Elliman’s Howard M. Lorber: “Hard Asset” Value Makes Real Estate a Timely Investment

At a time when rising inflation and interest rates, ongoing supply-chain challenges and the war in Ukraine have understandably shaken the confidence of market investors and everyday consumers, real estate remains a solid, even timely investment.

That was the view expressed by Douglas Elliman Executive Chairman Howard M. Lorber at a recent event marking the release of The Wealth Report 2022, a joint publication by the U.S. real estate brokerage and its international partner, Knight Frank Residential.

Held March 9 at Casa Cipriani and sponsored by CrossCountry Mortgage, the event featured a presentation of the report’s insights on global trends among ultra-high-net-worth individuals, followed by an on-stage conversation between Lorber and Robert Frank, Wealth Editor for CNBC. In addition to reflecting on the real estate impacts of rising inflation and interest rates, Lorber discussed why New York City will be the world capital for second homes and how Douglas Elliman plans to expand its leadership in luxury markets across the U.S. and beyond. An edited transcript of the conversation follows.

Robert Frank: If you look at the top 1%, they have added $10 trillion in wealth, just from the financial markets over the past two years. And by the way, 15 years ago, their entire net worth was around $10 trillion. So, the amount of wealth being created, particularly in the U.S. from stock markets, that is still there. There’s still so much house much money to play with.

Now, Liam [Bailey, Knight Frank’s Global Head of Research,] is correct that inflation means different things for different levels of income and wealth for the wealthy. Inflation is not a concern about the cost of things you buy everyday—the cost of gas, the cost of bread—it’s really how it affects your investment. And hard assets tend to outperform during inflationary periods. So, that’s positive for real estate. On the flip side of that, interest rates going up is a huge deal for the wealthy who are leveraged across their businesses, across their personal lives. So, when it comes to real estate, how do you see inflation and interest rates playing out this year?

Howard M. Lorber: The fact is that history has shown that when you have inflation and you have mortgage rates going up, although from a very low level, that doesn’t stop people from buying. In fact, that brings buyers into the market, because they’re afraid that if they wait too long, they’re going to be priced out of the market. The other factor is, when you look at inflation, hard assets do well during inflation, and it’s the same rationale to buy now. It pushes people to act quicker, and so in this set of circumstances, it’s a very positive factor for real estate.

RF: So that that lights a fire under the buyers. The challenge now in a lot of markets—and I know we did start to see this in New York—is inventory supply and sellers.

HML: The good news about that is that as prices go up, more inventory comes into the market. So, you have someone that has a house, and it’s worth $4 million, and he doesn’t want to sell it. Then all of a sudden it’s worth $5 million, he’s going to start thinking, and maybe it’s $6 million, he puts it on the market for sale. So, it’s self-fulfilling. It’s going to happen. It’s almost impossible to keep inventory at a very low level when you’re in times of inflation and rising interest rates.

RF: If there was one number that I hope we all remember from this morning—a number that Liam tucked away in his presentation—which is: The number of people in North America in the U.S. worth $30 million or more—that really is the golden slice of real estate, right? In the next four years, that number is going to grow by 70,000, up to 300,000. So, over the next four years, there will be 70,000 new clients worth $30 million or more, which, as a wealth reporter, I find really exciting. And then you look at it globally, the numbers in Asia could even outperform that. So, my question to you, Howard is, how does Douglas Elliman plan to capture that market, to best position for that market and to help your brokers with that golden slice of real estate?

HML: I think the advantage we have is we’re primarily in the in the luxury markets, the high-end markets.  And we’re going to expand in other luxury markets, which to me also means low-tax or no-tax states. So, Nevada is now a great market. Arizona is a low tax state. We’ve already expanded into Texas—Texas could be, for us, a market as big as New York or Florida, if we do it properly. So, I think that those are the types of things that we want to do to maintain our market position. And pretty much in every market that we’re in, we have a major market share. And in most of those markets, we have always had the highest price setting, which is hard to do when you’re in a lot of markets. But that’s because we have great brokers in all the markets. So, that’s the way we’re going to continue to build the company.

What we want to do is really more in Texas, open Arizona, open Nevada—and I think that will be a good year for us, if we get those two done in 2022. And then we’re also looking at some other markets that we’ve been speaking to our partner Knight Frank on—Montreal, Toronto, parts of the Caribbean. And then South America. That’s very important for us because of the amount of new development we do, especially in Florida. So, we can open in Brazil or Mexico or Cabo [San Lucas], which feeds California. Mexico feeds Florida, mostly, and Texas. So, I think that’s really, really what we want to be doing.

RF: Latin America is interesting for Douglas Elliman because you have so many of those relationships in South Florida that have only grown over time. And when you look at the relationships and the geography that Douglas Elliman has seen before it’s happened—you guys were so early on the New York-Florida corridor and owning that clientele, which just turned out to be brilliant. And then you look at the migration out of New York—obviously, we did see a lot of out migration during the pandemic. If it’s the top 1% who pay over 40% of the taxes in New York State, and probably more in New York City, that’s a problem. So, how do you see the migration, particularly as it relates to New York.

HML: I can only say this: That for every very wealthy person that moved to Florida, I can’t think of one of them that sold their apartment or house in the city—not one. And I think that bodes very well for New York City. New York City has so much to offer—New York City is going to be the No. 1 place for second homes for the whole world. It may have been a little shift, but that’s what I believe the shift is going to be. People still want to be in New York City, from all over the world. It’s still not as high as it could be, pricewise; it hasn’t been like Palm Beach or even Miami or parts of California. It just hasn’t had that big, big increase yet.

RF: It was astounding to me that sale prices in New York, when all was said and done, only came down 7%–8%. And correct me if I’m wrong, I think the original Douglas Elliman founded this company by marketing the idea that New York real estate would be a safer investment over the long term than stocks. And that was proven once again.

HML: I think the world understands that. And when you think about it, we haven’t had any international buyers come into the country in the last two years. So, as that’s going to open, you’re going to have many more buyers in New York. I think London is going to have the exact same experience that for some, if you live in New York, your place in London may be your second home, or vice versa. And that’s really the trend that we believe is going to happen.

RF: It was really encouraging in this Wealth Report to see, when you looked at lifestyle cities and ranking, New York was No. 3, behind London and Paris, but New York was ahead of Los Angeles. And when I think of lifestyle, I think of Los Angeles. I made the mistake in the pandemic of thinking that New York real estate could not recover until the commercial market came back because we are a productivity working machine. That’s what New York does. And what I didn’t realize is that maybe now New York is more of a cultural playground, as opposed to a work machine,

HML: That’s part of my rationale for what’s going to be the No. 1 second-home market for the world.

Many of you may have heard me say this before, but I believe that real estate is a perfect investment. I call it a “comfortable investment” because we all know, if you’re in the market, you have your iPhone, every 20 seconds you can value your portfolio and be happy and miserable. And there’s no way, there’s no way [in real estate] to value whether you’re halfway up or down every 20 seconds, even every month. So, it’s an important asset to be part of your portfolio.

The fact is that real estate traditionally has been a great factor in the wealth of many people—and not always the ultra-high-net-worth people. [For] mid- to lower-earners, the only real asset they have…is not a few stocks, it’s their house. And so, they have the best investment they could have made. So, I think that those are all the arguments for why you should be buying real estate now.

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