Nailing Trends

How, if at all, does a good CRE professional move with the capital flows of the marketplace as they move through property types. We preach specialization, but might there be times when comps don’t take enough into account?

“When you’re a hammer, everything looks like a nail.”

About ten years ago apartments began their amazing run which has pushed values to highs that no one ever thought. Looking back, there are understandable reasons why, however, affordability has continued to decrease, and concessions are finally starting to increase, albeit after nearly a decade.

 More recently, industrial space has become the darling of much institutional capital. Those inflows can be attributed to a greater understanding of logistics, a low cost of improvements and vacancy, as well as the amazon effect on the last mile.

So how does one understand enough to properly evaluate whether these investments are fads or solid long term gains? Does it even matter? There is a podcast by a gentlemen by the name of Michael Covel that hammers on the efficient market theory. Covel believes that humans are irrational and that the pendulum swings quite wide, so focus on making the trend your friend is the best investment philosophy. However, his focus is on the stock market which is highly liquid, so can the same thoughts can be applied to real estate, which is far more illiquid? Furthermore, so much real estate is held with leverage, where a small swing in valuations can wipe out entire pools of equity, as can a large vacancy through negative cash flow.

At the end of the day, no one can be an expert in all things, but we can know the thoughts of multiple experts in most things. Paying attention to risks and benefits to alternative investments can give some insight into peaks and troughs of valuations. Also, with real estate as a physical asset, there is usually some point where replacement cost comes into play and transaction data from surrounding competition can give insight that helps narrow the field of uncertainty. Good professionals will have this information readily available to them, if they don’t know it by memory. As a CRE professional I try to understand the various aspects of financing structures, lease terms, replacement cost, zoning issues and functional obsolescence of multiple property types to evaluate which may have the best attributes for my clients’ investment preferences.

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