Navigating Commercial Real Estate In Complex Economic Uncertainty
Updated: Jan 18
As uncertainty and inflation surge in the U.S. and worldwide, there are many perspectives and attitudes about how investors should approach investing. The variety of investment tastes spans from the ultra-bold to the ultra-reserved and everything in between. This wide variation comes from the complexity of investor preferences and risk tolerance. Risk tolerance is as individual as the people doing the investing.
From the Ultra-Bold Perspective
A real estate investor with a high tolerance for risk might be comfortable acquiring a property with a bridge loan where the cap rate is lower than the interest rate. They remain confident in their ability to improve operations and execute on the business plan, so they feel confident about assuming greater risk even during uncertainty.
Many seasoned investors have applied this approach successfully. However, taking greater risk is not for all investors because this bold strategy leaves little room for error and miscalculation. As uncertainty grows, the risk increases even further.
From the Ultra-Reserved Perspective
"Sit it out and buy gold!"
Regardless of perspective, there is no crystal ball.
Whether you are a bold and adventurous risk-taker or ultra-reserved, it is always a matter of preference and risk tolerance. There is no right or wrong. However, regardless of risk tolerance, the truth is that no one can predict the future nor can they make any guarantees.
The last time the U.S. faced such great uncertainty was in 2008, when sub-prime loans demolished the housing market and caused the foreclosure rate to soar after adjustable rate mortgages began to reset and climb to unaffordable rates. Shadow inventory climbed, and lenders stopped lending for quite some time.
The Center for American Progress characterized the 2008 housing crisis as:
"An environment characterized by minimal government oversight and regulation that depended on a perpetually low-interest rate environment where housing prices continued to rise and refinancing remained a viable option to continue borrowing. When the housing market stalled and interest rates began to rise in the mid-2000s, the wheels came off, leading to the 2008 financial crisis" (McArthur & Edelman, 2017).
The Middle Way
In times of uncertainty, there is always a way to wisely navigate the real estate market by aligning the buying strategy with the realities in the market.
With risk tolerance in mind, savvy commercial real estate investors can make offers based on actuals instead of speculating on future growth. Speculation is synonymous with gambling. In times of economic uncertainty, a gamble can and often does pay off, but there are no guarantees.
A few considerations would be useful when considering real estate investments in times of uncertainty:
Make data-driven decisions.
Evaluate properties based on historical data
Make offers based on actual income and expenses.
Use long-term fixed debt to acquire properties.
Real estate's cyclical nature.
When the buying strategy aligns with market cycles and conditions, a property is more likely to sail through uncertainty and succeed. As interest rates continue to rise, prices must decrease in order to maintain a certain desired rate of return.
To learn more about apartments and how your money can work harder for you by investing passively in multifamily real estate, Then Book A Call Today, and we will be happy to have an initial conversation. We are looking to build a community of like-minded forward-thinking people interested in leveraging the collective power of syndications to help co-create financial legacies through apartment investing.
References: McArthur, C., & Edelman, S. (2017, April 13). The 2008 Housing Crisis: Don’t Blame Federal Housing Programs for Wall Street’s Recklessness. Retrieved from Center for American Progress: https://www.americanprogress.org/article/2008-housing-crisis/