Calculated Speculation

A commercial real estate asset is a small business unto itself, operating in a micro-market that may be as big as a ZIP code or as small as a few city blocks. While portfolio investments like stocks, bonds and institutional real estate are heavily affected by macroeconomic trends like employment and interest rates, the financial performance of any given real estate asset is influenced much more strongly by what goes on around it. And even though these high-impact local events may seem to come out of nowhere, in reality they might be a long time coming.

Armed with market knowledge, a strategic plan and conservative financing, investors can both capitalize on these trends and mitigate micro-market risk factors.

Imagine these micro-market scenarios:

1. A former manufacturing area on the edge of town has become a hot spot, complete with trendy restaurants, craft beer bars and converted loft apartments.
2. Thanks to a recent change in state law, the movie industry has suddenly converged on the metro area, converting old warehouses to production studios and stimulating growth in the surrounding neighborhood.
3. The city’s big professional sports team just announced plans to relocate to a new stadium in the suburbs after next season, significantly impacting both the current and future sites.

Besides making local news, these are the kinds of events that can turn a neighborhood’s real estate market on a dime. They are not always predictable, nor is it always clear what impact they will have.

For example, that hot new industrial-chic area may be an opportunity for a self-storage facility as hundreds of incoming residents move into small apartments. As for that soon-to-be abandoned ballpark, who knows what types of developments will fill the void?

The point is that holding the right property at the right time is the way to make big returns in private equity real estate. To do that, you have to be a little ahead of the curve, take some risk and be patient. That is why real estate investing is always a matter of calculated speculation.