I recently had the pleasure of partnering with Ethan Penner, founder and managing partner, Mosaic Real Estate Investors, to develop and present a webinar with National Real Estate Investor. The webinar was designed for the high net worth investor. Ethan is a recognized pioneer in the fields of real estate and finance who is widely credited with creating the Commercial Mortgage-Backed Securities market. We’ve partnered on a few panels over the years and thought it timely to do this presentation.
What we both ultimately wanted to communicate was that we are living in interesting economic times. A 30-year bond bull market has taken the 10-year T-bill from 15% to 2% or less. The rock-bottom T-bill really can't ride much lower, making it impossible for the last 30 years of economic history to repeat itself. Our jointly held belief is that a smartly selected real estate portfolio is still one of the best places to invest; however, all economic and market factors must be taken into account in the determination of what "smartly selected" means to each individual investor. Contrary the the way it is frequently treated, real estate should never be handled like a commodity, with a one-is-like-the-next approach. An investment that doesn't fit for one party could be ideal for another. This level of specialization creates a great divide between investing in real estate and investing in equities.
To further underscore that position, Ethan used the famous Dirty Harry line “Do you feel lucky, punk… well, do ya?” because it’s the phrase that comes to his mind when asked about investing in the stock market.
When you compare real estate to the stock market, a targeted and well-advised investment strategy takes the “luck” out of the equation. As Ethan noted, “as an investor myself I try to avoid being ‘lucky.’ I would rather be rewarded when I do my work.” Moreover if you have the ability to hold over the long term, which is a goal of many family office investors, then you don’t have to rely on luck.
The reality of the current financial environment is that capitalization rates and interest rates have a far greater probability of going up than down, and the global economy is fragile. This is why a CRE portfolio must be strategic and well-selected. Plan your long term CRE investment goals with rigor and discipline. If you currently own CRE and are thinking of selling, strongly consider doing so in 2016 or early 2017, or run the risk of interest rates and cap rates going up. If you are not a seller, consider refinancing before the next Fed interest rate increase. In your scenario planning be prepared to hold a minimum of 5 years, and test what a 20% drop in income does to your cash flow. Most important, as the market becomes more challenging to navigate, be sure to have trusted and experienced counsel to advise you.
I encourage you to watch the webinar to hear more of the conversation.
I also hope to see many of our clients and peers at the annual ICSC Conference in Las Vegas May 22-25. This is a great deal-making opportunity – and an ideal place to hone your real estate investment strategy. Please visit us at booth #C150M.