Even in times of economic distress, it’s critical to find the sweet spot where decent returns can still be had on our investments.
In today’s market, we’ve seen economic fundamentals deteriorate without much change in the corresponding price of real estate. This means that either the fundamentals need to catch up to the price or the price needs to come down to match the prevailing economic conditions.
In a growing market, a portfolio made up of all equity investments is optimal as this investment has unlimited upside. In a declining market, preferred equity is the more favorable investment choice because it generates a far more stable return with downside protection. Understanding where we are in the market cycle is the key to successful active management. Partnering with the right investment team, who understands the importance of preferred equity, is essential to investors looking for a less risk, more reward balance.
The key to generating above-market returns during an uncertain real estate market is having a pipeline of quality opportunities and experience in evaluating real estate. Your partner acquisitions team needs to live and work in their target markets, establishing on the ground relationships with developers, brokers, and property owners.
In 2008, excess lending and loose standards in the market led to an almost decade-long downturn. Today, however, debt and equity providers have behaved a little more responsibly over the past ten years to avoid another real estate bubble scenario.
Experts suggest this year’s recession is likely to be much kinder on real estate than 2008 because we are starting at a place where debt and equity are in equilibrium.
We anticipate that we will all be ok in today’s environment because of our fixed returns and protected positions.
