The Imminent Commercial Real Estate Collapse Will Spawn Generational Wealth

Shah Gilani|June 12, 2023

Everyone knows there’s money to be made in real estate, you buy and hold it and make a fortune.

Right?

Well, sometimes.

But what most people don’t know is that there’s actually more money to be made, and a lot faster, when property prices crash. That’s the lesson from the 2008 residential real estate crash and the Financial Crisis.

But there’s one major caveat: you just have to see it coming and play it smartly.

That’s what I did in 2008…

And the lessons learned back then are even more important now. Mainly because we have another property crash coming – a $21 trillion goliath that’s unlike anything we’ve ever seen.

We’re at a point of make it or break it – something we’ll discuss in-depth this Thursday – so buckle up. If you’re on the wrong side, you’ll get killed. If you’re on the right side, well, this is the place that fortunes have been made in the past 15 years.

Here are those lessons…

Who made how much on the crash (and how they did it)…

And how we’re going to use what we learned back then to profit today…

Transparent Bubbles

There’s something about bubbles most people don’t see, though they should. Maybe it’s greed that blinds them, especially if they’re eagerly inflating the bubble they’re hoping to make a fortune on.

Maybe they can’t see the proverbial forest for the trees. Maybe they believe in perpetual motion machines.

Whether we’re talking about tulips, internet companies, or cryptocurrencies, these bubbles are ingrained into our understanding of capital markets.

But whatever it is, that isn’t me. And it isn’t you. Because we understand that bubbles create situations where we can profit in two ways.

The irrational exuberance allows us to ride on the way up, and the stark realization of fantasyland allows play to the downside when the bubbles inevitably burst.

It was easy for me to see the residential real estate bubble inflating in the mid-2000s, peaking in late 2007 and bursting like nothing else the world’s ever seen before in 2008, because I was part of it, and because I was analyzing all aspects of the bubble as it was inflating.

As far as being part of it, suffice it to say I was invested in a residential homebuilder, developing several residential communities, and amassing land in Florida, including the largest tract of undeveloped farm- land in a rapidly growing county of southwest Florida.

And I was also analyzing what was happening with home price appreciation, the market for residential loans, prime and subprime mortgage-backed securities, derivatives and credit default swaps on pools of mortgages, what banks were doing stockpiling hundreds of billions of MBS assets in “off balance sheet” silos so they wouldn’t have to set aside reserves on them, how leveraged Fannie Mae and Freddie Mac were, and how credit funds and investment banks like Bear Stearns that sponsored and financed credit funds were doing.

In other words, I saw the market from the inside out and outside in.

The Moment When I Realized Something Was Awry

What first caught my attention was the homes we were building weren’t selling while they were under construction in late 2007, as they had been earlier. Prices were still going up, but at a demonstrably slower pace, and closings were taking a little longer.

We were still plotting sites, still planning infrastructure buildouts, still moving forward in growth mode, until I saw hiccups in the mortgage securities market.

Price volatility picked-up. Credit default swap prices started ticking up. Pools were taking longer to amass. Crazy derivatives like synthetic MBS pools, “reference pools” that didn’t consist of actual mortgages but were portfolios of mortgages referenced (meaning were paper copies of real mortgages) in terms of what they were doing, how they were trading in the real world, stopped selling and bankers stopped creating them altogether.

On the ground, something scary started happening. Other big builders in South Florida were offering me pieces of their deals, where before we were mostly competing for land and prime community building sites. All of them who had been in the business for years before I started building and speculating on land were looking to lay off some of the leverage they’d built up.

That leverage was everywhere.

When home price appreciation slowed to a trickle, I knew it was about to be game over.

Before prices started to fall, I sold all my deals, all the properties I’d contracted, at breakeven, because I, too, was leveraged and I knew I had to get out before prices started to fall and the bottom fell out.

I got out unscathed and warned my investment banker and hedge fund friends, in a blog titled Friday Night Illumination I was writing on Friday afternoons after the markets closed, to…

“SELL EVERYTHING”

No one says that, ever. But I did.

A handful of people made insane fortunes on the crash because they saw it coming too.

John Paulson’s hedge fund made $20 billion in a year off the implosion, Paulson’s take was a cool $4 billion for himself.

Michael Burry, of The Big Short fame, made $400 million for his investors and took home $100 million for himself. If you haven’t Michael Lewis’s book or seen the movie, I highly recommend it.

There were other hedge fund honchos who saw it coming too and made fortunes, but not a lot of people saw the crash coming, or knew how to make money on real estate and markets crashing.

That’s the nature of bubbles. They’re transparent for a reason.

The good news here is there’s another real estate crash coming, this time in commercial real estate, and not only am I watching this unfold from the inside with friends of mine who are big financiers of commercial real estate in New York City and around the country, I’m watching it from the outside tracking prices, vacancy rates, debt maturities, new credit standards and refinancing restrictions, what pensions selling, what private equity portfolio companies are unloading real estate, how leverage is forcing mark-downs and distressed sales.

And I’m going to tell you how to make the kind of plays Paulson & Company and Michael Burry made.

Join me tomorrow as we talk through the second leg of this Big Short, when real estate prices crashed in shopping malls, restaurants, and every other business affected by the pandemic lockdown three years ago.