Take Two: Unpacking change with real estate insiders Mitch Roschelle ’83 and David Missirian

A Tough Sell

Digital home tours. Fevered bidding wars. Rock-bottom interest rates. Empty office buildings. Real estate experts Mitch Roschelle ’83 and David Missirian explore whether the pandemic will unpack permanent change for the industry.

INTERVIEW BY KRISTEN WALSH

The real estate business adapted to COVID-19 by digitizing buying and selling. Has it done enough? Mitch Roschelle: Real estate has been an analog business in a digital world for a long time. This period has gotten industry leaders to realize the value of digital in terms of how space is used, how they keep track of people and space, and how they determine space utilization. The user experience for commercial real estate and for residential real estate — all of that will change permanently and perhaps for the better. David Missirian: From a legal perspective, the industry doesn’t like change and traditionally lags behind society. Even during the pandemic, our solution of what to do with the courts was to close them down and require people to mail documents. There’s a balance that has to be struck between efficiency and keeping the system safe. Legal documents need to be private and protected. With paper, it’s easier because there’s only one copy. If we use digital means, it’s easy for a sophisticated hacker to destroy things. When that happens, we have a huge issue. MR: It costs banks a lot to invest in technology to enable digital transactions — not just the bank itself, but the entire chain of custody of that mortgage loan. Residential mortgage closings and transactions are strong candidates for blockchain, for example, but that would wipe out an entire industry of title closers who make their money showing up at closings with paper documents for people to sign. There’s a lot of resistance to adopting technology in this industry because there are always analog businesses involved. DM: Another issue is that the real estate industry has different rules in every state and even from county to county. So adopting a universal closing system would be a tough sell. Which changes in the real estate market have surprised you? MR: The falloff in the supply of homes for sale. It’s been staggering. I never anticipated this outsized demand for homes. Now we are in a vicious cycle: People won’t sell their homes because they don’t know if they’ll be able to buy something, because there’s nothing on the market. Part of that is low interest rates and part is cabin fever during the pandemic.

In commercial real estate, what surprised me is the number of office tenants in cities who are putting a lot of their space on the market for sublease. They are going to need that space when employees return to the office.

DM: On the residential side of things, the supply is basically nonexistent. If the interest rate gets any lower, which is prompting a lot of people to buy, I am a bit concerned. During my 35 years in the industry, I’ve seen the market superheat at least three times. I am nervous because there’s so little supply that we’re going to start to see crazy bidding wars with people paying way more than they should.

That is problematic because they start to think, “I have to win; I have to have this house.” Well, no, you don’t need to have a house that is overpriced, because what will ultimately happen is the market will superheat up, reach a certain point and then readjust. The market will realize that you paid $400k for a piece of property that should have sold for $350k. Then the market drops again, and we’ll have a lot of people who’ve lost all the equity in their homes.

As to subleasing space, I see that as a short-term strategy. Some companies have lost income due to COVID, and they’re trying to make money somehow with what they have. But people are going to want to go back to work in offices. Online communication is efficient and productive, but it is not fulfilling.

Has the pandemic changed the real estate market for good? MR: In general, I give companies high marks on agility during the pandemic. But in terms of what’s next, most companies continue to kick the can down the road. In my view, indecision is not strategic. DM: These changes in the market will remain for at least the next year if not longer. It’s unlikely that the Fed will raise interest rates given the desire to stimulate the economy. But we should keep in mind that low residential supply has happened before and caused prices to rise. To keep prices from reaching unsustainable levels, people should resist the desire to pay more for a home than it is worth.

Founder of Macro Trend Advisors Mitch Roschelle ’83 is a nationally recognized thought leader on real estate, housing, finance, the economy and capital markets. In addition to being a regular guest on outlets such as Fox Business, Fox News Bloomberg, OAN and Cheddar News, he created and co-hosts “The NoPo Podcast.”

Assistant Professor of Law and Taxation David Missirian is a general practice attorney with a concentration in real estate law, from both the residential and lending sides. He teaches courses focused on business law and real estate law.

“Residential mortgages are strong candidates for blockchain, but that would wipe out an entire industry of title closers, who show up at closings with paper documents for people to sign.” MITCH ROSCHELLE ’83