As a real estate investor, I’m often asked: “What inning do you think we’re in now?”
Candidly, I’m not sure the baseball analogy – that so many in our industry use – really fits the real estate cycle. If baseball was like real estate, it’s entirely possible we’re in extra innings or are playing the second game of a double header.
The challenge is that each real estate cycle is uniquely different from prior ones. Whereas, baseball games are fairly predictable. Each baseball game usually has nine innings, and every game has the milestone “seventh inning stretch” along with the “last call for alcohol.”
If only the real estate cycle had such regular milestones – especially the last call for alcohol – to prepare us for the end of the party. Predictable timing and schedules aren’t set in stone with the real estate business cycle, but that doesn’t mean there aren’t patterns to analyze. To paraphrase Mark Twain, “history doesn’t repeat, but it rhymes.”
With that said, I don’t presume to know exactly “what inning we are in,” but it sure feels like late in the game, even if nobody has announced the last call for alcohol. Right now, most real estate deals are priced to perfection leaving little room for error in calculating construction costs, interest rates and more. As a result of this “priced to perfection” model, we’ve adjusted our investing strategies accordingly.
So, with this later-cycle viewpoint, what are we investing in now? This is the second question I’m often asked.
First, we try to find investments that have more than one path to a successful outcome.
Second, since we’ve predicted we’re at a later point in the real estate cycle, we like playing in a more defensive position: low leverage or all cash.
Here’s what we are doing at this juncture:
- Selling assets that are ready to sell
- Providing debt, such as short term credit facilities, to real estate operators who secure us with sufficient collateral
- Providing preferred equity
- Acquiring land deals with a longer term perspective
- Implementing development or exit strategies on prior land acquisitions
While the first three strategies listed above have a short-term duration, we are currently taking a long-term view with land deals. We use our market knowledge to purchase well located land, in cash, along paths of growth and development. We will buy land with challenges, whether those be environmental, zoning or assemblage, if we can acquire it for a smart basis. We then work to create value by solving those challenges while planning for the highest and best use of that land. After that, we look at our options. Is it best to sell or develop? If we decide to develop, we will do it in partnership with a developer that has expertise in that particular real estate product type.
After 24 years of creating value through smart real estate transactions, we have first-hand experience in all stages of the real estate cycle. We’d love to compare playbooks and notes to see if there is some synergy to do business together. We’re curious to know, what are your real estate strategies for this stage in the cycle? Email me!