Recession fears are mounting, and it's affecting what the ultra-wealthy are doing with their money.
Wealthy Americans are selling their luxury real estate holdings faster than they're buying new ones, TD Wealth senior vice president and regional investment director James Beam told Business Insider. The slow state of the luxury real estate market reflects this trend, Beam said.
"The wealthy are definitely saving more," Beam said. "They're spending less in luxury sectors like real estate, and I think there are several factors influencing this trend. One, tax changes, and also the fact that the wealthy have a higher percentage of overall ownership of a stock and bond market."
"They've been feeling this volatile bumpy ride with the markets and interest rate environment ... for a long time now, close to a year and a half," Beam continued.
Reduced spending among the ultra-wealthy has also hurt retailers that cater to them, Beam said. Barneys New York filed for bankruptcy and put itself up for sale in August, citing financial problems caused by rising rents and slowing sales, Business Insider previously reported.
Price cuts, parties to attract buyers, and conversions to rentals
In the luxury real-estate market, a surplus of mega-mansions in Los Angeles, luxury condos in Miami, and penthouses in New York City have forced brokers to resort to throwing $100,000 parties and offering multimillion-dollar discounts to attract buyers, Business Insider's Katie Warren previously reported. Some mansions have even been converted to rentals.Sales of luxury ranches have also slowed due to a lack of interest from millennials, Business Insider's Hillary Hoffower reported.
The wealthy are selling real estate, but not buying it, out of a suspicion that prices will never get higher than they are right now, Seacoast Investment Services vice president and certified financial planner Dennis Nolte told Business Insider.
Nolte began to notice that some of his ultra-wealthy clients in the Orlando, Florida area were bearish on both residential and commercial real estate about a month ago.
"People don't think that commercial prices are going to get any better than this," Nolte said. "Longterm holders are wanting to get more liquid."One of his clients recently sold their chain of massage parlor franchises, Nolte said. Another client of his, who runs a business helping foreign doctors relocate to and set up practices in the United States, also began to complain that even the doctors who purchased residential real estate were reluctant to do the same for their businesses.
The wariness is not limited to wealthy US residents.
Between March 2018 and March 2019, sales of residential real estate to non-US citizens fell 36% from the year prior, a July 2019 report by the National Association of Realtors found. The dollar value of sales to Chinese nationals — the largest buyers of American residences besides Americans themselves — fell 56%. The report cited a global slowdown in economic growth, tightening restrictions on capital outflow from China, and issues with the existing housing inventory as causes.
Preparation for a possible recession extends well beyond real estateReevaluating their real estate portfolios isn't the only thing high net worth individuals are doing in anticipation of an economic slowdown. Many are also selling bonds, stockpiling cash, and paying down their debts, Business Insider previously reported. Over the past month, Nolte has seen wealthy families in the Orlando, Florida area sell undeveloped tracts of land that have been passed down for generations.
"The one percent, they're fearing the worst right now," Beam said.
The wealthy are still pouring money into real estate investment funds, said Jared Feldman, who serves as the CFO of several private family offices as a part of his role as the co-Practice Leader of New York accounting firm Anchin's Private Client Group. Some of Feldman's ultra high net worth clients are taking advantage of discounted luxury properties to diversify their portfolios.
"For the right price, we're not seeing people hold off," Feldman told Business Insider.