Should investors run for the hills in the face of uncertainty?

It doesn’t take a lot to notice that we are living in uncertain times. The media loves talking about it. Fed Chief Powell has made it clear that he isn’t taking his foot off the interest hike pedal any time soon. Banking chiefs from Chase, BofA, and Goldman, all have flashed warnings about an impending recession. I am in the camp of a mild recession. Nevertheless, talking about uncertainty, has moved investors to the sidelines. I wonder, if this is the right strategy. If you think about Warren Buffet’s famous quote. “be fearful when others are greedy and greedy when others are fearful”. Buying commercial real estate in uncertain times creates benefits for the investors right now. I personally know several investors, including myself, that purchased commercial properties in 2020. Yes, that’s correct. I purchased commercial property in the year of the pandemic. I would be lying, if I said that I wasn’t concerned, but I did find that the competition was minimal. To that end, if you were selling, that meant I would be able to dictate my terms. We have since sold that property, because we reached our targeted goal. It was a great investment because once the economy opened back up, investors flocked back from the sidelines. The property we bought in 2020 increased in value so much that our 5 year plan tuned into 18 months.

What I learned from this experience in buying in uncertain times are 4 things.

1. Commercial RE Market is inefficient: Even though you may find that a market is declining, it doesn’t mean that all markets are declining. Take for example, Austin and Boise. Those markets are softening in value. In contrast, markets where employers that exists within the military sphere, have been more resilient. Looking for these market inefficiencies is where the opportunities exist. Knowing where to place capital, versus not, is very critical. To that end, our latest acquisition was in a market where the largest employer had military contracts.

2. Value-Add Opportunities: In any market cycle, you are going to find opportunities, where the owner didn’t increase rents, operationally did not manage the property, or just doesn’t want to own it. Even in today’s cycle you will find good deals, where you can purchase the asset for lower than the real value.

3. Value in Unique Assets: I love brown stone buildings. Something about the history of these properties draws me in. But buying the right brown stone is the challenge. After all, we are in a business of making money. Cycles of uncertainty, draws owners of unique asset to want to sell. An professional investor may want to diversify its risk, or an older owner may want to cash out for retirement, in either case, these assets would never have been sold without the market uncertainty. These uncertainty creates opportunities.

4. Opportunity to Reposition: As they say. Beauty is in the eye of the beholder. I know an investor that is buying office space and converting it to multi family. Another bought a retail big box space and repositioned it into warehouse space. It just depends on where you see opportunity. Uncertainty, creates these voids, where you would not have in up cycles.

Real Estate investing is about the long term horizon and capitalizing on opportunity. Its important to understand that uncertainty doesn’t mean running for the hills. It means we need to manage risk differently, and understand the opportunity in front us. For now, we will continue to look at deals, with an eye to the future horizon, understanding risk, thankfully with less competition. ..for now.