreet Founders, Michael Weisz and Milind Mehere, hire experienced professionals in that field. For real estate, that meant Mitch was the obvious choice—bringing almost 20 years of real estate investment experience to the Yieldstreet team.

I recently caught up with Mitch for a brief discussion on the real estate market as we close out the 2010s and enter what we hope to be the Roaring 20s 2.0.

How would you summarize the last decade (2010-2019) in real estate?

I would say the last decade in real estate has been defined by a low rate environment which has buttressed all asset classes, including real estate. When you think about fixed income, which real estate falls under, you have a fixed or somewhat fixed income stream. The lower rate environment has increased the value of these fixed income streams. As a result, real estate prices are equal to or higher than ‘07 in most real estate classes, other than retail. Investors are paying higher multiples for the same cash flows. I don’t see rates going higher in the near term. However, any large move in either direction will cause investors to pause and evaluate any ramifications.

What were the biggest surprises in real estate over the last decade?

I think, if you ask most people, although the low in the market was September 2008 when Lehman filed, leading into ‘09 which was really a very difficult year, you started to see movers coming into the market buying on the cheap in 2010 and 2011. And although we had some form of annual economic crisis—the euro-crisis and Greece for example—the markets really bounced back fairly quickly because of Fed Stimulus, which I would consider one of the bigger surprises, if not the biggest. Fed Stimulus pumped capital into the market, driving rates lower and really pumping up asset values across the board. The lowering of rates is not a surprise, it was the magnitude of the move lower and the duration at which those rates stayed so low. 

What are the significant opportunities over the next decade?

I think the way in which capital is raised is most definitely an area to watch. The online retail investor is looking for new ways to invest capital. I would never have imagined just 5 years ago that people would be putting $50K into an investment via an online company. That to me would seem so outlandish. I do think that behavior is going to continue to change. However, the question is, how deep is that going to get? There is a view at Yieldstreet that it is going to get very deep and you will see more and more people becoming involved. 

I also believe home ownership rates will increase again. When you look at ‘07, it was 69%. Now we are at 61%. You have all these Boomers retiring while younger people are looking to buy.  The younger generations are also looking to buy different properties compared to what their parents wanted. Properties with less of a footprint and a higher level of efficiency. Less taxes is also top of mind for them. I could foresee people renting longer while boomers age in place.  

With Millennials coming of age and their tenure in renting coming to a close (i.e. getting ready to buy) have suburbs seen a resurgence after the masses flocked to urban downtowns?

That is a good question. I don’t know enough about those demographic trends. What I can say is raising a family in New York City is expensive. If you want good schools for your kids, oftentimes it will require private school education which, at $50K+ per year, is a very high cost to cover. I personally see more families where both spouses work living in the city. That is a major driver in the decision process. If you have a spouse earning an income under $75K, paying for child care so you can work full-time is not advantageous since you are going to spend your entire income on child care. It becomes a cost benefit analysis which, for some, turns out to be more costly than beneficial.

I personally think the suburbs are not dying, but home buyers are finding they have to go farther and farther out to find affordable housing of good quality. Whether it be the inland empire in Los Angeles, Marin County near San Francisco, or Suffolk County on Long Island, those are the suburbs that will often see a larger price drop in a downturn as potential buyers look to buy closer. As the market retrenches, and all prices come in, those are the first markets to get hit.

Has having a real estate mogul as a president been beneficial or a hindrance?

I think he (President Trump) certainly has real estate in mind as he has been a real estate investor his whole life. The OZ Zone (opportunity zones) seemed really compelling on paper. I think it’s been woefully underwhelming in terms of how much capital has come in. I think it’s because people don’t want to lock up their money for 10 years. That is a long time and a lot can happen in that period. Secondly, it only works if you have capital gains in other asset classes that you can monetize and invest. So maybe people don’t want to sell their stocks because the market is doing so well. That was something I think President Trump was contemplating when he created that legislation.

In terms of SALT, State and Local Tax Deductions, that is the biggest change for people in blue states. New York, California, Pennsylvania, Massachusetts, Connecticut, and New Jersey are all high tax states where your taxes dramatically changed come last January when you could no longer claim more than the $10K annual cap. This is a huge financial hit for many people. Take Nassau and Westchester counties as examples. One would likely eat up the entire $10K cap on real estate taxes alone. I believe it is going to continue to drive people to migrate to low tax states like Florida, Texas, and Arizona. I think you will see a continued migration out of the Northeast. It is inevitable.

What are some of the leading indicators investors and those looking to raise capital should be aware of looking to the 20s?

Demographics are clearly one. There is no real broad theme that you can make for the entire country or even at a state level. Every city or locale has its reasons for what’s driving it up or down. I think the trends right now for office space are very tech driven. Work-life balance has been a major trend. To your point earlier, more people want to move into the hip urban areas for an easier commute and better work life balance. I think the theme for the 2020s is housing costs and how people afford homes in areas like San Francisco, Los Angeles, and New York where it becomes completely unaffordable. Folks are paying half their income for housing, if not more. It’s hard to save for your children’s education, retirement, or a down payment on a home when you are paying so much in rent.

I am not sure what the solution is. You have co-living growing as an asset class. Micro units where people can continue to drive down the cost of housing. It’s a big issue that every city is facing.

When looking back at all the tragic natural disasters that have occurred—wildfires, hurricanes—have those affected the market and do you take that into account when evaluating new markets for 2020?

I don’t consider it extensively, but I certainly look very closely at flood plains. Houston for example, the hurricane a few years ago destroyed large swaths of Houston. If we invest there, we are very careful about that. Any investment that we make in a floodplain will require flood insurance. 

Closing remarks on the past decade and what we hope to be the next set of roaring 20s?

The last thing I would say is that there is a general feeling of angst around “how much more does this market have to go up?” What will stop it from going up? When will it go lower? Given the abundance of debt out there, more and more owners are choosing to refinance than sell.  So sales volume is somewhat muted across most property types. With rates as low as they are, the weighting is going to be skewed to refinancing instead of a sale unless the price is so aggressive. I think that is a trend that won’t change in the near term. It is a manifestation of people’s concerns about where the economy is going. If they can’t achieve their sales price, refinancing is a great option given how rates are 3.5-4%. As long as rates stay low, I expect that will continue.

Any markets you are hip on for 2020 and beyond?

We always focus on the top 30 MSAs. Nashville is one that is talked about a lot. I don’t know enough about it other than there are jobs moving there and huge housing growth. The biggest issue with Nashville is home price appreciation (HPA). It has been meaningfully higher the last few years. Charleston is another similar case. All of Florida is attractive because of the migration of people who want to avoid taxes—to go to a no state tax locale is a big deal. For those in New York, you are saving 8.5% of your income. If you are in New York City, it is an additional 3%. That is a lot of money. The demographic shift will likely continue into the 2020s.

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