Growing CRE Capital in 2016
Written two years ago, the thoughts below were a look forward in an attempt to define a strategy that offered upside while protecting against downside as is seemed an asset bubble was forming through easy money policy. Today, at the end of January 2019, the stock market has continued to rise alongside CRE construction and rates with only a few nerve-racking periods along the way. Conversations today seem to indicate that while TI costs have risen substantially, and multi-family concessions are rising, there is still runway ahead for a bit longer.
The future holds a difficult reality for those expecting to enjoy retirement from retirement savings programs, pensions, or self-directed investments. Returns that were once commonplace, have gone into hiding. This is no different for real estate investors who have watched opportunities to invest in properties that deliver historical returns of 7-10% evaporate before their eyes.
Why is this?
· There is a worldwide search for returns (yield) for a number of reasons, but one main driver is the low interest rates that typically would have put a floor on available risk-free returns of government treasuries which so much of the worlds savings are invested in.
· This low return environment creates a chain reaction effect involving other markets driving more and more investors, large and small, towards investing in commercial real estate investments since they offer an attractive alternative to other investments.
· Econ 101 is that More Demand = Higher Prices & Lower Returns
What is the real estate investor to do?
· Stay conservative and limit downside risk by finding good assets that offer elements of security in cash flows associated with tenant credit, lease term, location, or utility.
· Identify then exploit upside potential by looking beyond what is being purchased today towards what could be sold tomorrow through population growth, demographic improvements, or redevelopment potential, then exploit it. This is where working with the right broker is a huge asset in identifying opportunities in the marketplace.
· Actively utilize intelligent legal, financing and tax strategies to increase upside and limit downside when opportunities present themselves. This is where a great team of advisors is so crucial in capital preservation leading to greater compounding growth.
Today, there is a worldwide search for yield where $16 trillion ($13 trillion two weeks ago) of debt is yielding negative returns, driving new players, such as pension funds with seemingly unlimited capital, into the commercial real estate world in order to keep their funds under management growing at all. As this has happened, pricing of commercial real estate has continued to rise to historical highs, driven by more and more demand for limited supply of available properties.
Today’s situation insists that the local investor intelligently identifies and then capitalizes on opportunity while simultaneously mitigating risks in order to grow their investments in a safe and consistent manner. This is a tall order, and with each of us living longer and longer, the risks of failing have never been greater.