Unproductive Real Estate, Unproductive Genitalia, and the Property Brother Propaganda Machine

Bloodthirsty investors and an American housing marketing juggernaut fluffs the importance and market value of homes--while basic human needs and desires are woefully unmet and cast aside.

The $25B Hudson Towers was the largest single American real estate ever built. Its residential, office, and retail spaces have been flailing since opening, driven by high costs, a glutted market, and massive changes in the way people work, live, and shop. Oh yeah, a Regional Planning Authority report said it could be underwater by 2030 due to rising sea levels.

Last year, fellow housing activist Lou Cespedes and I wrote a piece in The Brooklyn Paper entitled “The City No One Asked For.” The piece protested the large office and residential towers that have overtaken New York City’s skyline and represent the bulk of the city’s new construction . These charmless glass-and-steel monstrosities are neither affordable to local wage earners, sustainable in their locations and designs, nor meant to do more than generate development and debt service fees, and act as tax-free (via abatements), collateralized-assets that can be leveraged to acquire more debt that’s put into other, similar developments. 

Apex🌲🏴‍☠️ @apex_simmaps

Want to understand how massive corporate investors are buying up huge swaths of land and housing, making everything more expensive, and making us all unhealthy? Strap in. Here's a quick explanation of a Spread Earnings/Margin Income strategy.

I was reminded of NYC real estate’s design intent reading the above tweet by Substacker Apex. He explained how investors use large cash balances to acquire low interest, Fed-and-other-centrally-bank-issued debt (new money) to buy and build investments. Between the beginning of 2020 and the end of 2021, the U.S. Fed issued 80 percent of all total cash to pay for those investments, much of which was directed towards buying real estate in the form of mortgage backed securities (MBS). These securities are associated with existing and new real estate developments, redevelopments, bundled outstanding commercial and residential mortgages, and the like. Marketed as an economic shot of adrenaline, the influx of money is mostly diluting the value of the existing money pool and driving inflation.

The dense grey lines represent newly-issued debt used to purchase new and existing real estate developments and assets.

The influx of new cash—much of which only available and benefiting investors—has devalued the dollar, driving up effective inflation and cost of living.

Whether cash or collateralized, tradeable assets (e.g. bonds issued against commercial real estate holdings, venture capital, etc.)  today’s institutional investor is able to leverage what they have for what they want, which is “financing.” In this context, financing means the minimum amount of equity and debt commitments to transact or start a deal : buying a company, factory, real estate asset, infrastructure project, etc. Because there’s so much available deb, the investor rarely needs to touch their cash, just have it around in case; that untouched cash used to secure the debt is known as “dry powder.” It’s money with the potential to do something, but doesn’t need to because there’s new, free money for that.  

The more freely the Fed issues investment debt, the more investors hold onto to what the cash they got.

To illustrate, let’s say Investor A has a $10M cash balance, which they use to secure a $2M investment loan at 5 percent over two years. Even though many capital markets (real estate, commercial bonds, etc.) are producing far better returns on short-term investments, let’s say A’s investment yields a modest 20 percent with 5 percent interest over two years. While that debt is being serviced, the investor is getting 15 percent returns on the initial investment (20 percent less debt service), which required little or no money (equity) down, and certainly none that isn’t recouped. The new dividends can be used for luxury goods or reinvested for compound growth (leveraging $11.5 of dry powder instead of $10M) or some combination thereof. 

Earnings before interest, taxes, and amortization (EBITA) is a way to inflate asset values for short-sells. Earnings—and thus valuation—are essentially impossible to tally without these factors, making the figure pretty meaningless for investment and valuation purposes.

The problem is that designing investments for maximum debt extraction, service fees, and operating income is different from designing for efficiency, supporting maximum human and planetary health, or withstanding investment timelines longer than a few years. The former’s design is usually additive , demanding more square footage, horsepower, gadgets, infrastructure, ice cream toppings, and anything that makes or consumes money. The latter’s design is usually subtractive , demanding greater simplicity, fewer distractions, greater quality, less upkeep and expense or anything that detracts from the user’s overall enjoyment of life.