“What car are we on?”
As a veteran of multiple real estate cycles, I have observed the growth and contraction in the activity and valuation of real estate over the past 30 years.
Any of us who have been alive and in business since the 1980’s have witnessed some truly extraordinary economic events – stock bubbles and crashes, the collapse of the savings and loan industry, the RTC, the roaring 90’s, and finally, the ‘Great Recession’ in 2008. One common question we all ask, in hindsight, is “How did we miss this?”
Most all investors in and users of real estate all wished they had known or could have foreseen what was coming. What was common in each of the down cycles was an overconfident optimism and focus on returns and deals at the expense of discipline and process. With the Trump administration economic policies in full swing, we are seeing again a robust recovery, better trade positions in some cases and gradual loosening of credit standards. Couple that with the Fed and its mostly methodical but gradual increase of interest rates, and our economic picture is providing more clarity and incentive for many companies and workers. We may not ever choose to face the political and economic reality of the deficit – both major parties are fully complicit in this charade – so, the question becomes, with the factors in place today, how long can we expect the glow to stay on the economy and by extension, real estate?
The lenders and professionals we interact with are expressing optimism about the economy through 2019, with a view towards slowing in 2020 and beyond.
I like to call this the ‘last car on the roller coaster’ – you are on a hill, you know over the crest are things you can’t see or predict but you know they are coming.
The hill may be steep or a gentle downturn. It could even be a slight dip leading to another big hill.
What do we recommend?
If you are investing in real estate:
Focus on the best locations – pay the price for better quality location, even if it means lower returns.
Avoid retail – The retail delivery model is experiencing serious, constant disruption. The retail real estate concept you invest in today is likely to see change and be affected by this disruption that is surely in the future. See option 1 to keep the effect of this disruption to a minimum.
Continue to invest in multi-family and residential – Rental real estate is on a seven year tear, and it is not ending anytime soon. People need to live somewhere, and a greater percentage of the population is willing to forego ownership in exchange for mobility and that means short term leasing and living arrangements to many.
Focus on flexibility of leasing terms – keep your least term as short as possible and avoid locking into full market rates.
Keep your cash handy – In a down market, cash is king and opportunities may present themselves for ownership versus leasing as prices fall. It is still too early to see this clearly but if it happens, it would mirror every cycle we discussed above.
At Piedmont, we are thinking. About you. And the world around us. Let us help guide you as you seek to make sound real estate decisions.
Stay well and stay tuned…..