5 Magical Steps To Investing Wisely During The Peak Of The Market
by Ward Richmond
If you keep up with my blogs you know that the North American industrial real estate market is booming. We are seeing record absorption numbers, record square footage of product under construction, record rent rates and record cap rates which translates to record sale prices.
In general, investors are hungry for buying new product. In fact, they’re hangry! In certain cases, they are down on their knees! This is all somewhat confusing to me. I was always taught to “buy low, sell high!” Newsflash: The market is at its all-time peak. If you are buying, there is a good chance that you are buying high. Stop doing that. Don’t be the “buy high guy!”
These hangry real estate investors evidently have a lot of money to spend. I get at least 2-3 calls per week from investors who “just kicked off a $500 Million fund to buy industrial real estate in Dallas!” Where in the hell does all of this money keep coming from? In my opinion, some of these billion dollar funds that “have to place the money” in some short period of time are buying industrial properties at prices that flat out, do not make sense.
There are 3 key contributors to maxing out property valuations to “prices that flat out, do not make sense” in 2017. If you own a property which embodies these 3 factors, you are holding a Royal Flush in your hand. NOW is the time to cash in!
- Well stabilized. Is your asset well stabilized? Do you have 0% vacancy? Do you have long term leases in place? Are your leases with a strong credit tenant base? Do you have a 15 year lease in place with Amazon or WalMart? That sounds just right. Is the rent in line with the market? If your answers are “yes”, then your asset is well stabilized!
- High quality. Is your property considered to be a “Class A” distribution facility? Was it built in the last 5 years? Is it state of the art? Is it 32’ or 36’ or 40’ clear? All of these are strong but the higher, the stronger! Does your property have abundant parking? Is it LEED certified? If your answers are “yes”, then your asset is high quality! Congratulations!
- Strong market. Is your asset located in a strong market? It is 2017, so you probably are! Seriously though, are you in a core market? Are you in Dallas? If not, you should be! LA? New Jersey? Chi-town? Hot-lanta? Toronto? Oakland? Seattle? If you answered “yes” to any of these or you are in another city which is a hotbed for distribution, then you are in business, my friend!
If there is product being advertised for sale that is a stabilized, “Class A”, distribution facility, located in a strong market, it is going to be a blood bath for the investors that are trying to buy it. These properties are listed by only a handful of excellent commercial real estate brokers throughout the country who are commercial real estate’s version of rock stars thanks to their ability to leverage these assets against the massive influx of capital and hangry investors and max out value (to the extreme!) during this booming economy.
That’s great for these rock star brokers and even better for these timely sellers. Pat yourselves on the back. All the way to the bank! That being said, some of these buy side investors playing this game of $100 million “chicken” and bidding up prices until they set new cap rate records, have me a little concerned.
The buy-side investors who are hitting it out of the park in this booming economy are avoiding this “song and dance” with the institutional investors and are keeping lower profiles and close tabs on the market in an effort to identify creative opportunities to drive value. These guys are my inspiration for this blog post.
If you are looking to avoid bidding wars and being the “buy high guy”, here are 5 Magical Steps To Investing Wisely During The Peak Of The Market:
- Sell Your Building. This is 2017. It is time to sell, not buy. In my opinion, it is the best time to sell industrial real estate in the history of the world! Set a realistic offering price, add a few million bucks to it and it is your time to go kill it! Sell now and get your cash ready. Keep your powder dry. Winter is coming! Please contact my team immediately if you are considering selling your industrial asset and we will put together a marketing proposal that will knock your socks off!
- Buy Off Market Investments. Finding an off market opportunity still offers an opportunity to create value in this ferocious market that we are living in. This is best accomplished by building relationships with real estate brokers who are true market experts. The guys that are out in the market each day visiting with top owners and tenants will uncover opportunities that create a win-win scenario for both sellers and buyers.
- Buy a Sale Leaseback. The sale leaseback is an excellent way to invest in 2017. The key here is to find a tenant that owns their building and is looking for the opportunity to cash out. For the tenant, now is a great time to cash out – as mentioned in strategy #1 above! For the investor, a sale-leaseback offers the opportunity to negotiate a customized lease agreement. This opportunity allows investors to create more value versus buying an asset with a lease that is already in place with terms that may not be as appealing for the investor.
- Buy Value-Add Investments. The value-add investment is a riskier investment which in return should typically offer investors more upside than a totally stabilized asset. Examples of value-add opportunities include a property that is 50% leased. This creates an element of risk which will typically allow the investor to buy the property at a reduced price versus a stabilized asset. Another example of value-add is a property that is leased at a below market rent rate with a shorter lease term (1-3 years). You can get in there and buy it at a below market cap rate due to length of the lease term and after a few years, when it is time to renew the lease, you are betting on your ability to raise the rent and in turn generate enhanced value for your asset. This requires a little bit of patience and risk but patience and risk is the name of the game if you are trying to find a good deal in 2017.
- Buy Land. Remember in the movie Anchorman when Steve Carrell’s character says, “I love lamp!” Well, I love land! Land requires patience but if you are willing to view your investing as a marathon and not a sprint, acquiring strong land positions is a great way to do it. I think Dallas-Ft. Worth in particular is still extremely under-valued in comparison to land in other major distribution markets. You can buy land in DFW for bulk industrial in the $2-4 psf range. In the scheme of the world, that’s a smokin’ deal. Chicago averages around $7 psf but can swing from $4-20 psf depending on the area. In places like “The Inland Empire” in LA, land can be in the $20-25 psf range or higher! New Jersey can range $30-70 psf! What the what?! If I had millions of dollars to spend, I would be putting it in land – in Dallas-Ft. Worth. No looking back.
“Buy land. They’re not making it anymore! – Mark Twain