Managing Partner, Evergreen Property Partners. Top 10 Family Office RE Professional, Top 30 Family Office RE Investor, Harvard Graduate
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Without a crystal ball, it is impossible to say precisely what the coronavirus pandemic will ultimately do to real estate, but we can make reasonable guesses based on what we know about the economy and markets in general. For example, when a global recession occurs, family offices can generalize about the economic impact on real estate.
As many people know, the pandemic’s most significant impact on the real estate sector has been on the hospitality industry, as tourists cancel their holidays and companies restrict their employees’ travel. The retail and office property sectors of real estate are also continuing to be affected, and although industrial properties have been doing very well, that does not mean it’s immune to rent cuts.
Real estate continues to provide good risk-adjusted returns with less correlation with other asset classes, so the urge to continue investing in real estate is justified. Property’s ability to continue to deliver better returns relative to other asset classes is likely to continue.
By and large, family office investors are in a better position to invest today than they were during the Great Recession and are willing to learn from the lost opportunities from the recession. Before, family offices were unsure of the market, and the majority of families waited until they saw an uptick happening to give them the confidence to invest. Unfortunately, this created some lost opportunities and upside that they could have taken advantage of. Family offices today are starting to build up cash to take advantage of distressed opportunities, and some are even starting to invest in more diverse property types.
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Ultimately, family offices cannot stand idly by as markets continue to fluctuate. They must be willing to invest. Many are waiting for buying opportunities and starting to implement those investment strategies. But family offices must take this time to review their investment parameters and plans for the future. They must also begin to involve younger family members to take a closer look at their investment strategy and how to analyze and handle the challenges that this pandemic has created; this may only be a precursor to a more significant crisis in the future. This is an educational opportunity for the younger generations in the family.
The American economy and the real estate market will continue to be affected in some way by the pandemic. The scale of the human catastrophe of this pandemic is not yet foreseeable. But if we focus on the financial side, the effects are already visible.
Today is potentially a once-in-a-lifetime opportunity to invest in distressed real estate, but the fundamentals need to considered. Migration patterns, quality of life, job opportunities and cost of living are just a few of the essential data points that need to be taken into consideration. Family offices must conduct research to determine what certain patterns and data points indicate for the future and the health of the potential investment. Stick to underwriting fundamentals, and consider becoming even more conservative. For example, if you are looking to invest in a multifamily property, test to see what the property would look like with a 10% vacancy. In retail, what happens if you lose one or two tenants? Can your investment weather the storm? Can a hotel investment operate with only a 55% occupancy rate? Also calculate projections on newly purchased properties and how they can be expected to perform in the near and long term.
You make money when you buy real estate, not on the sale, and making sure that acquisitions are done properly will make all the difference in the world, regardless of a pandemic.
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