Sonenshine Reflections

“Reflection is one of the most underused yet powerful tools for success.”  -Richard Carlson

As I reflect on my 45-year career as a real estate professional and apply it to what is happening in the market today, I have a real tough time making sense of it all. Never have I been so uncertain about what will happen next.

What’s Muddying the Water?

• Disruptions due to COVID-19, particularly in the office and hospitality markets
• Soaring prices fueled by excessive amounts of private liquidity and government largess
• Rapidly rising cost of land and construction, necessitating higher rents
• Uncertainty over the direction of inflation and interest rates
• Impact of eCommerce on retail
• Impact of investor intrusion into the single-family housing market on multi-family real estate
• The growth in private unregulated lending

What Do I Know?

• Most real estate downturns result from a drastic and rapid change in the capital markets
• There is little if any upside left in pricing
• Interest rates will eventually rise
• There’s a limit to how much rent tenants can afford—they will seek cheaper alternatives or modify space requirements

Yet, as I write this, none of these things is happening or appears to be on the horizon. In fact, every economist or real estate forecaster I have heard paints a rosy picture, at least through 2022.

If there is one thing I have learned in 45 years, it is this: When the “nothing can go wrong” theme dominates the discussion, it is time to be extra cautious.

Where Do I See Opportunity?

• From the pandemic onset, I’ve thought office will offer a buying opportunity. I still believe that.
• While I was skeptical at first, single-family rental is here to stay. Demographics support this.
• Secondary markets with good growth dynamics should come into favor.
• Considerable repurposing of malls, and to a lesser extent office and hospitality properties, is coming.

Stan’s Strategic Advice

• Be patient. No exceptional buying opportunities currently exist.
• If you need to move cash, buy well-located, quality assets that you can hold long-term.
• Be wary of yields driven by low interest rates. They will not last forever.
• Invest with reputable fund managers or sponsors with a proven history and a focused investment criterion.
• Keep this in mind: Development and value-add investment is inherently risky as it often utilizes debt to achieve desired yields.

Final Takeaway

What I’ve said above may seem apparent, but when investors become euphoric because of previous results, they often become careless. Many a gain has been wiped out at the end of a cycle.

Seek advice from a real estate professional to help you see the big picture, to evaluate all the relevant factors, and to help you make a decision that meshes with your overall financial plan.

PREF has the experience and insight to help you do this. Until next time, invest wisely.