Build An Empire In The Wild Ride Of This Real Estate Market

I just returned to New Jersey from 3-days at eCore Summit 2022 (followed by the historic and monumental ArtScroll Mesorah Publications event, which I'll share in a post in the coming week).

Below, I’ll share my market insights on the topics of value-add, stabilized, development and management, as well as take-aways from the eCore Summit annual conference at the Trump National Doral, Miami -

My week was filled networking and discussions with other active players in the market, industry icons, friends, clients, future-clients and of course insightful panel discussions. It was another amazing and productive annual eCore Summit

This year even more than in the past, it was important to be where other deal makers and shakers come together. Deals are getting done… in many cases ‘differently’. It’s like musical chairs, with a different set of set of rules to play in this 'game', and updated goals and objectives to come out stronger through the market disruptions.

Spoiler alert: If you’re sitting on the sidelines, you’re missing out.

Real estate is back to real fundamentals. Opportunity is here, but not from sitting on the sidelines. Investors who focus on the basics will benefit in the long term. Creating a specific business plan for each investment, getting creative and following the plan has consistently proven for a successful outcome. 

The last few years where value creation was recognized often merely because of cheap debt, it felt as if Real Estate was like day trading, and always ending the day profitable. However, investing in quality assets, good locations and recognizing value of appreciation, requires more time and patience, to achieve a healthy cash flow compared to the past.  

Let’s break it down: 

VALUE-ADD vs. STABILITY 

In more volatile times, there are good options to acquire quality assets in strong markets and locations to build and preserve wealth and in some cases even deliver returns for investors sooner, while insulating against the current volatile debt market. There may also be opportunities, where others will need to exit to protect their principal investment.

For example, Value-Add properties that present an opportunity taking debt at a lower LTV to enter an investment using shorter-term permanent debt or longer-term debt with reasonable step-down options, positioning the asset to replace the debt with a lower cost of capital when the opportunity presents itself in the cycle.  

Another example is by acquiring stabilized properties through loan assumptions at better rates that new debt can offer. It may feeling like clipping a coupon through the debt market volatility, while benefitting from the upside as the market comes back - as it always has historically through various cycles. While coupon clipping was previously found more by institutions, private investors are appreciating the benefits of this too. Obviously, being a direct investor in real estate offers many more benefits to just buying a bond, and this is one of those more secure ways to do so.  

Having dry powder (cash) on hand now should not cause you to pause with pencils down, as the opportunities are available. Enjoy the returns on assets that are consistently appreciating in value, as they have consistently over the many decades and cycles.  

Real estate is not like day trading. Having a short-term view can result in the loss of opportunity. It takes patience, persistence and being open to new opportunities.  

DEVELOPMENT 

I know I just mentioned above to ‘follow the plan’, but for developments that take time from initial concept until shovel in the ground, you should be open to new ideas. Listen to others, look at the bigger picture trends and don’t be stubbornly focused, and pivot if needed - (it is the case at times in value-add opportunities as well).  

Norman Radow of The RADCO Companies ® shared some insights from a study he was involved with in some workouts he was involved in helping with of many failed real estate investments by Lehman Brothers in the collapse. He shared that many investments failed for a variety of understandable reasons. However, one consistent failure was found by developers who had land; they wouldn’t pivot on their plan from the initiation when the change of concept was needed for its success.  Even to the point that when Norman sat with a developer after the fact, and asked "Now that we're here, what what you have changed?" The response: "Not a thing!", staying firm that nothing could have changed, when in fact pivoting in design would have potentially saved the investment.

In my opinion, development can be the highest level of value-add. Now, Development sites present an opportunity as the Fed continues to cool the inflation.  

As a former builder/developer for over two decades prior to moving over to the investment sales role at Marcus & Millichap in 2018, I clearly recall construction material price-increases continuing to go up, even adding fuel costs to deliveries driving up even more costs, especially during the summer months when projects were seeing a lot more activity. But then prices would only drop when there was a slow down due to market conditions and when manufacturers become less greedy or somehow figured out how to lower their costs.  

I do think governmental support through removing or lowering tariffs and bringing more manufacturing jobs locally, will also support the adjustments in lower pricing needed in the industry.  Not to omit the PILOT (Payment In Lieu Of Taxes) that enable a developer to supplement for the initial entry into the development, but the municipality and its' residents will benefit for greater revenues down the line, once the developer has stabilized and has been able to recognize a return on their risk and investment.

I see opportunities now to acquire land, being in control to build in markets with good economic drivers. Both within suburban and select urban markets. Be it shovel-ready multifamily sites to start now to meet the insatiable demand for those who can no longer afford to buy homes with 7% interest rates, industrial sites for newer logistical needs or and others for sites not yet approved with more runway for approvals and design, to control the land and come out the other side when there is a renewed demand for residential home sites.

MANAGEMENT 

I have great respect for apartment owners, as the role they play seems to be under-appreciated by the governmental authorities and politicians making landlords the 'bad guys' with an unlimited money tree, and making the tenants the underdog. Yet, apartment owners have employees, expenses and pay taxes - often-time a great source of government funding, as well as cost for operations and their own families to support.

An old friend and successful owner/operator shared a very focused approach to overseeing the quality of service, which they take very seriously. Weekly property visits are unannounced at the property level. A visit would be made to each new tenant, stating they’re from upper management. They would ask “how was your experience moving in, cleanliness, staff, process and is there anything we can do for you now.” If it was positive, they would ask for a Google review. I found this to be a great way for upper management to keep a finger on the pulse of tenants. As another owner shared, “let’s not forget we are providing homes for our tenants.”  

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Chez Eider specializes in the sales and advisory of New Jersey multifamily and office investment properties, as well as development sites.   The Eider Group at Marcus & Millichap is best know for its' Local Knowledge and expertise, and national reach. 

If you’re an owner, developer or investor and any of this resonates with you, PM or email chez.eider@MarcusMillichap.com | SUBSCRIBE for new listings, latest research video, reports, upcoming webinar events & recent deal activity.  

#RealEstate #cre #multifamily #office #development #fedrates #stateofthemarket  Joe Lubeck Russell Appel Henry Stimler Harry Bookey, Norman Radow