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On behalf of the entire team of Peak 15 Capital, I want to thank you for signing up for, and reading, our newsletter. Welcome!
As many of you know, Peak 15 works in the intersection between capital markets, and the more targeted commercial real estate space. We have hundreds of conversations a month with investors from all over the country (and the world), each with unique insights and opinions on the world around us. We at Peak 15 work hard to make sure that we are engaging with correct information and we are all on the same page. The purpose of this newsletter is to provide you, the reader, the same distilled insight so that you can see the world in the same way that we do.
Each newsletter will begin with updates from our own section of the financial world. Our goal is to provide a brief 3-5 minute reading to make sure you are not missing out on major stories that could impact your financial world. The bulk of our newsletter will provide some reflections and historical context for the time we are living in today. The goal is not only to leave our readers better informed about the world around them, but better equipped as well.
Without further adieu, thank you and welcome to the first Peak 15 Newsletter
Updates:
This being our first newsletter, there are quite a few updates that we feel that our readers should be aware of with the biggest being inflation. Obviously, the COVID-19 pandemic as well as the response of governments everywhere has led to an inflationary period. In response to this, The Federal Reserve has decided to introduce rate hikes over several months.
We are thankful that the Fed has decided not to use shock-and-awe and have instead decided to gradually increase the interest rate to a more reasonable level. Frankly, such a rate hike should have happened earlier, but we welcome the correction nonetheless. Regardless, we have not seen demand in real estate react to the initial rate hike quite yet. Brokers are still pricing assets with very small cap rates and still getting more than enough interest to make a deal. This behavior cannot continue forever and we are expecting cap rate expansions over the next several months.
As far as our own acquisitions, we are proud to announce the closing of English Village Apartments with our great friends over at Victory Capital Group. English Village is a 32 unit apartment complex in Greenville, North Carolina and we are so excited to have a closing like this in our own backyard.
Reflections:
Why do prices change?
Inflation, and stories surrounding it, have dominated capital markets recently, but very little work has been done to demystify the phenomenon.
Inflation means that prices are going up. It is as simple as that. These price increases are either caused by changes in supply or by changes in demand. This pandemic, we had both.
Supply chain disruptions have affected almost every industry. With less shipments coming in, each product becomes more valuable and prices have nowhere to move but upwards. On the demand side, the government made money available to people throughout the pandemic through stimulus checks resulting in increases in demand.
This perfect inflationary storm has given us the pictures we have today, but maybe it is worth wondering if inflation needs to exist at all. I mean, is there an upside?
A world without this kind of inflation is a world that existed for hundreds of years. In the 1600s, when international trade was carried out with gold bars as the currency. It is true that gold was being dug up in the 1600s, and gold rushes often led to fascinating inflationary periods, but it was widely accepted that there was a finite amount of gold on Earth. The problem with this kind of system is that when something is a fixed resource, and it does not go down in value, it is in everyone’s best interest to hoard it.
A viable trade strategy then, was to buy nothing and let gold accumulate. This world economy gave rise to a philosophy called mercantilism, which means trading, or not trading, with the intent of getting richer.
Bitcoin is a pretty fascinating case study for us right now since it is a finite resource, just like gold. However, we will be skipping out on gold rushes this time since the mining of this symbol of value is regular and predictable. Furthermore, there are only 21 million of them, no more and no less. Bitcoin is the perfect anti-inflationary asset in this way. It does a great job at storing value over time, it just does not stimulate transactions.
There is no fixed amount of US dollars on earth today, there are more dollars in the world today than there were last week. New dollars are created when risk is taken. The beauty of this is that wealth must circulate the economy to maintain and generate value. The dollar incentivizes transactions, otherwise, the wealth is diluted.
Another feature of our fiat currency is the central bank and the tools at its disposal. In a time of high inflation, the central bank can raise the price of debt, meaning demand generally falls all over the economy and prices fall with it ending the inflationary spell.
Peak 15 Capital is in the unique position of witnessing inflation from several different angles in real time. With the rush of both money and information into the market, the demand for stabilized commercial real estate has skyrocketed and prices with it. This is certainly no secret and this feeling is shared among most sponsors and investors that we talk to.
Consider also the price of debt rising substantially over the next year. With the supply of debt shifting, sponsors will be incentivized to look for other capital solutions. JV and LP Equity, we expect, will be in even hotter demand once these rate hikes materialize.
Interestingly enough, we have two instances of inflation each pulling our sponsor’s decisions in a different direction. On one hand, building supplies are already expensive, but on the other hand, buying a stabilized asset means bidding against what could be the most competitive commercial real estate buying market in human history. Because of this, we have seen our sponsors lean into ground-up development despite the higher building costs, and we have seen tremendous success in this strategy.
We hope that this letter can serve as a window into our business, as well as a window into this economic concept. Inflation is certainly an abstract concept and the mechanics are hardly ever laid out in plain English, but we believe that if you zoom out enough, inflation can become understandable and predictable.
Thank you so much for reading, and thank you for your continued support of Peak 15 Capital.
Keep climbing!
Peter Vermette
