By Matt Bear, Founder and Chief Executive Officer of Bear Real Estate Advisors
Empathy. All the great sales people have it. They feel what you feel, they fear what you fear, and they want what you want.
Now in my 30th year in the commercial real estate business there are things I have learned along the way that have created my point of view of which I use to serve the interests of my clients. Everything begins with a conversation about risk (which includes the probability of losing all of your money), reward (which includes both the return on your money and the return of your money) and what needs to be done to get your reward (without losing all of your money). This line of thinking is rooted in three areas: time, finance (debt) relative to market cycles, and capital allocation.
Try as we might, we can’t control time. We can only infer what we believe will happen in the future, make decisions based on that inference and take action to the best of our ability. Then, we hope it all works out. When I was a developer and experienced the 2008 recession, one of the lessons learned was that the market you start a project in and the market you deliver the project in will probably look the same – unless they don’t.
Howard Marks of Oaktree says, “You can’t predict the future, but you can prepare.” Few, if anyone, would have predicted the outbreak of a global pandemic. Or if the credit markets freeze, your tenant may not open, or, even worse, they could go bankrupt. But, while you can’t predict the future, you can prepare. And how do you prepare? By having good partners with aligned interests and deep financial resources. Even if you don’t need a partner, get a partner. Even if the waterfall hurdles are high, the fees are low and all of the work falls on your shoulders, get a partner. Be generous to your financial partners, and they will be generous to you when you need them the most A good partner in a bad market is worth it (Yes, real estate sponsors I’m talking to you.).
FINANCE AND MARKET CYCLES
Investors, both small and large alike, buy or build what banks will finance. Cheap and accessible credit causes asset prices to rise, but trees don’t grow to the sky. What was popular one day can be a pariah the next. The supply and demand balance can flip quickly, and it is usually caused by a market correction. In a normal credit market, real estate is a momentum and growth game, and market corrections are almost always caused by the absence of available financing. When the credit window slams shut, it becomes a value business. Value is, to paraphrase Warren Buffet, “to buy a dollar for less than a dollar.” Value investors don’t focus on good properties – they focus on good buys. Said another way, there are no bad assets, only bad prices. The key is to know what kind of investor you are. Do you want new and popular, and hope for a rising tide? Or do you wait for market corrections and accept the uncertainty of buying at a market bottom? Or do you do both? As William Thorndike said, “Great investors must know how to sell high and buy low.”
There is no right answer. An investment-grade, single-tenant, 1,000,000-square-foot logistics building will likely be a safe, durable investment – until delivery strategies change and your tenant vacates. . Then, you may not be able to sell it in a downturn. Worse still, you may not be able to refinance it. Of course, great unexpected events happen too, and luck plays a part, but as usual you get lucky when you repeatedly make good decisions. My point here is that you must understand the kind of investment you are making in order to determine if it will stand up to periodic market cycles. Ours is a cyclical industry and, even though history may not repeat itself, it often rhymes, to paraphrase another American legend, Mark Twain.
Capital allocation refers to what you need to do in order to get the most return relative to your threshold for risk. Or, simply said: What is your target return, and how much risk are you willing to take to achieve that target?
For me, this means having the agility to move with the market, while still being aware of changing investment opportunities. This is made difficult by the tendency for capital to be raised thematically. Because so many investors have the same theme, competition increases, prices rise, and the probability of unseen or unpredicted risk increases. It seems like the best capital raisers are specialists, but the best investors are often generalists.
Similarly, I believe in a barbell strategy with one side based on higher risk and higher return, while the other side of the barbell is low risk and low return. In the middle sits a basket of investments throughout the capital stack.
Real estate is no different than any other business. You must be involved, manage changes, and evolve and adapt to that which the market brings you. And of course, have the right broker.