During the COVID lockdowns, franchise hotels that cost $15 million to build were, at least according to the Income Approach, essentially worthless. They were all losing money. Then COVID ended, travel resumed, profits returned, and their values soared back up to over $15 million.
Now think about golf courses. Beautiful $14 million golf courses, in affluent areas and lined with mansions, were, at least according to some idiots, worth less than $3 million because they were losing money. There were too many golf courses.
Then many over-leveraged golf courses failed. Supply fell to meet demand. Those $3 million courses soon soared to $7 million and more, as the owners were finally able to raise their greens fees.
Can you imagine some new developer spending $14 million to build a competing golf course today? It will be decades before the numbers justify the construction of any new golf courses. Golf course owners are protected from new competition.
Now think about office buildings. Construction costs have soared with inflation. The replacement cost of most office towers today is stratospheric.
Some would argue that the world has discovered that it doesn’t need so much office space. People can work from home, right? As a result, office towers in New York City are selling for just 45% of their values six years ago.
No one ever listens to me, but brokers...
It's all about loan servicing rights.
Some lender had a delinquent $200+ million first mortgage on a half-empty office tower in NYC. The lender just sold that note for around $100 million to George Soros.
I think Mr. Soros was savvy enough to realize that the replacement cost of real estate often matters a great deal. Soros will probably foreclose on the building, but he is wealthy enough to hold that office building until supply falls enough to meet demand.
I think that Elon Musk is a pretty smart guy too. He says that workers are much less efficient when they work from home. He ordered everyone working for his companies to return to the office. Other companies may discover the same thing.
I think George Soros just made one helluva deal. Can you imagine how long it will be before any competing office towers are built? Fifteen years? Longer? Astronomical construction costs are a very high barrier to new competition. He has that moat around his office space leasing business that Warren Buffet is always talking about.
