Spring Outlook and Commentary – April 2013
I bumped into a fellow broker recently who asked me, ‘are y’all still buying everything you touch?’ To which I said, ‘no, but we are actively looking for opportunities’.
Inside I bristled for a couple reasons:
1. We are VERY selective in what we purchase, we only bought 8 assets last year and typically look at 100+ deals before one works for us and
2. Why are we sticking out in the market as one of the most active buyers of real estate vs. our peers? Are we missing something or being reckless?
The question caused me to think through and to discuss with peers the financial hurdles and thresholds we use to analyze deals, to question what part of the real estate cycle we think we are in and to think about the macro economy and its effect on our investments.
Before I dive into my conclusions, I must admit that there is a part of me that feels like we are sharing our ‘secret sauce’ with the general public. But we try to be a very open firm that shares information freely. I’ve found that more and the better people get to know us, the more opportunities we all seem to find. With that said…
How do we analyze deals?
Someone asked me the other day if you only could give one piece of advice for a real estate investor what would it be? My answer was to buy below replacement cost. Leases can artificially enhance the price the market is willing to pay for a given building. Ignore the leases, look to what the underlying dirt and building is worth.
This guiding principle kept us safe during the great recession of 2008 and its aftermath.
As things get better, we’ll be challenged to stay disciplined and hold to this principle.
Where are we in the real estate cycle?
We think we are in the recovery phase of the RE cycle. This spring we have noticed a large increase in incoming calls on our listings. It seems that much of the pent up demand is now looking for a home. Lenders are becoming more competitive for deals and underwriting is becoming more borrower friendly. Take a look at the most recent Urban Land Institute/Ernst & Young survey concerning CRE:http://www.uli.org/press-release/consensus-forecast-april-2013/
How will the macro economy effect us?
As a real estate investor, I feel bad thinking this, but if things stayed like they are for a really long time, we could make a bunch of money. One of largest components of a real estate deal is the leverage piece and right now rates are phenomenal. We are seeing sub 4.5% rates that can be fixed up to 15 years! As our economy heals, rates will undoubtedly climb back up. More often than not, after a long period of low interest rates, increased money supply, and a currency debasement, inflation follows and sometimes with a vengeance.
This is where our current investment thesis is tethered, when inflation does kick in, real estate is the place to be. In fact it might be the very best inflation hedge across all asset types if managed properly.
By using debt to purchase real estate heading into an inflationary environment, we are using today’s dollars to purchase an appreciating asset to then pay the bank back with tomorrow’s devalued dollars.
Inflation is real estate’s best friend.